European Monetary System - EMS

What Does it Mean?
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A 1979 arrangement between several European countries which links their currencies in an attempt to stabilize the exchange rate. This system was succeeded by the European Monetary Union (EMU), an institution of the European Union (EU), which established a common currency called the euro.

Investopedia Says:
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The European Monetary System originated in an attempt to stabilize inflation and stop large exchange-rate fluctuations between European countries. Then, in June 1998, the European Central Bank was established and, in January 1999, a unified currency, the euro, was born and came to be used by most EU member countries.

W-Shaped Recovery

What Does it Mean?
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An economic cycle of recession and recovery that resembles a "W" in charting. A W-shaped recovery represents the shape of the chart of certain economic measures such as employment, GDP, industrial output, etc. A W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to the previous peak, followed again by a sharp decline and ending with another sharp rise. The middle section of the W can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis.

Investopedia Says:
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A W-shaped recovery generally characterizes a period of extreme volatility compared to other types of recoveries. There are countless other shapes a recession and recovery chart could take, including L-shaped, V-shaped, U-shaped and J-shaped. Each shape represents the general shape of the chart of economic metrics that gauge economic health.

Bull Bond

What Does it Mean?
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A bond that is likely to increase in value in a bull market, when interest rates are declining. Most bonds tend to increase in value when interest rates decline, but bull bonds refer to types of bonds that do especially well in this environment.

Investopedia Says:
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A common example of a bull bond is the principal only (PO) strip mortgage-backed security. Whereas most bonds will increase in value in a declining rate market, mortgage-backed securities perform especially well. POs are mortgage securities created by separating principal payments from interest payments collected in a pool of mortgage securities. The principal payments are then combined to form a mortgage pool. PO mortgage securities do well in a falling rate market because mortgage holders refinance their loans at lower interest rates. Investors are repaid their original investment more quickly, increasing the rate of return for the mortgage-backed security.

Golden coffins

What Does it Mean?
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A lucrative death-benefit policy given to top executives. A golden coffin is a death-benefit package awarded to the heirs of high ranking executives who die while still employed with a company. Benefits awarded can include unearned salary, accelerated stock options and insurance proceeds.

Investopedia Says:
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Golden coffins have come under fire as an inappropriate and uneccesary faction of executive compensation. Proponents of golden coffins however claim that such death benefit packages are rarely paid out and act as inexpensive way to keep top executives and discourage unwanted takeover attempts.

Currency Carry Trade

What Does it Mean?
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A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

Investopedia Says:
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Here's an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.

Stop- Loss Order

What Does it Mean?
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An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor's loss on a security position.

Also known as a "stop order" or "stop-market order".

Investopedia Says:
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Setting a stop-loss order for 10% below the price you paid for the stock will limit your loss to 10%. This strategy allows investors to determine their loss limit in advance, preventing emotional decision-making.

It's also a great idea to use a stop order before you leave for holidays or enter a situation in which you will be unable to watch your stocks for an extended period of time.

Currency Risk

What Does it Mean?
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A form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Investopedia Says:
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For example, if you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change in the value of the Canadian dollar against the U.S. dollar. So, if you realize a 15% return in your Canadian stocks but the Canadian dollar depreciates 15% against the U.S. dollar, this will amount to no gain at all.

Academic studies of currency risk suggest - although without absolute certainty - that investors bearing currency risk are not compensated with higher potential returns, meaning it is essentially a needless risk to bear.

Price-Earnings Ratio - P/E Ratio

What Does it Mean?
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A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

Also sometimes known as "price multiple" or "earnings multiple".

Investopedia Says:
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In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

Short Selling

What Does it Mean?
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The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Investopedia Says:
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Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.

This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.

Forex Option Trading

What Does it Mean?
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A security that allows currency traders to realize gains without having to purchase the underlying currency pair. By incorporating leverage, forex options magnify returns and set a firm downside risk level. Alternatively, currency trading options can be held alongside the underlying forex pair to lock in profits or minimize risk. In this case, limiting the upside potential is usually necessary for capping the downside as well.

Investopedia Says:
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Not all retail forex brokers provide the opportunity for options trading. As such, retail forex traders should research any broker they intend on using.

Because of the risk of loss that is associated with writing options, most retail forex brokers do not allow traders to sell options contracts without high levels of capital for protection.

Currency Option

What Does it Mean?
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A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased. Currency options are one of the best ways for corporations or individuals to hedge against adverse movements in exchange rates.

Investopedia Says:
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Investors can hedge against foreign currency risk by purchasing a currency option put or call. For example, assume that an investor believes that the USD/EUR rate is going to increase from 0.80 to 0.90 (meaning that it will become more expensive for a European investor to buy U.S dollars). In this case, the investor would want to buy a call option on USD/EUR so that he or she could stand to gain from an increase in the exchange rate (or the USD rise).

Forex Hedge

What Does it Mean?
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A transaction implemented by a forex trader to protect an existing or anticipated position from an unwanted move in exchange rates. By using a forex hedge properly, a trader who is long a foreign currency pair can be protected from downside risk, while the trader who is short a foreign currency pair can protect against upside risk.

Investopedia Says:
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The primary methods of hedging currency trades for the retail forex trader is through spot contracts and foreign currency options. Spot contracts are the run-of-the-mill trades made by retail forex traders. Because spot contracts have a very short-term delivery date (two days), they are not the most effective currency hedging vehicle. In fact, regular spot contracts are usually the reason why a hedge is needed.

Foreign currency options are one of the most popular methods of currency hedging. As with options on other types of securities, foreign currency options give the purchaser the right, but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in the future. Regular options strategies can be employed, such as long straddles, long strangles, and bull or bear spreads, to limit the loss potential of a given trade.

Not all retail forex brokers allow for hedging within their platforms. Be sure to research the broker you use before beginning to trade.

Funemployment

What Does it Mean?
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Unemployed individuals who decide to enjoy the free time that unemployment provides. The term was coined during the financial crisis of 2008-2009 to describe those who had recently lost their jobs and were choosing to use their newfound freedom to travel, go to the beach, be physically active and generally enjoy themselves until they found a new job.

Investopedia Says:
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People who describe their joblessness as funemployment are typically younger individuals with fewer fiscal responsibilities or people who have accumulated enough savings to enjoy the extra time their unemployment has afforded them. People who describe themselves as funemployed often point out that during times of recession, finding a new job can be a long and stressful process, so rather than spending their days worrying about their future, they take advantage of the chance to do things they would be unable to do if they were working.

Yankee Bond

What Does it Mean?
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A bond denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporations. According to the Securities Act of 1933, these bonds must first be registered with the Securities and Exchange Commission (SEC) before they can be sold. Yankee bonds are often issued in tranches and each offering can be as large as $1 billion.

Investopedia Says:
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Due to the stringent regulations and standards that must be adhered to, it may take up to 14 weeks (or 3.5 months) for a Yankee bond to be offered to the public. Part of the process involves having debt-rating agencies evaluate the creditworthiness of the Yankee bond's underlying issuer.

Foreign issuers tend to prefer issuing Yankee bonds when U.S. interest rates are low, because this means lower interest payments for the foreign issuer to pay out.

Forex Training

What Does it Mean?
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A form of instruction or mentorship that provides information on forex trading tactics, methods and successful practices. Forex training acts as a guide for the retail forex trader, providing insight into successful strategies, signals and systems as well as other general information on the foreign exchange market.

Investopedia Says:
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Because of the massive size of the forex market, there is a wealth of information available for traders who are looking to enhance their trading knowledge.

Remember that there is no "holy grail" of trading! If the system and signals in the training program were foolproof, the developer would be using them exclusively, rather than distributing the information to others.

Curb Trading

What Does it Mean?
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Trading that occurs outside of general market regulations. Curb trading commonly occurs through computers or telephones after the official exchanges have closed.

Also known as "kerb trading".

Investopedia Says:
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In the past, stocks that were considered unfit to trade on the New York stock Exchange were bought and sold on the street curb. This led to the formation of the American Stock Exchange, so curb trading now commonly refers to any trades outside of exchange regulations.