Passionate and light sensual kiss all over you
13 years ago
Showing posts with label B. Show all posts
Showing posts with label B. Show all posts
Thursday, April 23, 2009
Bulletin board
A website where investors post gossip, fact and opinion about stocks and markets. Bulletin boards are immensely popular, but - given their virtual anonymity and their lack of regulation -they can be traps for unwary investors.
Bulletin board
A website where investors post gossip, fact and opinion about stocks and markets. Bulletin boards are immensely popular, but - given their virtual anonymity and their lack of regulation -they can be traps for unwary investors.
Bull
An optimist; someone who assumes that prices will rise. The origin is unknown, although it probably evolved because it contrasts strongly with bear. As the quote from Alexander Pope shows, it was in common usage in London by the early 18th century.
Come fill the South Sea goblet full;
The Gods shall of our stock take care:
Europa pleased accepts the bull,
And Jove with joy puts off the bear.
Alexander Pope, inscription on a punch bowl, 1720
(the year of the South Sea Bubble)
The Gods shall of our stock take care:
Europa pleased accepts the bull,
And Jove with joy puts off the bear.
Alexander Pope, inscription on a punch bowl, 1720
(the year of the South Sea Bubble)
Warren Buffett
Arguably the best-known investor on the planet. Buffett is known for the world-class returns he has produced for over 30 years from his investment conglomerate, Berkshire Hathaway, and for his witty and insightful chairman's letter in Berkshire's annual report. Adding in the investment record of Buffett's partnership, which he ran from 1956 to 1968 before sinking his capital into Berkshire, then his record from 1956 to 2001 showed an annual compound growth rate of 24.5%, enough to turn $1,000 into $i9m. Over the same period, the pre-tax return from the S&P 500 index was 10.1% a year.
Buffett is characterised as an exponent of value investing and he learned his trade from Benjamin Graham, who first espoused that particular cause. In many respects, however, Buffett's investment style is far removed from Graham's. It focuses on the "business franchise", the idea that there is a small cadre of exceptional businesses whose advantages mean that they are protected from everyday economics. Brand-name corporations, or those which can grow on the back of bigger corporations - "gross royalty businesses" such as advertising agencies - are good examples.
Buffett is characterised as an exponent of value investing and he learned his trade from Benjamin Graham, who first espoused that particular cause. In many respects, however, Buffett's investment style is far removed from Graham's. It focuses on the "business franchise", the idea that there is a small cadre of exceptional businesses whose advantages mean that they are protected from everyday economics. Brand-name corporations, or those which can grow on the back of bigger corporations - "gross royalty businesses" such as advertising agencies - are good examples.
Brady bond
Named after Nicholas Brady, an American Treasury secretary, who in 1989 came up with the Brady Plan to ease the debt burden that was crushing too many developing-country economies. Brady bonds are issued by indebted governments as part of a refinancing of their bank debt following the introduction of an agreed schedule between them and their creditors. This would be likely to include the adoption of responsible monetary policies by the governments concerned and some debt write-off by their bank lenders. Even so, Brady bonds, which are traded on over-the counter markets, are high-risk investments.
Book value
That part of a company's assets which belongs to its shareholders; in the UK these are generally known as shareholders' funds or, simply, net assets. It is an accounting valuation arrived at by taking the gross assets of the business as shown in its balance sheet and subtracting all the prior claims on the business, such as bank debt, payables, allowances for future claims, and so on. Alternatively, it is the sum of the shares outstanding, additional paid-in capital and retained earnings. Book value is usually expressed in per share terms so as to make an easy comparison with the market price of the shares (see Price to book ratio).
Bottom fishing
What value-seeking investors do after a stock market has fallen heavily, exposing good value in shares which fair-weather investors are still too shell-shocked to take.
Book value
That part of a company's assets which belongs to its shareholders; in the UK these are generally known as shareholders' funds or, simply, net assets. It is an accounting valuation arrived at by taking the gross assets of the business as shown in its balance sheet and subtracting all the prior claims on the business, such as bank debt, payables, allowances for future claims, and so on. Alternatively, it is the sum of the shares outstanding, additional paid-in capital and retained earnings. Book value is usually expressed in per share terms so as to make an easy comparison with the market price of the shares (see Price to book ratio).
Bond rating
The chances that bonds of all types might go into default - that is, the borrower will fail to pay the interest and/or the capital due on a bond - is rated by several credit organizations, the best known of which are Moody's and Standard & Poor's (s&p). Both organizations use a similar system to rate the safety of a bond, primarily based on a detailed examination of the credit-worthiness of the borrower and the terms of the bond. For S&P the credit rankings range from AAA (the best) to D, meaning that the bond is already in default. The Moody's ratings go from Aaa to D. However, only bonds with a rating of BBB or better (Baa in the case of Moody's) are considered "investment grade", that is, good enough for institutional investors. Bonds below these grades are colloquially termed junk bonds.
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Bond rating
The chances that bonds of all types might go into default - that is, the borrower will fail to pay the interest and/or the capital due on a bond - is rated by several credit organizations, the best known of which are Moody's and Standard & Poor's (s&p). Both organizations use a similar system to rate the safety of a bond, primarily based on a detailed examination of the credit-worthiness of the borrower and the terms of the bond. For S&P the credit rankings range from AAA (the best) to D, meaning that the bond is already in default. The Moody's ratings go from Aaa to D. However, only bonds with a rating of BBB or better (Baa in the case of Moody's) are considered "investment grade", that is, good enough for institutional investors. Bonds below these grades are colloquially termed junk bonds.
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Bond rating
The chances that bonds of all types might go into default - that is, the borrower will fail to pay the interest and/or the capital due on a bond - is rated by several credit organizations, the best known of which are Moody's and Standard & Poor's (s&p). Both organizations use a similar system to rate the safety of a bond, primarily based on a detailed examination of the credit-worthiness of the borrower and the terms of the bond. For S&P the credit rankings range from AAA (the best) to D, meaning that the bond is already in default. The Moody's ratings go from Aaa to D. However, only bonds with a rating of BBB or better (Baa in the case of Moody's) are considered "investment grade", that is, good enough for institutional investors. Bonds below these grades are colloquially termed junk bonds.
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Bond rating
The chances that bonds of all types might go into default - that is, the borrower will fail to pay the interest and/or the capital due on a bond - is rated by several credit organizations, the best known of which are Moody's and Standard & Poor's (s&p). Both organizations use a similar system to rate the safety of a bond, primarily based on a detailed examination of the credit-worthiness of the borrower and the terms of the bond. For S&P the credit rankings range from AAA (the best) to D, meaning that the bond is already in default. The Moody's ratings go from Aaa to D. However, only bonds with a rating of BBB or better (Baa in the case of Moody's) are considered "investment grade", that is, good enough for institutional investors. Bonds below these grades are colloquially termed junk bonds.
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Both S&P'S and Moody's bond ratings are monitored closely by investors and therefore any change in an issuer's ratings will be matched by a corresponding movement in the market price of its debt
Bond
Generic name for a tradable, long-term debt security raised by a borrower who agrees to make specific payments, usually regular payments of interest and repayment of principal on maturity. (See also treasury bond, euro bond, gilt-edged stock.)
Bollinger bands
Used in technical analysis to determine areas of support for and resistance to price changes. On a chart these plot the standard deviation of the moving average of a price. So when they are plotted above and below the moving average, the bands widen and narrow according to the underlying volatility of the average. The longer the period of low volatility, the closer together the lines become and the greater is the likelihood that there will be a break-out from the established price pattern.
Black scholes option pricing model
A pricing model that ranks among the most influential. It was devised by Fischer Black and Myron Scholes, two Chicago academics, in 1973, the year that formalized options trading began on the Chicago board of trade. The Black-Scholes model, or adaptations of it, has gained universal acceptance for pricing options because its results are almost as good as those achieved by other options pricing models without the complexity.
Behind the model is the assumption that asset prices must adjust to prevent arbitrage between various combinations of options and cash on the one hand and the actual asset on the other. Additionally, there are specific minimum and maximum values for an option which are easily observable. Assuming, for example, that it is a call option then its maximum value must be the share price. Even if the exercise price is zero, no one will pay more than the share price simply to acquire the right to buy the shares. The minimum value, meanwhile, will be the difference between the share's price and the option's exercise price adjusted to its present value.
The model puts these fairly easy assumptions into a formula and then adjusts it to account for other relevant factors.
Note that the basic Black-Scholes model is for pricing a call option, but it can be readily adapted for pricing a put option. It also ignores the effect on the price of the option of any dividends that are paid on the shares during the period until the option expires. This is remedied either by deducting the likely present value of any dividend from the share price that is input into the model, or by using a refinement of the Black-Scholes model which writes off the effect of the dividend evenly over the period until it is paid.
Behind the model is the assumption that asset prices must adjust to prevent arbitrage between various combinations of options and cash on the one hand and the actual asset on the other. Additionally, there are specific minimum and maximum values for an option which are easily observable. Assuming, for example, that it is a call option then its maximum value must be the share price. Even if the exercise price is zero, no one will pay more than the share price simply to acquire the right to buy the shares. The minimum value, meanwhile, will be the difference between the share's price and the option's exercise price adjusted to its present value.
The model puts these fairly easy assumptions into a formula and then adjusts it to account for other relevant factors.
- The cost of money, because buying an option instead of the underlying stock saves money and, therefore, makes the option increasingly valuable the higher interest rates go.
- The time until the option expires, because the longer the period, the more valuable the option becomes since the option holder has more time in which to make a profit.
- The volatility of the underlying share price, because the more it is likely to bounce around, the greater chance the option holder has to make a profit.
Note that the basic Black-Scholes model is for pricing a call option, but it can be readily adapted for pricing a put option. It also ignores the effect on the price of the option of any dividends that are paid on the shares during the period until the option expires. This is remedied either by deducting the likely present value of any dividend from the share price that is input into the model, or by using a refinement of the Black-Scholes model which writes off the effect of the dividend evenly over the period until it is paid.
Black monday
Monday October 19th 1987 when Wall Street had its worst day since 1914. The Dow Jones Industrial Average fell 508 points from 2,247 to 1,738, or 22.6%. This triggered panic selling in equity markets around the world and, for example, on the same day the UK's all-share index fell 9-7% from 1,190 to 1,075, then dropped a further 11% the following day. Until that point 1987 had been a great year for equities. From the start of the year until its mid-August peak, the Dow rose 44%. However, rising interest rates caused investors to worry and the German Bundesbank's decision to increase its rates on October 16th was the cue for them to dash for the exit.
The Dow bounced back rapidly from its low. On October 26th alone it put on 10%. The UK index, however, continued to fall and did not bottom out until December 3rd, when it closed at 750, 39% below its mid-year peak.
The Dow bounced back rapidly from its low. On October 26th alone it put on 10%. The UK index, however, continued to fall and did not bottom out until December 3rd, when it closed at 750, 39% below its mid-year peak.
Binomial option pricing model
The basic principle behind this and other option pricing models is that an option to buy or sell a specific stock can be replicated by holding a combination of the underlying stock and cash borrowed or lent. The idea is that the cash and security combined can be fairly accurately estimated and their combined value must equal the value of the option. This has to be so, otherwise there would be the opportunity to make risk-free profits by switching between the two.
Take a simple example, the aim of which is to find the value today of a call option on a common stock that expires in one year's time. The current stock price is $100, as is the call's exercise price. To maintain clarity and avoid the complicating effect of an option's delta on the arithmetic involved, imagine that an investor holds just half of this stock (that is, $50-worth) in his portfolio. The portfolio's only other component is a short position in a zero-coupon bond currently worth $42.45, which has to be repaid at $45 in a year's time.
Next assume that the value of the stock in a year's time will be either $110 or $90. From these two postulated outcomes several conclusions arise. First, we can value the call option in a year's time. It will be either $10 or zero. Second, we can value the portfolio. It too will be either $10 or zero. This must be so, since the value of the portfolio is the stock's value minus the debt on the zero-coupon bond. So it is either $55 minus $45, or $45 minus $45. The future value of the stock may be uncertain, but the value of the debt on the bond is not. Third, the alternative values for both the call option and the portfolio at the year end are the same. If this is so, then their start value must be the same as well. The start value for the portfolio can be easily calculated. It is $50 minus $42.45; that is, $7.55. So this must also be the present value of the call option.
From this basic building block of the binomial model comes the formula that the value of a call will be the current value of the stock in question multiplied by the option's delta (which, in effect, was 0.5 in our example) minus the borrowing needed to replicate the option. Using our example, the linear representation would be:
Call value = ($100 x 0.5) - $42.45 = $7.55
This is the single-period binomial model, so called because the starting point is to take two permitted outcomes for the stock price and then work back to find what this means for the present value of the option.
In the real world, however, a single-period model is not practical, hence the development of the multi-period binomial model where each period used to estimate the price of the option can be as short as computer power will allow. As the number of price outcomes rises by 2 to the power of the number of periods under review, the model is computer-intensive; a model using 20 periods, for example, would need over 1m calculations. Additionally, rather than using arbitrary stock-price outcomes from which to estimate the value of the option, the model takes advantage of the fact that, given an estimate of the rate at which a stock price will change, future stock prices can be estimated within a reasonable band of certainty using mathematical distribution tables.
The result is a model which produces options prices that closely mirror market prices. Furthermore, because the binomial model splits its calculations into tiny time portions, it can easily cope with the effect of dividends on stock prices and, hence, option values. This is an important factor with which the more widely used black-scholes option pricing model copes less capably.
Take a simple example, the aim of which is to find the value today of a call option on a common stock that expires in one year's time. The current stock price is $100, as is the call's exercise price. To maintain clarity and avoid the complicating effect of an option's delta on the arithmetic involved, imagine that an investor holds just half of this stock (that is, $50-worth) in his portfolio. The portfolio's only other component is a short position in a zero-coupon bond currently worth $42.45, which has to be repaid at $45 in a year's time.
Next assume that the value of the stock in a year's time will be either $110 or $90. From these two postulated outcomes several conclusions arise. First, we can value the call option in a year's time. It will be either $10 or zero. Second, we can value the portfolio. It too will be either $10 or zero. This must be so, since the value of the portfolio is the stock's value minus the debt on the zero-coupon bond. So it is either $55 minus $45, or $45 minus $45. The future value of the stock may be uncertain, but the value of the debt on the bond is not. Third, the alternative values for both the call option and the portfolio at the year end are the same. If this is so, then their start value must be the same as well. The start value for the portfolio can be easily calculated. It is $50 minus $42.45; that is, $7.55. So this must also be the present value of the call option.
From this basic building block of the binomial model comes the formula that the value of a call will be the current value of the stock in question multiplied by the option's delta (which, in effect, was 0.5 in our example) minus the borrowing needed to replicate the option. Using our example, the linear representation would be:
Call value = ($100 x 0.5) - $42.45 = $7.55
This is the single-period binomial model, so called because the starting point is to take two permitted outcomes for the stock price and then work back to find what this means for the present value of the option.
In the real world, however, a single-period model is not practical, hence the development of the multi-period binomial model where each period used to estimate the price of the option can be as short as computer power will allow. As the number of price outcomes rises by 2 to the power of the number of periods under review, the model is computer-intensive; a model using 20 periods, for example, would need over 1m calculations. Additionally, rather than using arbitrary stock-price outcomes from which to estimate the value of the option, the model takes advantage of the fact that, given an estimate of the rate at which a stock price will change, future stock prices can be estimated within a reasonable band of certainty using mathematical distribution tables.
The result is a model which produces options prices that closely mirror market prices. Furthermore, because the binomial model splits its calculations into tiny time portions, it can easily cope with the effect of dividends on stock prices and, hence, option values. This is an important factor with which the more widely used black-scholes option pricing model copes less capably.
Big bang
The event that took place on October 27th 1986 and transformed the way in which the London Stock Exchange operated. It resulted from a deal between the government and the stock exchange in which the government dropped moves to challenge the exchange's restrictive practices in return for various liberalization measures.
- The exchange scrapped the obligations that its members had to be either wholesalers of shares (jobbers) or brokers who dealt directly with investors.
- Brokers became free to supply clients with shares held in their own account and they could, if they wished, become market makers in shares.
- Restrictions on ownership of exchange member firms were first relaxed and then dropped, unleashing a flood of money into London as various financial conglomerates bought London jobbing and broking firms.
- A screen-based system of trading stocks (Stock Exchange Automated Quotations - SEAO) closely modeled on the NASDAQ system was introduced, leading to the demise of floor trading on the exchange.
Bid price
The price that a dealer will pay for securities in the market. Thus it is the lower of the two prices that the dealer will quote for any security. For a mutual fund, it is the price at which the fund management company will buy in units from investors. (See also offer price and spread.)
Beta
A widely used statistic which measures the sensitivity of the price of an investment to movements in an underlying market. In other words, beta measures an investment's price volatility, which is a substitute for its risk. The important point is that beta is a relative, not an absolute, measure of risk. In stock market terms, it defines the relationship between the returns on a share relative to the market's returns (the most commonly used absolute measure of risk is standard deviation). But in so far as much of portfolio theory says that a share's returns will be driven by its sensitivity to market returns, then beta is a key determinant of value in price models for share or portfolio returns.
An investment's beta is expressed as a ratio of the market's beta, which is always 1.0. Therefore a share with a beta of 1.5 would be expected to rise 15% when the market goes up 10% and fall 15% when the market drops 10%. In technical terms, beta is calculated using a least-squared regression equation and it is the coefficient that defines the slope of the regression line on a chart measuring, say, the relative returns of a share and its underlying market. However, the beta values derived from the regression calculation can vary tremendously depending on the data used. A share's beta generated from weekly returns over, say, one year might be very different from the beta produced from monthly returns over five years.
This highlights a major weakness of beta: that it is not good at predicting future price volatility based on past performance. This is certainly true of individual shares. For portfolios of shares beta works far better, basically because the effects of erratically changing betas on individual shares generally cancel each other out in a portfolio. Also, to the extent that portfolio theory is all about reducing risk through aggregating investments, beta remains a useful tool in price modeling.
An investment's beta is expressed as a ratio of the market's beta, which is always 1.0. Therefore a share with a beta of 1.5 would be expected to rise 15% when the market goes up 10% and fall 15% when the market drops 10%. In technical terms, beta is calculated using a least-squared regression equation and it is the coefficient that defines the slope of the regression line on a chart measuring, say, the relative returns of a share and its underlying market. However, the beta values derived from the regression calculation can vary tremendously depending on the data used. A share's beta generated from weekly returns over, say, one year might be very different from the beta produced from monthly returns over five years.
This highlights a major weakness of beta: that it is not good at predicting future price volatility based on past performance. This is certainly true of individual shares. For portfolios of shares beta works far better, basically because the effects of erratically changing betas on individual shares generally cancel each other out in a portfolio. Also, to the extent that portfolio theory is all about reducing risk through aggregating investments, beta remains a useful tool in price modeling.
Subscribe to:
Posts (Atom)
Posts
