Index Hugger

A managed mutual fund that tends to perform much like a benchmark index such as the S&P 500, which gives it the reputation of being a "closet index fund."The majority of actively managed funds are expected to outperform the so-called average performance produced by passively managed index funds.
Also known as a "closet tracker" or "pseudo tracker".
Investors pay fund investment managers higher fees to do better than index funds, although managers often fail to outperform the index.
A high R-squared factor, a mutual fund risk analysis measure, between 85 and 100 indicates that a managed fund's performance patterns are in line with the fund's benchmark index. If this is the case, investors may be better off investing in the index itself, which has lower portfolio turnover and lower expense ratio features.

Source: http://www.investopedia.com/terms/i/indexhugger.asp

Halloween Massacre

Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, announced that all income trusts would be taxed in a similar manner as corporations at a rate over 30% on taxable income, causing unit holders' values to decrease dramatically virtually overnight.
Income trusts, which were permitted to make distributions to unit holders on a pretax basis under old Canadian income tax laws, were a popular investment vehicle in the early 2000s, especially in Canada. The Canadian energy sector was hardest hit by the change, and suffered an estimated loss of about $35 billion to investors, giving rise to the term "massacre".
This change in the Canadian tax law, which was largely debated after the fact, was made to remedy a perceived loss of tax revenue.

Source: http://www.investopedia.com/terms/h/halloween_massacre.asp

Tight Monetary Policy

A course of action undertaken by the Federal Reserve to constrict spending in an economy that is seen to be growing too quickly, or to curb inflation when it is rising too fast. The Fed will "make money tight" by raising short-term interest rates (also known as the Fed funds, or discount rate), which increases the cost of borrowing and effectively reduces its attractiveness.
The Fed can sell Treasuries on the open market in order to absorb some extra capital during a tight monetary policy. This effectively takes capital out of the open markets as the Fed takes in funds from the sale with the promise of paying the amount back with interest. The Fed will often look at tightening monetary policy during times of strong economic growth.

Source: http://www.investopedia.com/terms/t/tightmonetarypolicy.asp

Correction

A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index. Corrections are generally temporary price declines, interrupting an uptrend in the market or asset.
A healthy market will correct from time to time.

Source: http://www.investopedia.com/terms/c/correction.asp

Moratorium

A period of time in which there is a suspension of a specific activity until future events warrant a removal of the suspension or issues regarding the activity have been resolved.
In bankruptcy law, a legally binding halt of the right to collect debt.
For example, if a company is going through rough times it might have a moratorium on advertising spending. In other words, to cut costs, it won't spend any money on advertising.
Such action may be imposed by a government, or taken voluntarily by a private business, usually in times of economic crisis such as an earthquake or flood, in order to provide people with time to stabilize their finances before dealing with potential problems such as a mortgage default and foreclosure.

Source: http://www.investopedia.com/terms/m/moratorium.asp

Alligator Spread

An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market movements. An alligator spread is usually used in the options market to describe a collection of put and call options that may not be profitable.
Pricing models and a more efficient market can help reduce the traditional spread on a security, but it is commissions that create the alligator spread, not market inefficiencies. The commissions are dependent on a transaction's brokers. Investors should check the commission schedules carefully to avoid having their profits devoured by the alligator spread.

Source: http://www.investopedia.com/terms/a/alligatorspread.asp

Overtrading

1. Excessive buying and selling of stocks by a broker on an investor's behalf in order to increase the commission the broker collects.

This situation has been known to arise when brokers are pressured to place a newly issued security underwritten by a firm's investment banking arm.

Also known as "churning".

2. A situation in which a company is growing its sales faster than it can finance them. This usually leads to enormous accounts payable or accounts receivable and a lack of working capital to finance operations.

Investopedia explains Overtrading
1. One way to protect yourself from overtrading (churning) is through a wrap account - a type of account that is manged for a flat rate rather than charging commission on every transaction.

2. Many businesses become insolvent because they try to accommodate everyone who wishes to purchase their products. This ultimately leads to not being able to pay for the financing costs used to produce the goods.

Source: http://www.investopedia.com/terms/o/overtrading.asp

Bucket Shop

A fraudulent brokerage firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities they sell are typically poor investment opportunities, and almost always penny stocks.
A brokerage that makes trades on a client's behalf and promises a certain price. The brokerage, however, waits until a different price arises and then makes the trade, keeping the difference as profit.
Bucket shops are sometimes called the boiler room. The U.S. has laws restricting bucket shop practices by limiting the ability of brokerage houses to create and trade certain types of over-the-counter securities.
The second definition for a bucket shop comes from more than 50 years ago, when bucket shops would do trades all day long, throwing the tickets into a bucket. At the end of the day they would decide which accounts to award the winning and losing trades to.

Source: http://www.investopedia.com/terms/b/bucketshop.asp

Herd Instinct

A mentality characterized by a lack of individuality, causing people to think and act like the general population.
This term is used in the investing world to refer to the forces that cause unsubstantiated rallies or sell-offs.

Source: http://www.investopedia.com/terms/h/herdinstinct.asp

Mechanical Investing

Buying and selling stocks according to a screen based on predetermined criteria, usually with the help of technical indicators such as relative strength or momentum. This method allows traders to enter transactions without emotion and backtest their strategies by using historical data from any time period.

Investopedia explains Mechanical Investing

For example, one of the most common mechanical investing systems is called the Dogs of the Dow. This strategy involves buying the 10 stocks on the Dow Jones Industrial Average with the highest dividend yield at the beginning of each year. The portfolio is then adjusted each year to only include the 10 highest yielding stocks. Proponents of mechanical investing say that using this method of investing removes all emotion by allowing a computer to do the work of deciding whether investing in a certain asset is warranted.

Source: http://www.investopedia.com/terms/m/mechanicalinvesting.asp

October Effect

The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological expectation rather than an actual phenomenon. Most statistics go against the theory.

Investopedia explains October Effect

Some investors may be nervous during October because the dates of some large historical market crashes occurred during this month. Black Monday, Tuesday and Thursday all occurred in October 1929, after which came the Great Depression. In addition, the great crash of 1987 occurred on October 19, and saw the Dow plummet 22.6% in a single day.

Sourche: http://www.investopedia.com/terms/o/octobereffect.asp

Black Monday

October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline, making Black Monday one of the most notorious days in recent financial history. By the end of the month, most of the major exchanges had dropped more than 20%.

Investopedia explains Black Monday

Interestingly enough, the cause of the massive drop cannot be attributed to any single news event because no major news event was released on the weekend preceding the crash. While there are many theories that attempt to explain why the crash happened, most agree that mass panic caused the crash to escalate.

Since Black Monday, a number of protective mechanisms have been built into the market to prevent panic selling, such as trading curbs and circuit breakers.

Source: http://www.investopedia.com/terms/b/blackmonday.asp

Rio Hedge

When a trader who is facing financial or legal troubles hedges his or her position in an investment with a ticket to a tropical location (such as Rio de Janeiro). The idea behind the Rio hedge is that if the investment goes bad (either legally or through financial loss) the investor will use the ticket to escape.

Investopedia explains Rio Hedge

The Rio hedge is a joke in the investment community regarding the risks involved in trading. A traditional hedge will protect against potential financial risks associated with an investment. The Rio hedge pokes fun at protecting against risks, such as getting caught by the authorities, lenders, or owners of the funds under management.

Source: http://www.investopedia.com/terms/r/rio-hedge.asp

Dollar Drain

When a country imports more goods and services from another country than it exports back to the same country. The net effect of spending more money importing than is received from exporting causes a net reduction in the importing country's reserves of the exporting country's currency.

For example, if Canada has exports $500 million worth of goods and services to the U.S. and has also imported $650 million worth of goods and services from the U.S., the net effect will be a reduction in Canada's U.S. dollar reserves.

A dollar drain position should not be maintained indefinitely. As a result of the laws of supply and demand, importing more than is exported may cause a devaluation of the importing country's currency. However, this effect will be mitigated if foreign investors pour their money into the importing country's stocks and bonds, as these actions will increase the demand for the importing country's currency, causing it to appreciate in value.

Source: http://www.investopedia.com/terms/d/dollardrain.asp

Calendar Effect

A collection of assorted theories that assert that certain days, months or times of year are subject to above-average price changes in market indexes and can therefore represent good or bad times to invest. Some theories that fall under the calendar effect include the Monday effect, the October effect, the Halloween effect and the January effect.

Most of the evidence for these effects is anecdotal, although there is a slight statistical case to be made for some of them, which is more than enough to encourage some investors to place their faith in them.

Proponents of the October effect, one of the most popular theories, argue that October is when some of the greatest crashes in stock market history, including 1929's Black Tuesday and Thursday and the 1987 stock market crash, occurred. While statistical evidence doesn't support the phenomenon that stocks trade lower in October, the psychological expectations of the October effect still exist.

Source: http://www.investopedia.com/terms/c/calendareffect.asp

W-Shaped Recovery

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.

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.

Source: http://investopedia.com/terms/w/w-shaped-recovery.asp

Business Cycle Indicators - BCI

Composite of leading, lagging and coincident indexes created by the Conference Board and used to forecast changes in the direction of the overall economy of a country. They can be used to confirm or predict the peaks and troughs of the business cycle and are published for the U.S., Mexico, France, the U.K., South Korea, Japan, Germany, Australia and Spain.

Interpretation of BCI involves much more than simply reading graphs - an economy is too complex to be summarized with just a few statistics. Although past business cycles have shown patterns that are likely to be repeated to some degree, business cycles can start and end quite quickly for reasons that an indicator may not account for. Thus, investors, traders and corporations must realize that it is unreasonable to believe that any single indicator, or even set of indicators, always gives true signals and never fails to foresee a turning point in an economy.

Source: http://investopedia.com/terms/b/bci.asp

Lender Of Last Resort

An institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. In the U.S. the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing and whose failure to obtain credit would dramatically affect the economy.

The lender of last resort functions both to protect individuals who have deposited funds, and to prevent panic withdrawing from banks who have temporary limited liquidity. Commercial banks usually try not to borrow from the lender of last resort because such action indicates that the bank is experiencing financial crisis.

Critics of the lender-of-last-resort methodology suspect that the safety it provides inadvertently tempts qualifying institutions to acquire more risk than necessary - since they are more likely to perceive the potential consequences of risky actions to be less severe.

Source: http://www.investopedia.com/terms/l/lenderoflastresort.asp

Double Dip Recession

When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession.

The causes for a double-dip recession vary but often include a slowdown in the demand for goods and services because of layoffs and spending cutbacks from the previous downturn.

A double-dip (or even triple-dip) is a worst-case scenario. Fear that the economy will move back into a deeper and longer recession makes recovery even more difficult.

Source: http://www.investopedia.com/terms/d/doublediprecession.asp

Tankan Survey

An economic survey of Japanese business issued by the central Bank of Japan, which it then uses to formulate monetary policy. The report is released four times a year in April, July, October and mid-December.

The survey covers thousands of Japanese companies with a specified minimum amount of capital, although firms deemed sufficiently influential may also be included. The companies are asked about current trends and conditions in the business place and their respective industries as well as their expected business activities for the next quarter and year.

Source: http://www.investopedia.com/terms/t/tankan.asp

G-20

Group Of Twenty - G-20.

A group of finance ministers and central bank governors from 19 of the world's largest economies, and the European Union. The G-20 was formed in 1999 as a forum for member nations to discuss key issues related to the global economy. The mandate of the G-20 is to promote growth and economic development across the globe.

The Group of Twenty consists of the members of the G-7, 12 other nations (including China, India, Brazil and Saudi Arabia), and rotating council presidency from the European Union. The commitee's inaugural meeting took place in Berlin in December of 1999.

Source: http://www.investopedia.com/terms/g/g-20.asp

Central Bank

The entity responsible for overseeing the monetary system for a nation (or group of nations). Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.

he central banking system in the U.S. is known as the Federal Reserve System (commonly known as "the Fed"), which is composed of 12 regional Federal Reserve Banks located in major cities throughout the country. The main tasks of the Federal Reserve are to supervise and regulate banks, implement monetary policy by buying and selling U.S. Treasury bonds and steer interest rates. Ben Bernanke currently serves as the chairman of the Board of Governors of the Federal Reserve.

Source: http://www.investopedia.com/terms/c/centralbank.asp

Blue Collar Trader

A trader who has another source of income, and does not trade as a means, but rather as a savings plan, or bonus, etc. This person typically does not trade in large volumes, leaning more towards trying to earn smaller returns. Such a trader is not significantly experienced or knowledgeable in the field, and will therefore tend to stick to less risky investments.

here are many websites, and other information forums to aid blue collar investors in trading. With the right information, blue collar trading can give the trader an extra income source. Blue collar investors work with brokers to gain advice on which investment decisions to make, and will pay a fee for their services, however, due to a highly competitive market, the commissions and fees for such brokers has decreased significantly.

Source: http://www.investopedia.com/terms/b/blue-collar-trader.asp

Position Trader

A type of stock trader who holds a position for the long term (from months to years). Long-term traders are not concerned with short-term fluctuations because they believe that their long-term investment horizons will smooth these out.

Many position traders will take a look at weekly or monthly charts to get a sense of where the asset is in a given trend. Position trading is the polar opposite of day trading because the goal is to profit from the move in the primary trend rather than the short-term fluctuations that occur day to day.

Source: http://www.investopedia.com/terms/p/positiontrader.asp

Market Maker

A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds.

The Nasdaq is the prime example of an operation of market makers. There are more than 500 member firms that act as Nasdaq market makers, keeping the financial markets running efficiently because they are willing to quote both bid and offer prices for an asset.

source: http://www.investopedia.com/terms/m/marketmaker.asp