Glossary for Robo-advisors

Here are the most common terms used with regard to finance and robo-advisors

Algorithmic trading (algotrading) Algorithmic trading is a trading system that utilizes advanced and complex mathematical models and formulas to make high-speed decisions and transactions in the financial markets.

American-style option An option contract that may be exercised at any time on or before the expiration date. For example, if one buys an American call giving him/her the right to buy shares in X expiring on the final Friday in March, the call may be exercised at any time on or before the final Friday in March. The differentiating feature of an American option is the fact that its value varies according to the value of the underlying asset over the life of the contract. This means that a holder may wait for an advantageous price and exercise the option. This contrasts with a European-style option, which may only be exercised on the expiration date.

Asset Allocation Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment time frame.

Asset class An asset class is a group of assets which exhibits similar characteristics, behaves similarly in the market and it is subject to the same laws and regulations.

At-the-money At-the-money is a situation where an option's strike price is identical to the price of the underlying security. Both call and put options are simultaneously at the money. For example, if XYZ stock is trading at 75, then the XYZ 75 call option is at the money and so is the XYZ 75 put option.

Balanced Portfolio A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.

Best execution Best execution is defined as the responsibility of brokers to provide the most advantageous order execution for their customers. Best execution requires brokers to get the best price for a trade in the shortest time frame.

Bull Market Bull market refers to an extended period in which investment prices rise faster than their historical average. Bull market can happen as a result of an economic boom, an economic recovery or investors behaviors.

Buy and hold strategy Buy and hold is a passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market.

Call option A call option is an option to buy assets at an agreed price on or before a particular date.

Capital gain/loss (realized/unrealized) Capital gain/loss is an increase/decrease of a capital asset, such as homes, cars, investment properties, stock, bonds, collective art, that gives it a higher/lower worth than the purchase price. The gain/loss is not realized until the asset is sold. A capital gain/loss may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

Circuit breaker Circuit breakers are measures approved by the SEC to temporarily halt trading on an exchange or in individual securities when prices hit pre-defined tripwires, in order to curb panic-selling on U.S. stock exchanges and excessive volatility.

Custodian A custodian is a financial institution that holds customers' securities for safekeeping to minimize the risk of their theft or loss. Custodians generally tend to be large and reputable firms.

Delta hedging Delta hedging is an options strategy that aims to reduce, or hedge, the risk associated with price movements in the underlying asset.

Diversification Diversification is a risk management technique that mixes a wide variety of investments within a portfolio.

Dividend A dividend is a sum of money paid regularly by a company to its shareholders out of its profits. Dividends can be issued as cash payments, as shares of stock, or other property.

Dollar-Cost Averaging Dollar-cost averaging is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.

Dynamic asset allocation (DAA) Dynamic asset allocation is a portfolio management strategy that involves rebalancing a portfolio so as to bring the asset mix back to its long-term target. The general premise of this strategy is to reduce the fluctuation risks and achieve returns that exceed the target benchmark.

Efficient frontier The efficient frontier is the set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal, because they do not provide enough return for the level of risk.

Efficient market An efficient market is a market where all the suitable information is available to all participants at the same time, and where prices respond immediately to available information. Stock market is the best example of efficient markets.

Emerging markets An emerging market is a nation’s economy that has some characteristics of a developed market, but does not meet standards to be a developed market. This includes countries that may become developed markets in the future or were in the past. Also emerging markets are not as advanced as developed countries but maintain economies and infrastructures that are more advanced than frontier market countries.

Equity risk premium Equity risk premium, also referred to as simply equity premium, is the excess return that investing in the stock market provides over a risk-free rate, such as the return from government treasury bonds. This excess return compensates investors for taking on the relatively higher risk of equity investing.

Ex-dividend Ex-dividend is a classification of trading shares when a declared dividend belongs to the seller rather than the buyer.

Exchange-Traded Fund (ETF) An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold.

Exercise price The exercise price is the price per share at which the owner of a traded option is entitled to buy or sell the underlying security.

Front-end load The front-end load is a sales charge paid when an individual buys an investment. The load is clubbed with the first payment made by an investor, so the total initial payment is higher than the later payments. The purpose of a load is to cover administrative expenses and transaction costs and sometimes to discourage asset turnover.

Fundamental analysis Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. The goal is to derive a forecast and profit from future price movements.

Greeks (options) The Greeks are dimensions of the risk involved in taking a position in an option or other derivative. Each risk variable is a result of an imperfect assumption or relationship of the option with another underlying variable.

Growth fund A growth fund is a mutual fund that invests primarily in stocks that are expected to increase in capital value rather than yield high income.

Hedge fund A hedge fund is a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains.

Hedging Hedging is analogous to taking out an insurance policy. If you own a home in a flood-prone area, you will want to protect that asset from the risk of flooding – to hedge it, in other words – by taking out flood insurance. Normally, a hedge consists of taking an offsetting position in a related security in order to reduce the risk of adverse price movements in an asset.

Historic volatility Historical volatility is a measure of the volatility of the underlying stock or futures contract. It is known volatility, because it is based on actual, recent price changes of the underlying asset. Historical volatility can be thought of as the speed (rate of change) of the underlying stock price.

In-the-money In the money means that a call option's strike price is below the market price of the underlying asset or that the strike price of a put option is above the market price of the underlying asset. Being in the money does not mean you will profit, it just means the option is worth exercising.

Index fund An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500).

Inflation Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

Insider trading Insider Trading is the illegal practice of trading on the stock exchange to one's own advantage through having access to confidential information.

Investment adviser An investment adviser is any person or group that makes investment recommendations or conducts securities analysis in return for a fee.

Investment manager An investment manager is usually part of a large financial institution: a bank, a trust, or a life insurance company. Investment managers manage the investment portfolios of these institutions, and may also provide direct investment management services to third-party clients.

Investment objective The investment objective is a client information form used by registered investment advisors and other asset managers that aids in determining the optimal portfolio mix for the client.

Investment risk Investment risk is the measure of uncertainty of achieving the returns as per the expectations of the investor. All investments have some level of risk associated due to the unpredictability of the market.

Liquidity Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market, such as a country's stock market or a city's real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.

Managed Fund A managed fund is an investment fund run on behalf of an investor by an agent.

Management charges Management charges are an amount charged by a broker or investment fund for managing investors' money. It can be annually, quarterly or monthly and it can be on AUM ( assets under management ) or base on the performance or both.

Market timing Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction is based on an outlook of market or economic conditions resulting from technical or fundamental analysis.

Mean reversion theory Mean reversion is the assumption that a stock's price will tend to move to the average price over time.

Modern Portfolio Theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk, defined as variance. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.

Mutual fund A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are typically managed by professionals.

Naked call A naked call is an options strategy in which an investor sells call options on the open market without owning the underlying security.

Naked Put A naked (or uncovered) put is a put option contract where the option writer does not hold the underlying position, in this case a short equity position, to cover the contract in case of assignment.

Opportunity cost Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action.

Option An option is a contract which gives the buyer the right, but not the obligation, to buy or sell an asset or instrument at a specific strike price on a specified date, depending on the form of the option.

Out-of-the-money Out-of-the-money (OTM) is a term used to describe a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset.

Passive Investor A passive investor is an investor who follows an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading. Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.

Portfolio A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, that is held directly by investors and/or managed by financial professionals.

Portfolio insurance Portfolio insurance refers to a method of hedging a portfolio of stocks against the market risk by short selling stock index futures.

Price correction Price corrections are generally temporary price declines interrupting an uptrend in the market or an asset.

Quantitative (quant) analysis Quantitative analysis refers to economic, business or financial analysis that aims to understand or predict behavior or events through the use of mathematical measurements and calculations, statistical modeling and research.

Rebalancing Rebalancing is the process of aligning the portfolio’s assets. Rebalancing involves periodically buying or selling assets to maintain an original desired level of asset allocation.

Recession A recession is a significant decline in activity across the economy, lasting longer than a few months, which is visible in industrial production, employment, real income and wholesale-retail trade.

Risk Risk involves the chance an investment's actual return will differ from the expected return, including the possibility of losing some or all of the original investment.

Risk-adjusted return Risk-adjusted return refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities, investment funds and portfolios.

Robo-advisor Robo-advisors (robo-advisers) are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision.

S&P 500 index The Standard & Poor's 500, often abbreviated as the S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

Segregated portfolio A segregated portfolio is a portfolio with segregated assets and liabilities within different classes (or sometimes series) of shares from each other and from the general assets.

Tax-loss harvesting Tax-loss harvesting is a strategy of selling securities at a loss to balance a capital gains tax liability. It is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates.

Time-weighted return The time-weighted rate of return is a measure of the compound rate of growth in a portfolio. Because this method eliminates the distorting effects created by inflows of new money, it is used to compare the returns of investment managers.

Total return Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.

Uncorrelated assets Asset correlation is a measure of how investments move in relation to one another and when. When assets move in the same direction at the same time, they are considered to be highly correlated. When one asset tends to move up when the other goes down, the two assets are considered to be uncorrelated.

Volatility Volatility is a statistical measure of the dispersion of returns for a given security or market index over time.

Wash Sale A wash sale is a transaction where an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain. Wash sales are a method investors employ to try and recognize a tax loss without actually changing their position.