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In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the Chicago Mercantile Exchange, while most insurance contracts have developed into a separate industry. In the United States, after the financial crisis of 2007–2009, there has been increased pressure to move derivatives to trade on exchanges.
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment in the stock market is most often done via stockbrokerages and electronic trading platforms. Investment is usually made with an investment strategy in mind.
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors. An IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used to raise new equity capital for companies, to monetize the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded.
In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price the parties agree to buy and sell the asset for is known as the forward price. The specified time in the future—which is when delivery and payment occur—is known as the delivery date. Because it is a function of an underlying asset, a futures contract is a derivative product.
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options.
The Depository Trust & Clearing Corporation (DTCC) is an American post-trade financial services company providing clearing and settlement services to the financial markets. It performs the exchange of securities on behalf of buyers and sellers and functions as a central securities depository by providing central custody of securities.
In finance, a contract for difference (CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time.
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment into the actual movement of money from one account to another. Clearing houses were formed to facilitate such transactions among banks.
The ex-dividend date, also known as the reinvestment date, is an investment term involving the timing of payment of dividends on stocks of corporations, income trusts, and other financial holdings, both publicly and privately held. The ex-date or ex-dividend date represents the date on or after which a security is traded without a previously declared dividend or distribution. Usually, but not necessarily, the opening price is the last closing price less the dividend amount.
Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades. Nowadays, settlement typically takes place in a central securities depository.
The price of a bond is the present value of its future cash-flows. To avoid the impact of the next coupon payment on the price of a bond, this cash flow is excluded from the price of the bond and is called the accrued interest. In finance, the dirty price is the price of a bond including any interest that has accrued since issue of the most recent coupon payment. This is to be compared with the clean price, which is the price of a bond excluding the accrued interest.
TAURUS was a program that set out to transfer settlements of London Stock Exchange shares from transmission of paper share certificates to an automated system. TAURUS was intended to reduce the time taken and the cost of settlement, increasing convenience and reducing settlement risk.
In finance, an option is a contract which conveys its owner, the holder, the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction. Thus, they are also a form of asset and have a valuation that may depend on a complex relationship between underlying asset value, time until expiration, market volatility, and other factors. Options may be traded between private parties in over-the-counter (OTC) transactions, or they may be exchange-traded in live, orderly markets in form of standardized contracts.
In finance, volatility is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns.
In financial markets T+2 is a shorthand for trade date plus two days indicating when securities transactions must be settled. The rules or customs in financial markets are for securities transactions to be settled within a commonly understood 'settlement period'. The most common current settlement period for securities transactions is two business days after the day of a transaction - which is widely abbreviated to T+2. On settlement, the seller must produce the security's certificate and executed share transfer form in exchange for payment from the purchaser. Many countries now dispense with the requirement that a physical stock certificate be produced, and have adopted electronic settlement systems.
Trade date is the date on which security trade occurs. A trade done very early or very late falls on the previous or following trade date.
Iran Mercantile Exchange (IME) is a commodities exchange located in Tehran, Iran.
A clearing house is a financial institution formed to facilitate the exchange of payments, securities, or derivatives transactions. The clearing house stands between two clearing firms. Its purpose is to reduce the risk of a member firm failing to honor its trade settlement obligations.
The Islamic banking and finance movement that developed in the late 20th century as part of the revival of Islamic identity sought to create an alternative to conventional banking that complied with sharia (Islamic) law. Following sharia it banned from its practices riba (usury) – which it defined as any interest paid on all loans of money – and involvement in haram (forbidden) goods or services such as pork or alcohol. It also forbids gambling (maisir) and excessive risk.
References
- ↑ "Introduction of T+2 standard settlement period" (PDF). London Stock Exchange. 2 December 2013. Archived (PDF) from the original on 1 December 2018. Retrieved September 6, 2017.
- ↑ Plaehn, Tim; LeDona Withaar (30 April 2019). "Settlement Date Vs. Purchase Date". Finance - Zacks. Archived from the original on 27 January 2021.
- Gastineau, Gary L.; Mark P. Kritzman (1996). Dictionary of Financial Risk Management. ISBN 1-883249-14-7.Settlement Date defined as the actual date of completion (page 251).
- investorwords.com defines "settlement date" as the last possible date of intended settlement. Accessed October 12, 2007.