Investment vocabulary

Also known as a debenture, a bond is a security. The issuer of a bond promises to pay a monetary amount specified on the instrument, with a corresponding interest rate, and repay it in a given period of time. In contrast to a common stock this type of security pays a set rate of return. If the bond is issued by a large, reputable company with a high rating, it will be a highly stable investment with relatively low risk.

A broker trades in securities and other investment instruments in his own name, but at the order and on account of his customers. For his services a broker receives a commission (called a brokerage fee).

A stock is a security emitted by joint stock companies. A stock owner automatically becomes a partner (co-owner) of the company he owns stock in and has a right to take part in its management (through general assembly), collect profit and to receive any capital remaining after liquidation. For the investor there is an interesting trend of long-term stock appreciation in developed financial markets.

A derivative is an investment instrument derived from a certain underlying asset - e.g. interest, currency or stock index and similar. Trading in derivatives involves the conclusion of a contract under precisely stipulated conditions (e.g. the purchase of foreign currency for a fixed rate) where the contract performance is realised at a certain future date (e.g. after 3 months). A derivative constitutes a kind of bet on the future development of the market price of the given underlying asset. Some derivatives such as futures and options are traded on derivative exchanges. Others such as forwards and forward rate agreements (FRAs) can be bought directly from a bank.

A fixed term deposit is tied to a pre-agreed maturity date and usually yields higher interest than regular deposits available on request. A term deposit is concluded with a bank and is the most common type of financial investment. You may think that your money is safe in a bank account, but that's not completely true. Even if we discount the possibility of a banking institution's failure, there is always the risk of inflation. The longer your deposit, the greater the inflation risk, and because interest rates change constantly, not even short-term deposits are risk-free. You never know what the rate will be in a year or even five years. In the face of inflation and interest rate risks, there is simply no such thing as a risk-free investment.

Hedge funds are a noteworthy category in asset management characterised by a high degree of strategic flexibility. Their returns often have no relationship to stock or bond market results. They offer the possibility of a high return, but require a relatively high initial investment. That's why hedge funds are often beyond the reach of the smaller investor.

An index reflects the movements of the capital market it is set to represent. An index is calculated from the market prices of selected companies' securities. Each company represented in an index is allotted a specific weight which reflects the influence it has in the index. An index reflects the state and rate of development of the market it represents. The most famous indices are the American Dow Jones, the S&P 500 and the FTSE 100 (containing the 100 biggest companies registered in Great Britain). The index for the Prague Stock Exchange is called the PX-50.

Inflation indicates the percentage loss of the real value of money with respect to time (the practical implications are that for the same amount of money you are able to buy less goods when compared to, for example, a year ago).

An investment instrument is generally any vehicle of value appropriate for investing. The most common investment instruments are securities, currencies, goods (commodities) or derivatives.

The investment term is the specified time invested, i.e. the time span capital is sunk into a particular investment. A good investment appropriate for a long-term investor can cause a short-term investor lots of headaches. For example, if you buy a stock index fund, a loss of value in the index can result in a loss of, let's say, 15 % of your investment's initial value. However, within a few years the stocks can appreciate to such an extent that you can look back at this time humorously. For investors with a shorter investment horizon a more appropriate vehicle is the bond. Bonds bring a lower but a more stable value appreciation (return) than stocks.

A portfolio consists of various investment instruments in ones' ownership. Depending on the type and quality of the investment instruments in a portfolio, the investor's risk can be spread out.

A rating expresses the likelihood that an entity emitting a security cannot meet its future obligations. This measurement is performed by reputable and specialized agencies (such as Moody´s or Standard & Poors). Not only do companies or banks receive ratings, but countries can receive them, as well. Ratings are usually given in letters A (best) - D (worst = default). The Standard & Poors ratings scale has the following lettering: AAA, AA, A, BBB, BB, B, CCC, CC, C.

Risk is the level of uncertainty associated with an expected return. In other words: the higher the risk, the higher the probability that the expected return will not be achieved. The connection between risk and return is quite a pragmatic one. If the investor desires higher yields, he will have to accept higher risk. However, if he accepts higher risk, there is no guarantee that the higher yields will be achieved. When investing, risk can be lowered and optimized by many methods. This is precisely our task at RSJ.

This term was developed in the 19th century. It summarizes certain instruments which had no common name untill that time (bills of exchange, cheques etc.). Most important for modern investing are stocks, bonds or share certificates.

A stock exchange is organized through the direct or indirect (via computer) assembly of people, which takes place regularly during a specified period of time. Securities are traded on the stock exchange according to set rules and exchange by-laws. Other traded instruments can include currencies or commodities (commodity exchanges).

The RSJ Trading System is a specialized type of trading with investment instruments. It is based on knowledge of financial markets and mathematical analysis (highly sophisticated mathematical models tested on historic time lines). RSJ seeks out situations in financial markets where a long-term yield can be expected (from mathematical probability theory this involves positive mean value). RSJ realizes this profit through its trading system.