Glossary of Financial Terms
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NASDAQ (or Nasdaq)
It is short for National Association of Securities Dealers Automated Quotation System. Nasdaq began as a quotation system for stocks, not traded on formal exchanges such as the NYSE (New York Stock Exchange). Nevertheless, it has grown to be an organized market with its own listing requirements. Unlike other exchanges such as the NYSE, Nasdaq has no physical location for conducting trading activities. It simply is a computer network connecting all the dealers and brokers. There are more shares listed on Nasdaq than on the NYSE. The trading volume (i.e., number of shares) is also larger on the Nasdaq. Although, the market capitalization of stocks traded on the NYSE is larger than that on Nasdaq. This is because NYSE tends to list all the big companies (such as GM and IBM), while Nasdaq has relatively smaller companies. However, that is not strictly true. Case in point, Microsoft is listed on Nasdaq.
See also “Over-the-Counter Market,” “NYSE” and “TSX.”
Nasdaq Composite
A widely watched stock market index in the U.S. It is a value-weighted or capitalization-weighted average of stock prices of all the securities (grater than 3,000) that are traded on the Nasdaq. “Value-weighted” is a term that states the larger the company in market capitalization, the higher the weight its stock enjoys in the index calculation. Since the index is based on all the Nasdaq securities, it involves things like ETFs, ADRs and REITs. In fact, aside from ADRs, the index also has some foreign listed companies. In general, the index is a barometer of the technology and high growth sectors.
See also “All Ordinaries,” “CAC 40,” “CSI 300,” “DAX,” “Dow Jones Industrial Average,” “Euro Stoxx 50,” “FTSE 100,”
“Hang Seng Index,” “NIKKEI 225” “Russell 2000,” “S&P/TSX,” “S&P 500” and “Shanghai Composite.”
Net Asset Value (NAV)
The per-share value of a mutual fund at the end of each business day. To calculate, you divide the total value of the fund’s holdings by the number of shares outstanding. In an open-end fund, when new investors want to buy shares or when existing mutual fund investors wish to redeem their shares, the fund will fulfill the transactions based on the NAV at the close of the business day.
See also “Mutual Fund,” “Closed-end Fund” and “Open-end Fund.”
Net Income
It is the bottom line (profit) on an income statement. More specifically, it is an accounting number that measures a company’s net profit after all expenses including taxes. For example, suppose a company has a total sales of $2,000,000, out of which cost of goods sold is $800,000. Therefore, the gross profit for the year is $1,200,000. Let’s imagine that the total operating expenses (including such items as wages, utilities and depreciation) amount to $500,000, and the interest expense is $200,000, the before-tax income is $1,200,000 $500,000 $200,000 = $500,000. In the end, assume a tax rate of 20% which leads to a tax payable of $100,000, then the net income for the year is $400,000.
It should be noted once more that net income is an accounting number. It is not the actual amount of money the company earns. For instance, part of the $500,000 operating expenses is depreciation. Suppose it is $80,000. This $80,000 is not actual cash expense. So the actual net profit in cash is $400,000 + $80,000 = $480,000.
See “Return on Assets (ROA)” and “Return on Equity (ROE).”
Net Present Value (NPV)
The value of future cash flows in today’s terms net of investments. For instance, if you invest $10,000 today on a venture and expect to receive a net income of $8,000 next year and $9,000 the following year. If your require a minimum return of 10% on an investment, then using this discount rate of 10%, you could calculate the NPV of this venture as
$8,000/(1 + 0.1) + $9,000/(1 + 0.1)2 $10,000 = $4,710.74.
See also “Discount Rate” and “Internal Rate of Return.”
Net Working Capital
The difference between a firm’s current assets and its current liabilities.
See also “Current Assets” and “Current Liabilities.”
Nikkei 225
A widely watched stock market index in Japan. Nikkei 225 is a price-weighted average of stock prices of the 225 largest companies traded on the Tokyo Stock Exchange. The meaning of “Price-weighted” is that the higher the stock price, the bigger the weight the stock enjoys in the index calculation. In this aspect, it is very different from most of the stock market indices in the world, but it is quite similar to the Dow Jones Industrial Average. As a matter of fact, it used to be called “Nikkei Dow Jones Stock Average” (from 1975 to 1985).
Currently the Nikkei 225 index hovers around 29,800. You may think that, this must have grown from a small number years ago. Not quite. Well, at its peak in the late 1980s, the index almost reached 40,000. In fact, the index was barely over 7,000 in March 2009, the lowest point it slid to since its peak. Now you understand what people mean when they say that “The Japanese market has been taking a beating in the past several decades.”
See also “All Ordinaries,” “CAC 40,” “CSI 300,” “DAX,” “Dow Jones Industrial Average,” “Euro Stoxx 50,” “FTSE 100,”
“Hang Seng Index,” “Nasdaq Composite,” “Russell 2000,” “S&P/TSX,” “S&P 500” and “Shanghai Composite.”
No-Load Funds
Mutual funds that are sold without commissions. Mutual funds offered by banks are usually no-load funds. The majority of mutual funds are sold through brokers that charge a commission of some sort.
Nominal Interest Rate
The risk-free interest rate we earn on a T-bill or a bond issued by the federal government. “Risk-free” here means that the instrument we are holding (e.g., T-bill) has no default risk. The term “nominal” is with respect to the term “real.” To put another way, nominal interest rate is the sum of real interest rate plus anticipated inflation. Since we cannot observe the real interest rate nor the anticipated inflation, we never know the true composition of the nominal interest rate. Nevertheless, we can always use recent inflation as a guide to the estimation of future inflation. Thus, once observing the nominal interest rate and the past inflation rate, we can have a rough idea of the magnitude of the real interest rate.
But why demand an interest rate that is the sum of the real interest rate and anticipated inflation? To better understand this, suppose we are in a world without inflation, i.e., a world where prices stay the same. If we deposit $100 today, we will demand more than $100 back a year later because we are giving up consumption today. We demand a return to as compensation for the delay of consumption. Suppose that the rate is 3%. Then we are basically saying that today’s $100 is equal to next year’s $103. Suppose the price of oranges is one dollar per pound. Then the above means we demand three more pounds of oranges if we have to postpone buying 100 pounds today. Thus, the 3% is the real return on investing or real interest rate.
Now, let’s suppose the inflation rate is 7%. The price of oranges one year later is $1.07 per pound. If we still demand 3% for postponing buying oranges today, then we can get only 103/1.07 = 96.26 pounds of oranges one year late. We will be worse off. How do we make sure that we still get 103 pounds of oranges?
Necessarily, we should demand a total interest rate such that we end up with $100(1+0.03)(1+0.07). Dividing this by the price $1.07, we would exactly get 103 pounds of oranges. If we multiply out the above expression, we will have $100(1+0.03)(1+0.07) = $100(1+0.03+0.07+0.030.07)$100(1+0.03+0.07) = $100(1+0.1). In the middle step, we omit the term 0.030.07 since it is very small. Obviously, the total interest rate we demand is roughly 10%, which is the sum of the real interest rate and the anticipated inflation. This is what we call the nominal interest rate.
Non-diversifiable Risk
Synonym of “systematic risk.”
Nonsystematic Risk
The part of a financial asset’s risk that is not connected to the overall market risk. It is firm-specific and can be diversified away when several assets are put in the same portfolio. Some examples of nonsystematic risk include management risk (e.g., a scandal involving the company’s CEO) and losses due to accidents (e.g., a fire at a company’s main assembly line). Since this type of risk is confined to a specific company and is not market-wide, they can be diversified away. An shrewd reader may think “How can a CEO scandal and a factory fire diversify each other? They are both bad.” Indeed, they cannot. Diversification refers to the losses that can be made up by gains. Thus, to make this illustration complete, imagine a portfolio within which Stock ABC falls because the company suffers a big loss from a factor fire, but Stock XYZ rises thanks to a major technological breakthrough.
See also “Diversification” and “Systematic Risk.”
NYSE
Short version of “New York Stock Exchange.” It is a formal stock change with a physical location which is New York. It is the largest exchange in the entire U.S. It tends to only list the largest companies in the United States. NYSE also lists the shares of many large foreign companies.
See also “Nasdaq,” “Over-the-Counter Market” and “TSX.”
NYSE Euronext
Located in New York City, it is an international conglomerate that operates major exchanges in Europe and the U.S., including NYSE, American Stock Exchange, and Euronext. It only came into existence in 2007 after the merger between NYSE Group, Inc. which controlled NYSE and Euronext N.V. which controlled Euronext.