Glossary
Absolute return: Investment strategy that aims to achieve "market-independent" returns.
Asset allocation: Allocation of assets to the individual asset classes in a portfolio. Asset allocation is used to manage the potential returns and the risk of a portfolio.
Asset class: Financial products with similar characteristics can be allocated to different groups. Traditional asset classes include, for example, equities, bonds, real estate and precious metals.
Benchmark: Comparison or reference value.
Bond: A security used for debt financing where the interest rate, term and repayment are fixed. The standard/fixed-interest bond, also called plain vanilla bond, has a constant interest rate (coupon) over the entire term. The total amount of this form of bond is divided into many equal "pieces". The denomination allows many creditors to participate in the bond, each with small investment amounts; this facilitates its marketing. By issuing a bond, the issuer - the debtor - raises debt capital. The bonds are traded on the bond market.
Bond picking: Targeted selection of bonds.
Bottom up: Analysis approach that focuses on the attractiveness of the individual investment. This means that an individual company is first considered before it is placed in the broader context of an industry, market or region.
Buy and Hold: "Buy and hold" is an investment strategy. Securities are purchased once and then held in the portfolio for the long term.
Carry: Return on a bond when it is held in the portfolio for a period of time taking into account all sources of return.
Cash flow: An economic measure that indicates the net inflow or outflow of liquid funds during a specific period. The free cash flow indicates the net inflow or outflow of liquid funds.
Cash flow rating (CaRat): analytical tool for stock valuation. For the valuation of a share, the long-term forecast cash flow profile is compared to the current market valuation.
Convertible bond: Fixed-interest security. In addition to a fixed interest rate and the right to repayment of the nominal value at maturity, convertible bonds also certify the right to convert the invested capital into shares of the issuing company. The conversion must take place within a certain period of time; this period - just like the exchange ratio - is determined before maturity. As a rule, convertible bonds have a lower interest rate than normal bonds because the holder is granted the advantage of the conversion option.
Convexity: Key figure which helps to estimate the price change of bonds when interest rates change.
Corporate governance: Corporate Governance is a legal and factual regulatory framework for the management and control of a company and deals with the question of how a company can be managed as well and responsibly as possible and how its internal organisation can be designed in such a way that undesirable developments can be identified and avoided as early as possible. The aim is to harmonise the incentive structures of different interest groups of a company (in the narrow sense: management and owners; in the broader sense: additional employees, lenders, suppliers, and the social and ecological environment) as well as possible.
Coupon: Describes the nominal interest rate of a bond. Authorizes the bondholder to receive interest.
Covered bond: A covered bond is characterised by the fact that it offers investors protection against default. The issuer is primarily liable for a covered bond. In the event of the issuer's default, the creditors are additionally protected against losses by a portfolio of collateral. This collateral often consists of mortgages or public sector bonds.
Credit spread: Risk premium (yield difference) that the bond debtor has to pay to the bond creditor compared to a low-risk bond (such as government bonds of the Federal Republic of Germany) with the same maturity. The lower the credit rating of the bond debtor, the higher the spread.
Creditworthiness: A measure of the creditworthiness of a debtor and its ability to meet its payment.
Currency risk: The risk that exchange rates fluctuate and lead to losses for investors.
Debt security: With a debt security, the holder of the debt security (creditor) transfers a certain amount of money to the issuer of the debt security (issuer) for a certain period of time. The issuer undertakes to repay this amount to the creditor at the end of the term. It also pays interest to the creditor according to a fixed schedule. The issuer uses a bond to raise capital and the creditor receives an interest-bearing investment.
Default risk: The risk that a debtor is unable to meet the agreed interest and principal payments (on time) or only partially.
Delta: Delta is a key figure that measures how much the price of an option changes when the price of the underlying asset underlying the option changes.
Derivative: Financial instrument whose price depends on the price development of an underlying reference value (underlying asset). Underlying assets are for example shares or gold. Derivatives include futures and options.
Distribution ratio: refers to the distribution ratio of a company or fund. The distribution ratio is the portion of the profits or returns generated that is paid out to the shareholders.
Diversification: The distribution of assets across various asset classes, individual securities, regions, sectors and currency areas - with the aim of reducing potential individual risks in financial investments through broad diversification.
Dividend: The dividend is the portion of the distributed profit of a stock corporation attributable to a single share.
Dividend yield: The dividend yield is calculated by dividing the dividend by the current share price multiplied by 100, indicating the return on invested capital per share as a percentage.
Drawdown: Represents the loss between a high and the subsequent low in a given period of the investment. The Maximum drawdown is the maximum possible loss that one could have suffered from the
investment during a given period.
Duration: Duration is the weighted average of the dates on which an investor receives payments from a fixed-interest security. It indicates the average capital commitment period of an investment. The duration is usually shorter than the remaining term of the bond, since capital flows back to the investors through interest payments in the meantime.
Emerging markets: Emerging markets are - not uniformly defined - underdeveloped but emerging countries that are currently undergoing a process of industrialisation. These countries are attractive targets for direct and portfolio investments by companies from industrialised countries. Important emerging markets include China, India, Brazil and Russia, but also many countries in Central, Eastern and Southeastern Europe. The translation as "emerging markets" is rather unfortunate, as they do not necessarily have to be on the threshold of an industrialised nation.
Equity index: Indicator of the average price development of the equity basket of a country, a region or even individual sectors. It reflects the price level of the selected shares on a specific day, either as a price index (based purely on changes in share prices) or as a performance index (adding dividend payments).
ESG factors: ESG ( Environmental, Social, Governance) factors or sustainability factors are aspects related to environmental, social and employee matters, respect for human rights, and the fight against corruption and bribery. Governance refers to aspects of good corporate management.
ESG conflicts: Potential conflicts related to ESG factors that can directly and indirectly affect the value of a company.
Exchange rate: Exchange ratio of two currencies.
Exchange traded fund (ETF): Exchange-traded index fund. ETFs allow investors to invest in a broadly diversified portfolio of equities and other asset classes. As a rule, they replicate the performance of an existing index such as the DAX.
Financial repression: Systematic influencing of the general interest-rate level by the central banks at the expense of savers - and in favour of the state. Negative real interest rates lead to a gradual expropriation of private savings - and increase the debt carrying capacity of states.
Fixed income: Generic term for fixed-income securities.
Flash crash: A flash crash on the stock market is a slump in prices that takes place within a very short time.
Forward: A forward contract is a non-conditional and non-standardised forward transaction that is agreed and settled between banks "over-the-counter" (OTC). The contracting parties are free to negotiate the terms. Forwards are traded on a variety of underlying assets. The most common are currency and interest-rate forwards (forward rate agreements, FRA).
Free float: All shares that are not held by major shareholders (share in the share capital of more than five per cent as defined by Deutsche Börse), i.e. can be acquired and traded by the general public.
Futures: Exchange-traded futures contract.
Futures contract: A futures contract is a standardised unconditional forward transaction which is agreed and settled over a futures and options exchange. Futures contracts exist for numerous items, such as wheat, gold, foreign exchange, government bonds and shares. The details of an exchange-traded futures contract, such as the precise specification of the underlying, the contract size and the term of the contract, are standardised. A futures contract is a derivative: the movement in its price depends essentially on the price of the underlying. Futures contracts are used to hedge against the risk of price fluctuations (hedging), to speculate on expected price movements in the underlying (trading) or to take advantage of price differences between markets (arbitrage). Futures contracts are to be distinguished from option contracts (conditional forward transactions).
Green bonds: Bonds whose issue proceeds (or an equivalent amount) are used exclusively for the pro rata or full (re-)financing of suitable green projects.
Gross domestic product (GDP): Central measure of the economic performance of an economy or economic region in a given period. It includes all goods and services produced within the geographical boundaries of an economy in a given period and valued at market prices, provided that they are not used as intermediate consumption for the production of other goods and services.
Hedge: Hedging of a financial instrument or an entire portfolio against future fluctuations in value by entering into the opposite position. The offsetting position is selected in such a way that it increases in value if the original position decreases in value.
High-water mark (HWM): Refers to the highest level that the net asset value of a fund has reached at the end of a certain period, e.g. 12-month accounting period.
High-yield bond: Fixed-interest securities from issuers with a poorer credit rating. They offer higher yields, but are also associated with higher default risks for investors.
Hybrid bonds: Subordinated corporate bonds. Subordinated bonds are those bonds which, in the event of liquidation or insolvency, are only repaid after certain other claims have been met.
Implied volatility: Financial mathematical key figure for options. It can be interpreted as a measure of market participants' expectations regarding the future price movements of the underlying instrument.
Interest: Generally speaking, interest is the price for capital loaned for a time, and is paid to the lender by the borrower. The interest rate is usually quoted as a percentage per year.
Investment grade: Comparatively high credit quality rating of debtors or securities with a rating in the range of BBB- or better.
Liquidity: Companies/persons are considered liquid if they are able to meet their payment obligations at any time. Securities are considered liquid in terms of their tradability if they can be bought and sold comparatively easily - a (sale) sale in itself therefore does not have a substantial influence on the market price. Real estate is comparatively illiquid because it is much more expensive to buy and sell.
Long position: Market participants who buy a security take a long position.
Market risk: Describes the risk of losing money in the investment of assets if the relevant market values change to one's own disadvantage. In the case of interest-bearing securities, this could result in a change in market interest rates and, in the case of securities in general, changes in stock market prices and, in the case of foreign currencies, changes in exchange rates.
Moral hazard: Moral hazard is a situation in which an individual has an incentive to behave immorally, e.g. irresponsibly. The term originally comes from the insurance industry, but is now generally used to describe inappropriately constructed incentive systems. A standard example of moral hazard is when an insured person recklessly takes on greater risks because the insurance company may have to pay for any damage he or she causes. Bank employees may be exposed to moral hazard if they are given an incentive in the form of bonuses to grant as many loans as possible - and they themselves are not liable if the bank and its owners incur high losses due to loan defaults after some time.
Net asset value: the sum of all the valued assets of an investment fund minus its liabilities divided by the number of fund units outstanding.
Non-investment grade: Comparatively low credit quality rating of debtors or securities with a lower rating than BBB-.
Option: Financial contract (conditional forward transaction), which securitises the right - but not the obligation - to buy (call) or sell (put) an underlying asset within a certain period of time (American option) or at the end of an agreed term (European option) at a predetermined price.
Plain vanilla bearer bond: see bond.
Price-to-earnings ratio (P/E ratio): This ratio is used to assess the stock market valuation of a stock corporation. In the calculation, the price of an individual share is set in relation to its proportionate book value, that is, the equity attributable to the individual share.
Quantitative easing: Refers to a monetary policy measure aimed at lowering long-term interest rates and injecting additional liquidity into the banking system. In quantitative easing, the central bank buys large amounts of bonds; this tends to push up bond prices and lower the corresponding yields - which in turn influences the general interest rate level in the bond market. Central banks resort to quantitative easing in particular when short-term interest rates are already close to zero. When they buy bonds, central bank money is created, i.e. the quantity of central bank money increases - hence the term quantitative easing (as opposed to monetary policy easing by lowering key interest rates).
Quantitative Tightening: Quantitative tightening is a monetary policy measure aimed at withdrawing liquidity from the banking system. This involves a central bank reducing its securities holdings ‒ for example, by not reinvesting government bonds at maturity.
Rating: Classification of debtors or securities in terms of their credit quality/creditworthiness according to credit grades. The classification is usually carried out by so-called rating agencies. The best credit ratings are listed by the most well-known agencies as AAA or Aaa, worse ratings with similar letter and number combinations. The credit quality of debtors or securities with a rating in the range of BBB- or better is considered comparatively high.
Relative value: Attractiveness of one investment compared to another.
Risk reward: Risk/reward ratio of an investment.
Risk to bond floor: In the case of convertible bonds, the "bond floor" represents the pure bond value without stock subscription rights. The risk up to the bondfloor is thus the maximum loss that can result from a decline in the share price (without considering the credit risk).
Roll-down effect: In a normal yield curve, the yield on bonds falls as the redemption date approaches. In return, there is a price gain for investors who have already held the bond for a longer time. The higher the difference in interest rates between bonds with longer and shorter maturities, the higher this price gain.
Second-round effects: Second-round effects are the reactions of market participants to first-round effects, i.e. to an increase ‒ or decrease ‒ in the price of individual assets, products or services. If, for example, after a rise in the price of crude oil the trade unions try to raise the reduced purchasing power of their members back to the original level by a strong wage increase, there is a danger of a price-wage spiral.
Security: Securitises a right to an asset, e.g. equity shares, debt securities (bonds) and investment fund shares. Securitisation makes it easier to trade these rights to assets. For many classes of securities there are institutionalised markets.
Share: Share: A security that represents a share in the capital stock of a stock corporation (AG) and the rights and obligations associated with it. The owner of a share - the shareholder - is a co-owner of the stock corporation. They are liable to the amount of their capital share.
Share class: The assets managed in an investment fund may consist of several unit classes. The investment concept in the various unit classes is generally the same. There may be differences, for example, in the structure of the fees or the distribution of income.
Short position: Market participants take a short position when they are in the seller position in a securities trade.
Social bonds: All types of bonds whose issue proceeds (or an equivalent amount) are used exclusively for the pro rata or full financing or refinancing of suitable social projects.
Spread: Spread is a general term used in stock market language to describe a price difference. In securities trading, the spread is the difference between the buy and sell price that a trader places for a security at a certain point in time. In the bond market, spread refers to the difference between the yield of a particular bond and a reference interest rate. In the case of bonds, the worse the credit rating of the bond debtor, the higher the spread. The difference in the valuation of similar underlyings that differ in one aspect - such as the maturity or the currency in which they are denominated - is also known as the spread.
Stock picking: Targeted selection of shares/individual securities.
Sub-investment grade: Comparatively low credit quality rating of debtors or securities with a lower rating than BBB-.
Sustainability bonds: Bonds whose issue proceeds are used exclusively to (re-)finance a combination of green and social projects.
Sustainability-linked bonds: Bonds where financial and/or structural characteristics may vary due to the attainment or non-attainment of pre-defined sustainability/ESG targets.
Taper tantrum: Refers to the strong stock market reaction following the announcement by the US Federal Reserve in May 2013 to reduce its bond purchases. As a result, bond and share prices and the gold price fell significantly.
Three “Ds”: In this context, the three “Ds” stand for “deglobalisation” (i.e. the renationalisation of production capacities), “decarbonisation” (i.e. the climate-friendly transformation of society and the economy) and “demography” (i.e. the demographically induced increasing shortage of skilled labour). In our opinion, these three factors will have an inflation-increasing effect in the medium to long term.
Top down: Analytical approach in which the entire macroeconomic environment is considered first. The perspective is then narrowed down to individual countries or sectors and only at the end is the quality of an individual company analysed. The opposite of this approach is the bottom-up approach.
Total return: Total return of an investment. This consists of the distributions paid out (dividends or interest payments) and possible price gains.
Track record: The track record reflects the historical performance of a fund. It is considered an important quality feature of a fund or portfolio manager.
Tranche: See share class.
Volatility: Describes the extent of short-term fluctuations of a value, measured by calculating the standard deviation (a statistical measure of the average distance of real values from their mean). For securities, volatility is calculated as the standard deviation of returns.
Warrant: See Option.
Yield: Refers to the return on capital employed. The return is usually given as a percentage and usually refers to a period of one year. The yield on a fixed-interest bond is calculated from its market price, nominal interest rate and term.