Scenario in which the spot price of a commodity is higher than the respective derivatives price
This is an irrational phenomenon applicable to the price calculation of
commodities, for the custody- and interest-related costs would lead to
commodities being more expensive on the derivatives market than on the cash
Analysis of individual items on the balance sheet with the goal of evaluating a company's economic situation
Balance-sheet analysis can be subdivided into internal and external analysis.
Internal balance-sheet analysis generates information on the company for the
management staff, and is part of corporate controlling operations. In external
balance-sheet analysis, outside persons or institutions examine key ratios, as
well as the published financial statements and accounts prepared for tax
purposes, in order to ascertain the company's earning power, creditworthiness,
and profitability. However, the findings of external balance-sheet analysis
cannot be regarded as completely valid, because information on unused credit
lines, outstanding contracts or undisclosed reserves can be concealed in the
balance sheet by calculating higher depreciation expenses.
Balance-sheet analysis is the most important component of fundamental analysis.
A measure used world-wide to quote changes in bond interest rates and yields
One basis point relates to 0.01 percentage points. Thus, if the interest rate
or yield of a bond rises by 0.63 percentage points, this corresponds to an
increase by 63 basis points.
Trade in the difference between the spot and the futures price of an instrument
With a basket certificate the investor acquires a fraction of a basket of securities that corresponds to the subscription ratio. Above that there are certificates contenting only one equity called share certificates.
The issuer determines the basket?s compilation before quoting the certificate.
Fundamentally, all securities with regular, at least daily, price
determinations are suited for the portfolio. The selection criteria for the
shares or securities in the basket are known and remain unchanged during the
life of the certificate.
Nevertheless, the composition of the share basket can change over time. If the
issuer follows a specific strategy with the certificate, the basket has to be
adjusted at specific end-of-period dates, provided the market leaders change.
In such a case, the basket is called an active basket. If, in contrast, the
composition of a share basket remains clearly defined, as is the case for an
index certificate, it is called a passive basket.
The success of a basket certificate is measured on whether it can outperform a
comparison index or fund, a so-called benchmark. Basket certificates can be
roughly divided into three categories based on the criteria for selecting
securities: Sector certificates; country or region certificates; and strategy
and thematic certificates.
Basket certificates make sense if an investor is convinced of the potential in
a particular sector or region, but shies from the risk of investing in
individual securities. Because the certificate is expected to achieve higher
profits than the benchmark index, the share basket usually contains fewer
titles than the benchmark index. That increases the potential for profits; but
the risk of loss increases compared to the index. Unlike shares, basket
certificates are not eligible for dividend payouts. The limited maturity
should also be taken into account.
Market trend characterized by sustained price declines, usually in all market segments
Investors in a bear market tend to have a pessimistic outlook. Their strategy
is to acquire so-called short positions, for example, by selling securities in
the hope that they will be able to buy them back at a much lower price, or by
selling short (see also short sale).
As a consequence, prices and indices continue to fall over the long term.
Antonym: bull market
Class of share that entitles the bearer, or holder, to assert all of the rights vested in the share
Bearer shares differ from registered shares in that the holder of a bearer
share is not designated by name on the share certificate, and is usually not
required to furnish proof of rightful ownership.
Bearer shares are transferred informally and by delivery, without any changes
having to be made to the certificate. As a consequence, they are highly
fungible (interchangeable) and can be traded easily.
In keeping with the German Stock Corporation Act, stock corporations issue
bearer shares unless their charter provides for the issue of another class of
General term: bearer instrument
Antonym: registered share
Performance indicator that expresses the sensitivity of a stock to changes in an index
The beta factor describes the extent to which the price of a stock follows the
development of an index ? i.e., whether it performs better or worse than the
market. A stock with a beta factor larger than 1 is more volatile than the
market; a beta factor smaller than 1 indicates that the stock is less volatile
than the market. If the beta factor is 1.2, an increase (or decrease) of 10
percent in the index would lead to an increase (or a decrease) of 12 percent
in the stock; if the beta is 0.8, the increase (or decrease) in the stock
would be 8 percent. When there is a clear market trend, stocks can be valued
on the basis of their beta factor. In a bull market, shares with a beta larger
than 1 offer above-average earnings potential; in a bear market, investors are
less likely to incur losses on shares with a beta smaller than 1. It is
assumed that the beta factor of the previous period will apply in the future
The validity of the beta factor as a performance indicator is linked to the
correlation coefficient. Price movements forecast on the basis of the beta
factor are more reliable as the correlation coefficient increases. While the
correlation coefficient is a measure of the type of correlation between a
stock and an index (positive or negative) and the likelihood of that the price
of the stock will develop parallel to the index, the beta factor indicates the
extent of deviation between the two.
The name for the price at which a market participant wants to buy a particular security
A market participant sets the bid price with an entry in the order book on an electronic trading system; in rare cases this is done orally on the trading floor.
The highest price at which a market participant is willing to buy a security (representing the demand side of the transaction).
Market participants announce bid prices either by open outcry on the trading floor, or by entering them in the open order book of an electronic trading system.
Antonym: ask price
Difference between the best bid price and the best ask price for a security at a given time; published in the open order book on Xetra®
The bid/ask spread shows the extent to which available bid and ask offers
vary: the lower the spread, the greater the consensus between participants
with respect to the value of the share in question. The bid/ask spread is a
widely used measure of the efficiency of the currency and capital markets,
since narrow spreads represent a high degree of market liquidity and low
On the trading floor of the Frankfurt Stock Exchange, the bid/ask spreads used
to be issued by the lead brokers. However, that is rarely the case today.
Instead, non-binding estimates are published via the trading system Xontro,
the price boards on the floor and data vendors.
In so-called "zero-spread trading" for private investors, i.e. in trading
without the difference between bid and ask prices, the lead brokers execute
orders at the midpoint of the estimates given. This price is guaranteed by the
lead brokers for orders in DAX® shares up to ?10,000 (in MDAX® shares
up to ?5,000 and in TecDAX® and SDAX® shares up to ?3,000) per price
calculation. These no-spread prices are published in real-time as so-called
indicative prices on the website of Deutsche Börse.
Formula used to determine the value of options and warrants
Named after the American economists Black and Scholes, this formula takes into
account the five most important determinants for the price of an option: the
price of the underlying stock, the exercise price, the time remaining to
expiration, interest rate levels and volatility.
Shares with large market capitalization, typically included in prominent indices, such as DAX
Standardized futures contract on a medium-term bond issued by the German Federal Government
The Bobl Future (Bobl = Bundesobligation, the German word for federal
government bond) is traded on the Eurex® exchange. The underlying instrument
is a notional bond that represents a basket of deliverable bonds with an
interest rate of 6 percent and a remaining maturity of between 4.5 and 5.5
years. The value of a Bobl Future contract is ?100,000.
Bodies of the stock exchange
Committees that are directly responsible for performing the functions of the stock exchange
As stipulated in the 1994 amendment to the German Stock Exchange Act, the bodies of the stock exchange comprise the Exchange Council, the Exchange Operating Board, Market Surveillance, the Sanctions Committee and the Arbitration Panel of the stock exchange.
The Stock Exchange Act and the Stock Exchange Rules and Regulations require that the admission of securities to trading be handled by two separate exchange bodies: the Admissions Office the Official Market and the Admissions Committee for securities not listed in the Official Market.
The relevant provisions can be found in sections 1, 3, 9, 28, 30, 37, 72 of the Stock Exchange Act.
A debt instrument that obligates the issuer to pay to the bondholder the principal plus interest.
Bonds are issued by the government or other public authorities, credit institutions, and companies, and are sold through banks. They enable the issuer to finance long-term investments with external funds. The total volume of a bond issue is divided into smaller amounts of at least ?50. The most important features of a bond are its maturity date, the coupon (interest rate), and whether the interest rate is fixed or floating. The rights vested in a bond are stipulated by law, but are typically supplemented with additional terms and conditions.
Bonds can fall into one of the three following categories:
fixed-rate bonds (interest rate remains constant throughout the life of the bond)
floating-rate bonds (variable interest rate that is tied to a benchmark such as a money market index)
zero-coupon bonds (bond that does not bear interest as such, but is sold at a substantial discount from its face value; the bondholder receives the full face value at maturity).
Reflects the weighted average price of a bond portfolio which consists of notional bonds or mortgage bonds at a given point in time
indices are calculated, updated and published by exchanges, banks and
other financial experts.
A bond index can be calculated either as a price or a performance index. Owing
to the wide range of bond maturities, bond indices are calculated on the basis
of a portfolio of notional bonds so that the structure of the index remains
constant over time.
Examples of bond indices in Germany are REX ®
, the iBoxx indices ( iBoxx
EUR and iBoxx
GBP ), the eb.rexX
index famlily and the PEX® .
Special distribution of funds to a companys shareholders
A company will distribute a bonus in addition to the dividend if it has been
especially prosperous during the financial year, or generates extraordinary
profits. For companies that pursue a dividend policy in which the amount of
the dividend remains constant over a long period of time, a bonus payment will
enable shareholders to benefit from positive fluctuations in earnings.
Bonus certificates have a risk buffer for price losses in the underlying; the bonus guarantees a minimum return above the risk level.
A bonus certificate represents an alternative to a direct investment in a
share or an index. Investors primarily use them if they believe that despite
rising prices setbacks are still likely to occur.
A bonus certificate is furnished with a bonus amount and an upper and lower
price level. If the certificate expires with the price of the underlying
ranging between these two levels, owners are paid out their bonuses. If the
underlying was at or below the risk level during the certificate's lifetime,
its price is that of the current value of the certificate at expiry. If the
underlying is above the upper level at expiry, the investor fully participates
in the price gains. Some bonus certificates have a profit cap. This is where
the certificate stops participating in the price gains of the underlying.
A bonus certificate is issued at the current price of the underlying. The
upper level is derived from adding the bonus to the issue price. The lower
level is determined at issuance and usually expressed in percent.
New shares distributed to existing shareholders in conjunction with a capital increase out of retained earnings, thereby enabling them to maintain a proportional share of ownership in the company.
A capital increase out of retained earnings is effected by converting general reserves into share capital. Bonus shares are distributed so that existing shareholders can own a percentage of the new share capital that is equivalent to their original stake in the company, which protects them from the effects of dilution.
Bonus shares are admitted to exchange trading without having to undergo the admission process. The price of existing shares decreases following the issue of the new shares in proportion to the capital increase (see the example given under "subscription right"). However, the total value of the shares owned by existing shareholders does not change.
Shareholders will profit from the issue of new shares if the bonus shares are entitled to a dividend payment in the same amount as the dividend paid on the original shares.
Procedure for underwriting and offering new issues of securities which takes into account the interests of both issuer and investors when determining the offering price. Opposite: Fixed-price offering system
Unlike the fixed price system, book-building enables institutional and other
large-scale investors to participate in the pricing procedure, which involves
five steps. The time required to complete each of these steps depends on the
issuing volume and the sector in which the company is active.
1. Selection of the lead manager:
The banks in the underwriting syndicate present their IPO strategies in
so-called beauty contests. The issuer then selects a lead manger on the basis
of criteria such as the consultancy services offered, the strategy for
bringing the security to market, the bank's standing and expertise in the
field, and the closeness of the business ties between bank and issuer. (Larger
issues such as the privatization of Deutsche Telekom may be handled by several
In this phase, the syndicate members contact potential large-scale investors
to ascertain their degree of interest in the security. The syndicate members
present their own research material as well as the issuer's offering
prospectus, which the syndicate designs in conjunction with the issuer. The
offering prospectus contains important information on the company's history,
business activities, management, strategic alignment, as well as the relevant
markets and its position vis-à-vis competitors. This information enables
potential investors to assess more accurately the opportunities and risks of
the issue. On the basis of discussions with institutional investors, the
syndicate and the issuer agree on a price range for the offering price. The
difference between the upper and lower values of the price range may be as
much as 10 to 15 percent.
The marketing phase begins when the price range is announced at a press
conference. The issuer's executive board then presents the company at "road
shows", i. e. public events, analysts' conferences, and meetings with both
domestic and foreign institutional investors. Private investors are informed
of the pending issue by their personal financial consultants.
This phase begins shortly after the inception of marketing activities. When
syndicate members receive subscription requests, they fill out order forms
which they then forward to the lead manager (also called "book runner"). The
forms contain information on the subscriber's identity (name and nationality),
what kind of investor the subscriber is (e.g. insurance company, pension fund,
investment fund, private investor) the volume of shares desired, the price
offered, and the investment strategy (short-term, medium-term, long-term). The
identity of institutional investors is disclosed only with the subscriber's
explicit consent, and the names of private investors are generally not
disclosed at all.
The book runner enters all subscription orders received into an electronic
order book. The orders are then evaluated so that preference can be given to
long-term investors when the securities are distributed. By carefully choosing
future investors, the lead manager can contribute to price stability and
inspire confidence that the security will be valued fairly.
5. Price determination and allocation of shares:
Order-taking is followed by a subscription period which normally lasts from
eight to ten days. Afterwards, the book runner analyzes the price elasticity
of demand on the basis of the information provided in the subscription
requests, usually assisted by a computer-driven scoring procedure that takes
into account criteria such as investment horizon. On the basis of this
analysis, the book runner determines a single offering price in agreement with
the issuer (in some cases, different prices will be set for private investors
and institutional investors). In allocating the securities, the book runner
achieves the desired mix of investors by instructing the syndicate banks to
set aside a certain number of shares to institutional investors (directed
allocation). The book runner also makes available a certain quantity of shares
to be distributed equally among for private subscribers (free retention).
The so-called green shoe has an important function in the allocation of
shares. This is an agreement between the issuer and the syndicate banks which
states that the issuer will provide a certain number of additional shares (a
type of reserve) to be distributed by the syndicate at the original price
should the demand for the security be considerably higher than expected. The
green shoe helps stabilize the price of the share after exchange trading in
the shares has begun.
Antonym: Fixed-price offering system
Börsenordnung (Stock Exchange Rules and Regulations)
Statutes of the stock exchange
The Stock Exchange Rules and Regulations (Börsenordnung) are issued by the Exchange Council in agreement with the operating body of the stock exchange. It ensures that the respective exchange can perform the tasks expected of it, and guarantees the interests of the public and trading. More specifically, the Stock Exchange Rules and Regulations regulate the organization of the stock exchange and the publication of all information regarding prices and volumes. In the case of securities exchanges, the Rules and Regulations also govern the composition of the Admissions Office and the appointment of its members.
Börsenrat (Exchange Council)
Body of the exchange that issues important regulations pertaining to trading
The Exchange Council (Börsenrat) comprises a maximum of 24 honorary members. These include bank representatives, market participants, issuers and investors. The Exchange Council is responsible for the following tasks:
1. Drafting and issuing the Stock Exchange Rules and Regulations as well as the fee schedule of the exchange
2. Specifying the terms and conditions for exchange transactions
3. designing the examinations to test the professional aptitude of exchange dealers
4. Issuing internal regulations for the Exchange Operating Board
5. Appointing and dismissing members of the Exchange Operating Board in agreement with the Exchange Supervisory Office
6. Monitoring the Exchange Operating Board
7. Appointing, re-appointing and dismissing the head and deputy of Market Surveillance as suggested by the Exchange Operating Board and in agreement with the Exchange Supervisory Office
8. Appointing members to the Admissions Office and the Admissions Committee.
Decisions taken by the Exchange Operating Board regarding the introduction of technical systems that support trading or the settlement of exchange transactions also require the approval of the Exchange Council; the same applies to the use of exchange facilities pursuant to section 1 paragraph 2 of the Stock Exchange Act.
Moreover, the Exchange Operating Board is required to submit decisions on fundamental issues to the Exchange Council for approval, a procedure that is regulated in greater detail in the internal regulations for the Exchange Operating Board.
Break-even point (warrants)
At break-even point, the price of the underlying instrument is such that if the warrant holder chooses to exercise the option, he will neither make a profit nor incur a loss.
A call warrant reaches the break-even point when the market price of the
underlying instrument is equivalent to the exercise price plus the price of
the warrant. A put warrant reaches the break-even point when the market price
of the underlying instrument corresponds to the exercise price minus the price
of the warrant.
The break-even point is one of the variables used in determining the value of
In venture capital language, capital used to finance an IPO
Investment banks and underwriting houses will help a company go public by providing bridge capital, which serves to "bridge" the period until the equity capital generated by the IPO flows into the company.
Brokers determine prices on the stock exchange.
They also provide assistance in making investment decisions and execute their clients? buy and sell orders. Their role thus corresponds to that of a "Freimakler" in the German system.
Synonym: exchange trader
Fee paid by investors to cover the intermediation function performed by brokers
When a security is bought or sold on the floor, the investor is required to
pay a brokerage commission that is determined on the basis of the order size.
In the case of shares, it is calculated as a percentage of the price of the
stock; in the case of bonds, it is specified as a percentage of the par value
of the bond. The fee is charged by the institution responsible for executing
and settling the order.
Brokerage fees are standardized and stipulated in the fee schedule of the
stock exchange. In the Official Market, the brokerage fee for exchange brokers
comes to 0.08 percent of the price of a stock, warrant or subscription right,
but in all cases at least 0.75 euro. For stocks in the DAX index, the
brokerage fee is 0.04 percent. For bonds, the fees are between 0.0015 and
0.075 percent, depending on the transaction.
Standardized futures contract on a long-term bond issued by the German Federal Government
The Bund Future is traded on the Eurex® exchange. The underlying instrument is
a notional bond that represents a basket of deliverable bonds with an interest
rate of 6 percent and a time-to-maturity of between 8.5 and 10.5 years. The
value of a Bund Future contract is ?100.000.
Bundesanstalt für Finanzdienstleistungsaufsicht (BAFin)
Merger of the former Federal Banking Supervisory Office (banking supervision sector), Federal Insurance Supervisory Office (insurance supervision sector) as well as the Federal Supervisory Office for Securities Trading (securities supervision/asset management sector).
The Federal Financial Services Authority (BAFin) was established on 1 May 2002. The tasks of the former federal supervisory offices for banking (BAKred), insurance (BAV) and securities trading (BAWe) have been amalgamated under the umbrella of the new authority. Thus there is now only one state supervisory authority in Germany for banks, financial services institutes and insurance companies which covers the entire financial market. The establishment of BAFin has merged the central tasks of customer protection and solvency supervision.
BAFin is a federal, legally responsible public institution in the business area of the Federal Ministry for Finance. It has registered offices in Bonn and Frankfurt am Main. BAFin supervises about 2,700 banks, 800 financial services institutes and more than 700 insurance companies.
Private investor who supports a start-up company by providing capital and what is usually many years' management experience
Business angels are typically former entrepreneurs. They support new companies
in their early stages by providing risk capital. In addition, they advise the
management team or assume management tasks themselves. In return for their
support, they acquire stock in the company.
Deutsche Börse AG and KfW Bankengruppe have joined forces with BAND (Business
Angels Netzwerk Deutschland) to create a forum for establishing contacts
between business angels and innovative companies.
Plan that documents the viability of a company
In its business plan, a company outlines its business model and its
medium-term goals. The main reason for writing up a business plan is to give
providers of outside capital ? and in particular venture capital companies ? a
means of evaluating the company's approach and development potential.
Important components of a business plan are thus the investment plan,
financing plan, liquidity plan and profitability forecast. The planning period
usually spans three to five years.
Exit scenario which sees the original partners of a start-up company buy back the shares held by the participating venture capital company