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Finance GlossaryPair Trading
Pair Trading
Definition of Pair Trading
Pair Trading is a market-neutral trading strategy that involves taking opposite positions in two highly correlated securities. The aim is to make a profit from the temporary difference in the prices. A trader may purchase the relatively underperforming stock (the 'long' position) and short-sell the relatively outperforming stock (the 'short' position) in the pair. The expectation is that the prices will eventually return to their historical mean relationship (convergence).
Related Terms
Plowback Ratio
The Plowback Ratio (or Retention Ratio) is the ratio of the net income of a company that is retained by the company to be reinvested in the company's business operations and growth (rather than paid out as dividends). The formula is: Plowback Ratio = (Net Income - Dividends Paid) / Net Income. High-growth companies in the IT or manufacturing sector often have a high plowback ratio as they see higher benefit in re-investing their profits to fuel expansion. A low plowback ratio indicates that a company is mature and returns a larger portion of its earnings to its shareholders.
Delivery Notice
A delivery notice is produced by the seller of a commodity futures contract. It is proof of confirmation of the sellers intention to physically deliver the underlying commodity to the buyer at the pre-agreed date.
Cash Conversion Cycle
A Cash Conversion Cycle (CCC) tells you how many days it will take to convert a company’s inventory or resources into cash. The formula for Cash Conversion Cycle is:
Cash Conversion Cycle = (DIO + DSO) – DPO
Cash Conversion Cycle = (DIO + DSO) – DPO
- DIO: Days Inventory Outstanding is the average number of days it takes for a company to turn inventory into cash through sales
- DSO: Days Sales Outstanding is the average number of days it takes for a company to collect its receivables
- DPO: Days Payable Outstanding is the average number of days it takes fo a company to fulfil its obligations or payables
Nominee
Nominee is a person appointed by an investor to receive the assets or benefits of an investment in case of the primary investor’s death. Adding a nominee helps ensure the smooth transfer of securities, bank balances, or mutual fund units to the rightful beneficiaries.
Annual Report
An annual report is an exhaustive written account of a company’s finances, activities, and other relevant information for the fiscal year.
Publicly traded companies are required to publish annual reports so that existing and potential shareholders have full transparency into the company’s finances and overall health.
Publicly traded companies are required to publish annual reports so that existing and potential shareholders have full transparency into the company’s finances and overall health.
Realized Gain
Realized Gain is the actual profit earned from selling an asset, such as a stock or mutual fund, at a price higher than its purchase cost, after accounting for fees. It differs from unrealized (paper) gains, as it triggers tax liability only upon sale. Investors track realized gains for performance evaluation and tax planning, ensuring compliance with capital gains rules.
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