INVESTORS’ GLOSSARY
ALPHA
Alpha is one of the two measures traditionally used to judge the performance of a money manager. It refers to the excess return that a money manager can generate by using his skills to pick the best performing stocks in the financial markets.
If a money manager generates a positive alpha this means they have made a higher return than a benchmark index, such as the S&P 500. If you beat the index by 0.8 per cent, then you have achieved alpha of 0.8. On the other hand, a manager who has missed the market’s return by 0.6 per cent would have an alpha of -0.6.
Alpha is also one of five technical risk ratios – when returns are calculated, it takes into account the the amount of capital put at risk by investors.
For example, one money manager risks £100m and generates a return of £200m. This might look impressive on a balance sheet, but it is a riskier strategy than that of a manager who risked £2m but generated a return of £10m.
In alpha terms, this would count as a better return.
AUCTION MARKET
The auction market determines the price you pay for a security when you buy it from a broker on an exchange or directly from an exchange yourself. A price for an asset is generated when buyers submit competing bids and sellers submit competing offers, all at the same time. And as you might expect, the highest bid offered for the asset determines the price that it will be sold for. A new auction begins when all of the bids and offers for an asset have been exhausted. The auction system is also used by stock markets – such as the New York Stock Exchange (NYSE) – to formulate prices at the start of each trading day. The auction market is essential for generating prices because one cannot perform a transaction in secret on a mainstream exchange.
Setting prices using the auction method compares with how prices are generated in an over-the-counter (OTC) or unregulated market. In an OTC transaction, the buyer and seller will negotiate the price of an asset between themselves.