What Is an Axe?

An axe (or “axe to grind”) is the interest that a trader shows in buying or selling a security that is typically already on the books. If a trader holds a long position but has short-term concerns, that trader’s axe toward short-term put options may be significant. Likewise, if a trader has risk exposure to an increase in interest rates, they may have an axe to hedge against that risk.

Many times, a trader with an axe will keep that information private. That is because if other market participants become aware of one’s motivations, they can take advantage of that information by offering unfavorable prices or withholding certain trades in order to exploit the situation.

Understanding an Axe

The term “axe” is derived from the phrase “axe to grind,” which means to possess an ulterior motive or selfish aim. The phrase has historically meant to have a grievance with someone, especially where one feels the need to seek retribution. The phrase probably originates from the act of sharpening an axe with a grinding wheel, with the intent (in this definition) to get revenge on someone by maiming or killing them.

Traders often use the term “axe” to represent someone’s particular interest in buying or selling a security that is already in their inventory, or hedging against it. The term was historically used to reference bond holdings, but traders have expanded the use to include all securities. In conversation, the term is often used to speculate about a trader’s plan with regard to a security that they hold.

Axe should not be confused with “ax,” which is a market maker central to the price action of a specific security.

How an Axe is Used in Practice

The term “axe” can be used in many different ways, which makes the context of the conversation important to consider.

Suppose that a trader has a large position in a given security. If that trader shops around for quotes with the intent of selling the stake, the trader who provides the quote may be at a disadvantage if they are unaware that the first trader has an axe with regard to the security. The second trader may ask, “Do they have an axe on this security?” which means “Do they have plans to sell this security?”

Traders may also use the term to represent securities related to the securities that they hold. For instance, a trader may hold a long position and have an axe toward put options if nervous about the stock’s short-term prospects.

Having an axe is often kept secret because knowledge of that information can be used by other market participants to exploit the situation for their own gain, and at the expense of the axe holder. That said, traders with good rapport may ask each other outright if they have a particular axe in the hopes that the other trader’s axe(s) will be opposite from their own—this way they can affect a trade or trades with each other in a mutually beneficial manner.

What Is an Asset Class?

An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are thus made up of instruments that often behave similarly to one another in the marketplace.

Understanding Asset Classes

Simply put, an asset class is a grouping of comparable financial securities. For example, IBM, MSFT, AAPL are a grouping of stocks. Asset classes and asset class categories are often mixed together. There is usually very little correlation and in some cases a negative correlation, between different asset classes. This characteristic is integral to the field of investing.

Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the asset class mix. Investment assets include both tangible and intangible instruments which investors buy and sell for the purposes of generating additional income, on either a short- or a long-term basis.

Financial advisors view investment vehicles as asset class categories that are used for diversification purposes. Each asset class is expected to reflect different risk and return investment characteristics and perform differently in any given market environment. Investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification.

Financial advisors will help investors diversify their portfolios by combing assets from different asset classes that have different cash flows streams and varying degrees of risk. Investing in several different asset classes ensures a certain amount of diversity in investment selections. Diversification reduces risk and increases your probability of making a return.

Asset Class and Investing Strategy

Investors looking for alpha employ investment strategies focused on achieving alpha returns. Investment strategies can be tied to growth, value, income, or a variety of other factors that help to identify and categorize investment options according to a specific set of criteria. Some analysts link criteria to performance and/or valuation metrics such as earnings-per-share growth (EPS) or the price-to-earnings (P/E) ratio. Other analysts are less concerned with performance and more concerned with the asset type or class. An investment in a particular asset class is an investment in an asset that exhibits a certain set of characteristics. As a result, investments in the same asset class tend to have similar cash flows.

Asset Class Types

Equities (stocks), bonds (fixed-income securities), cash or marketable securities, and commodities are the most liquid asset classes and, therefore, the most quoted asset classes.

There are also alternative asset classes, such as real estate, and valuable inventory, such as artwork, stamps, and other tradable collectibles. Some analysts also refer to an investment in hedge funds, venture capital, crowdsourcing, or cryptocurrencies as examples of alternative investments. That said, an asset’s illiquidity does not speak to its return potential; It only means it may take more time to find a buyer to convert the asset to cash.

What Is the Australian Securities Exchange (ASX)?

The Australian Securities Exchange is headquartered in Sydney, Australia. The Exchange in its current form was created through the merger of the Australian Stock Exchange and Sydney Futures Exchange in 2006. The ASX acts as a market operator, clearing house, and payments facilitator. It also provides educational materials to retail investors.

Understanding the Australian Securities Exchange (ASX)

ASX is consistently ranked among the top exchanges globally. Other major exchanges include the Tokyo Stock Exchange or TSE, the New York Stock Exchange (NYSE), the Nasdaq, and the London Stock Exchange (LSE). Each exchange has specific listing requirements that include regular financial reports and minimum capital requirements. For example, in 2021, the NYSE has a key listing requirement that stipulated aggregate shareholders equity for last three fiscal years of greater than or equal to $10 million, a global market capitalization of $200 million, and a minimum share price of $4. In addition, for initial public offerings and secondary issuers must have 400 shareholders.

Australian Securities Exchange (ASX) and Electronic Trading

As with the majority of international exchanges, ASX’s relies on a hefty data center to help connect it to leading financial hubs and facilitate electronic trading. Electronic trading gained strong traction with NYSE’s 2005 acquisition of rival market the Archipelago Exchange—a fully electronic exchange that listed new and fast-growing companies. NYSE Arca was the new name following the acquisition. Cybersecurity is an increasing concern as exchanges become more interconnected via the internet.

ASX and Education

The Australian Securities Exchange has a strong emphasis on educating visitors to its website, the investing public, and current and potential listers. For example, for first-time investors, ASX offers free resources for understanding the public markets, exploring different asset classes, and developing a personal investment strategy. Visitors can download a series of tutorials and guidebooks. In addition, ASX offers a game-version of trading where players do not have to risk real money; instead, they can learn the basics in a risk-free environment.

What Is Average Life?

The average life is the length of time the principal of a debt issue is expected to be outstanding. Average life does not take into account interest payments, but only principal payments made on the loan or security. In loans, mortgages, and bonds, the average life is the average period of time before the debt is repaid through amortization or sinking fund payments.

Investors and analysts use the average life calculation to measure the risk associated with amortizing bonds, loans, and mortgage-backed securities. The calculation gives investors an idea of how quickly they can expect returns and provides a useful metric for comparing investment options. In general, most investors will choose to receive their financial returns earlier and will, therefore, choose the investment with the shorter average life.

Understanding Average Life

Also called the weighted average maturity and weighted average life, the average life is calculated to determine how long it will take to pay the outstanding principal of a debt issue, such as a Treasury Bill (T-Bill) or bond. While some bonds repay the principal in a lump sum at maturity, others repay the principal in installments over the term of the bond. In cases where the bond’s principal is amortized, the average life allows investors to determine how quickly the principal will be repaid.

The payments received are based on the repayment schedule of the loans backing the particular security, such as with mortgage-backed securities (MBS) and asset-backed securities (ABS). As borrowers make payments on the associated debt obligations, investors are issued payments reflecting a portion of these cumulative interest and principal payments.

Calculating the Average Life on a Bond

To calculate the average life, multiply the date of each payment (expressed as a fraction of years or months) by the percentage of total principal that has been paid by that date, add the results, and divide by the total issue size.

For example, assume an annual-paying four-year bond has a face value of $200 and principal payments of $80 during the first year, $60 for the second year, $40 during the third year, and $20 for the fourth (and final) year. The average life for this bond would be calculated with the following formula:

($80 x 1) + ($60 x 2) + ($40 x 3) + ($20 x 4) = 400

Then divide the weighted total by the bond face value to get the average life. In this example, the average life equals 2 years (400 divided by 200 = 2).

This bond would have an average life of two years against its maturity of four years.

Mortgage-Backed and Asset-Backed Securities

In the case of an MBS or ABS, the average life represents the average length of time required for the associated borrowers to repay the loan debt. An investment in an MBS or ABS involves purchasing a small portion of the associated debt that is packaged within the security.

The risk associated with an MBS or ABS centers on whether the borrower associated with the loan will default. If the borrower fails to make a payment, the investors associated with the security will experience losses. In the financial crisis of 2008, a large number of defaults on home loans, particularly in the subprime market, led to significant losses in the MBS arena.

Special Considerations

While certainly not as dire as default risk, another risk bond investors face is prepayment risk. This occurs when the bond issuer (or the borrower in the case of mortgage-backed securities) pays back the principal earlier than scheduled. These prepayments will reduce the average life of the investment. Because the principal is paid back early, the investor will not receive future interest payments on that part of the principal.

This interest reduction can represent an unexpected challenge for investors of fixed-income securities dependent on a reliable stream of income. For this reason, some bonds with payment risk include prepayment penalties.