Definition of Bounce
The term “Bounce” can be applied in several contexts within finance, securities, and email communications:
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Banking: In banking, a bounce occurs when a check is returned by a bank due to insufficient funds in the account, making it non-payable. This event often leads to additional bank charges and potential complications for both the issuer and the receiver.
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Securities: In the securities market, a bounce refers to the rejection and subsequent reclamation of a security because of bad delivery. It indicates that the transaction could not be completed due to documentation or authorization issues.
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Stock Market: The term also describes a stock price’s sudden decline and subsequent recovery. A specific type of price pattern known as the “Dead-Cat Bounce” falls under this category, where a brief recovery follows a significant decline in stock prices before continuing to drop.
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Email Communications: Bouncing in email context refers to the return of an email because it could not be delivered to the specified address. This may happen due to incorrect addresses, full inboxes, or server issues.
Examples
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Banking Bounce: Jane writes a check for $500 to pay her rent, but her bank account only has $300. The check bounces due to insufficient funds, and she incurs a fee of $35 from her bank.
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Securities Bounce: A trader realizes a security transaction was voided because of incorrect paperwork, causing the security to be bounced back to them.
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Dead-Cat Bounce: After a steep decline, Stock XYZ briefly rises by 5% before continuing its descent the next day. This rise and fall pattern are typical of a Dead-Cat Bounce.
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Email Bounce: An automated email system sends an invoice to a customer, but the message is returned with a “Mailbox Full” error, indicating that it has bounced.
Frequently Asked Questions (FAQs)
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What happens when a check bounces?
- When a check bounces, the bank returns it unpaid due to insufficient funds in the account. This can result in fees for both the issuer and the recipient of the check.
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What causes a security to bounce?
- A security can bounce due to bad delivery, often resulting from incomplete or incorrect transaction documentation.
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What is a Dead-Cat Bounce in stock trading?
- A Dead-Cat Bounce is a temporary recovery in stock prices following a significant decline. It’s short-lived and typically followed by further decline.
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Why does an email bounce?
- An email bounces back when delivery fails, which can be caused by incorrect addresses, full mailboxes, or server issues.
Related Terms
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Insufficient Funds: A condition in which an account does not have enough money to cover a transaction or withdrawal.
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Bad Delivery: The delivery of securities or documents that do not meet the specified requirements, leading to a rejection or bounce.
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Dead-Cat Bounce: A phrase used in finance to describe a short-lived recovery in the price of a declining stock.
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Undeliverable Email: Electronic communication that cannot reach its destination due to issues such as incorrect recipient addresses or server problems.
Online References
- Investopedia - What is Insufficient Funds?
- Wikipedia - Electronic Check
- Investopedia - Dead-Cat Bounce
- Wikipedia - Bounce Email
Suggested Books for Further Studies
- “Check Fraud and the Role of the Banking System” by James Adler
- “Security Analysis: Principles and Techniques” by Benjamin Graham and David Dodd
- “Principles of Corporate Finance” by Richard Brealey, Stewart Myers, and Franklin Allen
- “Email Marketing Rules: A Step-by-Step Guide to the Best Practices” by Chad S. White
Fundamentals of Bounces: Finance and Communications Basics Quiz
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