WIC Glossary

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Information source: University.Smartmoney.com


Accounts payable - The money that a firm owes to others. Considered a current liability on a firms balance sheet.

Accounts receivable - The money owed to a firm. Considered a current asset on a firm's balance sheet.

Agency bonds - Bonds that are issued by a federal government agency or institution. They carry the highest credit rating (next to Treasuries) because if the federal government defaults on its debt, then we are in a whole other kind of trouble. They offer a slightly higher rate of interest than Treasuries since they have slightly higher risk, but they are still considered a safe, low return investment.

Amortization - The accounting procedure used to write off so-called intangible assets (assets which do not have a real value, like brand names or patents) over the period of their existence. Its partner in crime is depreciation which allows firms to write off capital (property, plant and equipment) expenses.

Arbitrage - The simultaneous buying and selling of a security at two different prices in two different markets. The arbitrageur makes money when there is a price discrepancy between the two prices. The differences are usually small, so large volumes are required for this to be profitable. These discrepancies do not stick around long because of efficient market theory, but there are gains to be made by the quick and the brave.

Ask price - The price at which someone is willing to sell an asset. In the stock market, the ask price is the lowest price at which someone will sell their security. The counterpart is the bid price, which is the price that someone is willing to buy. The difference between them is known as the spread.

Asset allocation - An investment technique which spreads one's money around to different types of investments in order to diversify, or spread out risk. The idea being that if one sector of the market tanks, your retirement fund is still sitting pretty.



Balance sheet - A financial statement that lists a funds assets and liabilities as of a certain date. It shows a firm's financial position by stating what a firms owns (assets) and what it owes (liabilities). The difference between the two is shareholders' equity or book value. Remember on a balance sheet that:

Assets = Liabilities + Shareholders' Equity

In other words, someone always owns every asset that a firm has . . . be it a lender or a shareholder.

Bankruptcy - A state of insolvency for a business or individual. In other words, make way for the repo man because you can't pay the bills. The United States Bankruptcy code is divided into different chapters that provide different kinds of relief. Some of them include forgiveness of debt in exchange for liquidation of assets, while others allow for a restructuring to repay the debts at a later date. Sometimes companies get so far into debt that the only way out is bankruptcy.

Basis point - One one hundredth of one percent (0.01%). This is a handy way to say these small amounts. For example, you may hear on the news every six weeks that they Fed has raised or lowered interest rates by 50 basis points, that would be 0.5%. Total jargon, but it makes you sound like an economist.

Bear market (Bearish) - A period where stock prices are declining for a prolonged period of time. Just think . . . a bear is scary, and so is a bear market. You are said to bearish if you are less than optimistic about the way that things are headed.

Beta - A measure of volatility against a benchmark. If a security tracks its benchmark exactly, then it will have a beta of 1. If a stock has a beta of 1.25, then it should outperform the benchmark by 25% during growth and under-perform the benchmark during a decline. Generally speaking, the higher the beta, the more volatile the security.

Without an R-squared, beta is meaningless because R-squared determines how much a investment's return is correlated to its benchmark. This is a tricky concept, but if you understand some basic regression analysis will take you a long way. Just think of it this way . . . you get a beta by regressing a security against the benchmark. BOOM!

Bid price - The price that someone is willing to pay for a security or asset. In the stock market, the bid price is the highest price that someone will pay for that asset. The counterpart is the ask price which is the lowest price that someone is willing to sell a security. The difference between the two is the spread.

Blue chips - Stocks which have a long-established record of profitability and paying dividends (most of them pay dividends, but not all). Blue chips are usually large, stable and well known like IBM, Phillip Morris and General Electric.

Bonds - A debt instrument that pays a set amount of interest at regular intervals for a given period of time. If you buy a bond, you are essentially giving the issuer a loan that they repay with interest. There are numerous different kinds of bonds from a variety of issuers, each with its merits and setbacks.

Bond brokers - Like a stock broker, except they deal you bonds. They call around and find the bond you want and then execute the transaction. They will usually charge a commission for their services or mark up the price.

Bond dealers - Dealers are like clearinghouses, they maintain a stock of bonds that they sell to the general public or brokers. By dealing with a dealer, you may eliminate the commission because the dealer makes money by taking the difference between the bid and ask price for himself.

Bond fund - A mutual fund that has a portfolio of diversified bonds. They run the gamut just like mutual funds in their focus, risk and return. The difference between a bond fund and holding your own portfolio of bonds is that funds are not obligated to make fixed interest payments, nor are they obligated to give you the principle back at a later date.

Bond rating/Credit rating- An assessment of the likelihood of the issuer to pay the interest on its debt on time. There are numerous agencies that give ratings, such as Standard and Poors and Moody's. Ratings are from AAA to D (default). Bonds rated below B are called "junk." Because there is more risk, issuers with low credit ratings pay higher interest to attract investors.

Bond ratings are also useful to tell how a company is doing. From time to time, you will read in the news that a credit ratter has reduced a firms debt to junk status. This can signal trouble at the firm since it means that they are most likely in a cash crunch.

Bond yield - The interest that you actually ear on your investment. If you buy a new issue, then the yield is the coupon rate (the rate on the certificate) but if you buy and sell on the secondary markets, the yield will fluctuate. If yield increases, then the price of the bond has fallen. If yield falls, then market value has risen.

Book value - The difference between a company's assets and liabilities. Book value is what would be left over for shareholders if the company was sold and its debts were all paid off. It is calculated by taking total assets and subtracting total liabilities and then dividing by the number of outstanding shares.

Bottom fishing - Buying when (you believe) a stock price has bottomed out or is at extremely low levels.

Bottom line - An accounting term for net profit or loss. It is the "bottom line" on a company's earnings report.

Broker/Brokerage firm - A person or organization who gives advice about investments and then executes the trades for you. There are both full-service brokerages and discount brokerages. The differences are that full-service brokerages generally give you more advice and look at your overall strategy, while discount brokers generally just execute the trades. Both charge commission, but discount brokers are cheaper than full service. Online trading companies are a type of discount brokerage.

Bull market (Bullish) - A period where stock prices are rising for a prolonged period of time. Bulls go charging forward, just like stock prices in a bull market. If you are optimistic about the market, you are generally said to be bullish. It's a good word to use on the golf course or at dinner parties . . . "Well, I'm rather bullish on Cisco."



Call - A bond issuer may include a clause in the bond that gives him or her the option to redeem the bond before its maturity date. This happens when interest rates have fallen significantly since the bond was issued and it would make more sense to issue new bonds at a lower rate rather than continue to pay interest on the original issue.

Call option - A financial instrument that gives an investor the right, but NOT the obligation to buy at a specified price during a specified time period. A call option is what is known as a future. The person writing the call is betting that the price of the asset will be less than the option so that the holder will allow the option to lapse without purchasing the shares. In that case, he or she keeps the shares and the money they received for selling the option. However, if the price of the option is lower than the trading price of the asset at the time when the option is due, then they are obligated to sell the shares at the lower price.

Capital asset - An asset that is held by a firm for more than a year and is not bought or sold normally. Capital assets usually include property, plant, and major equipment. These items are depreciated on the firm's balance sheet.

Capital gain/loss - Profit or loss realized from the sale of securities or an asset. Capital gains are subject to taxes from Old Uncle Sam. If the asset was held for less than 12 months, it will be taxed at your income tax rate. However, assets held longer than a year are taxed a maximum rate of 20%. See your neighborhood accountant for more details.

Certificate of Deposit (CD) - No, this is not something that contains Brittney Spears' latest single . . . it's that thing that Granny gave you when you were a wee tike to pay for College (yeah right). Anyway, a Certificate of Deposit is an instrument similar to a savings account, except there are limits to when you can withdraw the money. They pay better interest rates than a savings account because the money is locked for a set period of time. These are really guaranteed return . . . you get back the principle, plus interest at the agreed date. However, don't be fooled into thinking that these are the next best thing. The returns are still low, and if they are left no deposit for too long, any gains may be wiped out by inflation.

Closed-end fund - A type of mutual fund that issues a set number of shares that are traded on a stock exchange. Unlike the more traditional open-ended funds, where the share price is directly determined by the value of the assets that fund holds, closed end funds are priced based on supply and demand. So, for the non-Econ among us, that means that if people perceive this fund to have strong assets, it will be more desirable and the price will rise. The opposite is true if they think it is crap.

Closing price - Watch a financial network at the end of the trading day (4:00 PM Eastern) and you will see the day coming to a close. Well, the price of a stock when the market closes . . . you guessed it . . . is the closing price.

Commodities - Sell porkbellies, buy gold. Buy wheat, sell corn. These are some examples of commodities, which are sold in bulk. They are either sold on the spot market for immediate delivery (I want my hogs now dammit) or on the exchanges for future delivery. Commodities futures are a big business. A future (you'll see this again under "F") is when two parties sign a contract where one party will deliver certain items (like cotton) in the future for a price agreed upon now. One of the more famous commodities exchanges is the Mercantile Exchange in the Windy City of Chicago.

Common stock - Another name for the lower class in Victorian England. Ha! No really it's a certificate representing part ownership in a company. Common stock holders have voting rights in the company, but have no guarantee of dividend payments. Also, if the company goes bust, they are last in line to get their money back. Don't feel bad though, most people have common stock. And hopefully you will have sense to unload your stock before the company goes belly-up.

Consumer price index (CPI) - The most looked-at gauge of inflation. The CPI is calculated by finding out the value of a set basket of goods (set by the Commerce Department) and then tracking changes in the overall price of the basket over time. The Bureau of Labor Statistics adjusts the basket as needed, but only occasionally adjusts the base year. The current base period is from 1993-1995.

Corporate bonds - A debt instrument issued by a public or private corporation. Companies that issue bonds are rated by a credit rating agency. This rating is an assessment that tells you how likely the issuer is to repay their bonds. Corporate bonds are generally viewed as safer investments than stock because they pay fixed interest and the principle should be returned. However, a company with a lot of debt may receive a lower credit rating, which will make it difficult to sell the bond if you want to.

Corporation - A business entity that is treated as a person in the eyes of the law. A corporation can own assets and have liabilities. More importantly they pay taxes. A corporate organization for a business means that there are a shareholders with a stake depending on how much they invested. Depending on the size of your stake, you have more of a say in the matters of the company. Companies have annual meetings where shareholders get to vote on various matters. Because corporations can be SO large, the shareholders will appoint directors to the Board to handle the operations of the company. The Board will then in turn hire managers to run the day to day operations. There are many various on this theme, so ask an accountant if you are interested.

Coupon rate - The interest rate on a bond when it is issued. It's called the coupon rate because it is printed on the coupon. When bonds are bought and sold on the secondary markets, the actual yield of a bond can vary.

Current assets - Assets that are relatively liquid and can be converted to cash in 12 months. Some current assets that a company might have are cash, marketable securities (stocks), accounts receivable, and inventory.

Current liabilities - Obligations owed within 12 months. Some examples are accounts payable, short-term debt, and interest payment due on long-term debt.

Current ratio - Current assets divided by current liabilities. What does that tell you? Well, that gives an idea of a company's liquidity. If every one of their current obligations (vendors, creditors, etc.) showed up and said, "where's our money?" could they cut a check? If the current ratio is greater than one, then yes, they could.



Debenture - A common type of corporate bond, these are not backed with any asset, simply the credit quality of the issuer. Since there is no collateral, these bonds are higher risk, but that means higher returns. If a company of high quality issues a debenture, they may still be highly rated.

Debt - Securities that indicate a firm's intention to repay at a later date. This can be bonds, notes, loans, etc. There is much debate about the right amount of debt for a firm to take on . . . too much debt can unnecessarily burden the firm in tough financial times, but too little debt can limit growth.

Debt-to-equity ratio - This is a measure of a firm's financial "leverage." It is calculated by dividing long-term debt by shareholders' equity. The higher the ratio, the greater the chance the firm will be unable to repay all that debt in the future. But, the right amount of leverage, can boost growth.

Default (on debt) - Failure to pay the principle or interest on a debt security. Owners of a bond that is in default can usually make claims against the the issuers assets to get back their investment. A default generally does not mean that an investor loses his or her entire investment. There are a number of things that can happen if an issuer defaults on debt, but generally the investor will get a percentage of the face value of the bond.

An interesting side note: several years ago the state of Washington decided to default on bonds that it had issued. The Supreme Court ruled that it was unconstitutional for a government entity to default on its debt and ordered that the State resume payment to the bond holders.

Depreciation - A non-cash charge on a firms financial statements that represents the reduction in value of assets due to wear, age, or obsolescence. Hard assets (property, plant, and equipment) depreciate in value over time and must eventually be replaced. Accountants will write off these assets over the estimated useful life of the asset. Because depreciation appears on the income statement, some analysts prefer to use cash flows as it backs depreciation out of net income.

Derivative - A security whose value is "derived" from the performance or movement of another financial security, index, or other investment. Some examples are futures and options.

Discount bond - A bond that sells at a current market price that is less than its face value. Bonds sell at a discount when the coupon rate is lower than the prevailing rates.

Discount rate - The interest rate that the Federal Reserve charges its member banks for loans. This rate influences the rates that those financial institutions then charge their customers. This is one tool that the Fed uses to influence monetary policy. This rate affects the stock market as it provides a clue as to interest rate trends.

Diversification - Spreading your money around to different securities in order to protect yourself from market volatility. This does not mean simply buying different stocks in different sectors (although that is a part of it) it also means having different financial instruments in your portfolio in case one type goes sour.

Dividends - A portion of a company's net income that is paid to shareholders as a return on their investment. Dividends are declared or suspended at the discretion of the company's board of directors. The decision of a board to suspend dividends may signal tough times ahead for a company, while the decision to increase the dividend means that happy days are here. Dividends are nice because they give you cash-money in your hands for your investment. The downside is that they are taxed as income.

Dividend yield - A company's annual dividend expressed as a percentage of its current stock price. As stock price declines, dividend yield goes up. Some investors see high yield as a sign that a stock is cheaply priced.

Dollar-cost averaging - A strategy to invest fixed amounts of money in securities at regular intervals regardless of the markets' movements. The purpose of this strategy is to diversify your investment over time. You get an average cost of a security that drives the overall cost down rather than simply plunking down all your money at once.

Dow Jones - There are four averages calculated by Dow Jones that that track price changes in various sectors. The one most commonly referred to is the Dow Jones Industrial Average. This tracks the price changes of the 30 largest companies. While it used to be only industrials, it now includes a wide range including software giant Microsoft, chip manufacturer Intel, and McDonalds.



Earnings - The amount of profit that a company realizes after all costs, non-cash expenses, and taxes have been paid. Earnings are the measure of value. The market rewards both fast and stable growth of earnings. Sometimes you will hear earnings referred to as profit or net income as well.

Earnings growth - The percentage change in a firm's quarterly earnings per share versus the same period from the previous year. To gauge how successful a company is, compare its earnings growth to other firms in the same industry.

Earnings per share (EPS) - The portion of a company's earnings allocated to each outstanding share of stock. This can be useful to compare companies within an industry if one firm is massive compared to its competition.

EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization. This is also known as operating cash flow. This gives you a raw idea of a company's expenses related to its revenues. It can be useful for comparison.

Equity - Ownership interest possessed by shareholders in a corporation. This is what a stock is. It is the portion of a company's net worth that belongs to shareholders.

Extraordinary items - A non-recurring event that must be explained to shareholders in annual or quarterly reports. A company may cite extraordinary items if its earnings are off for a particular quarter or year due to something out of the ordinary, like a merger, lawsuit, or unanticipated tax charges or benefits. These items can make earnings look better or worse than they really are, so be careful.



Face value - The value a bond has printed on its face, usually $1,000. It represents the amount of principle due at maturity. Due to changing interest rates, the actual market value of the bond may fluctuate.

Federal Funds Rate - The interest rate that banks charge each other for the use of federal funds. If banks need an overnight loan to meet the Federal Reserve's reserve requirements, they will get a loan from another bank at the Federal Funds Rate. This rate changes daily and is the most sensitive indicator of general interest rate trends. The rate is not set directly by the Fed, but fluctuates in response to supply and demand for funds.

Federal Reserve - The central bank of the United States that sets monetary policy. The Federal Reserve oversees the money supply, interest rates, and credit with the goal of keeping the United States economy and currency stable.

Fiscal year - The twelve-month period that a firm or government uses for its bookkeeping purposes. A company's fiscal year can be the same as the calendar year, but it does not have to be. The abbreviation that you will often see is FY.

Fixed assets - Tangible property used in the operation of a business but not expected to be consumed or converted into cash in the ordinary course of events. This is generally a firms property, plant, and equipment.

Foreign exchange - Market in which foreign currencies are bought and sold and exchange rates between currencies are determined. The exchange rate is the price at which one country's currency can be converted into another.

Fundamental analysis - Fundamental analysis asserts that a stock's price is determined by the future course of its earnings and dividends. If you are using this, you will look at a firm's financial statements and its competitive position within the industry to determine the intrinsic value of a stock's underlying business. If this intrinsic value is greater than the price of the stock, the stock is said to be undervalued and has greater earnings potential than the price indicates and it should be bought.

Futures - An agreement to buy or sell a set amount of a commodity or security at a designated price at a designated time in the future. This differs from an option as an option is the right to buy or sell, where as a future requires that the commodity (like wheat or corn) is actually delivered. A future is a kind of derivative.



Generally Accepted Accounting Principles (GAAP) - Guidelines that determine what should be done in particular accounting situations. It is supposed to make firms easier to analyze and to make their books more transparent for investors.

Goodwill - An accounting term. Any advantage (like a brand name or symbol) than enables a business to earn better profits than its competitors. During acquisition, goodwill is the amount that the buyer is willing to pay for the firm over the liquidation value of its assets for this advantage. The purchaser then writes off this goodwill over a period of time (up to 40 years) through amortization.

The biggest example of goodwill in recent history was Ford's purchase of Jaguar. They paid an incredible sum for the brand name, as the Jaguar factory in England was worth very little (mostly antique equipment).

Gross Domestic Product (GDP) - The total value of all goods and services produced by a nation. GDP is made up of consumer and government purchases, private domestic investments, and net exports of goods and services. It is a measure of national output and is used to determine whether the economy is in a state of expansion or recession.



Hard asset - Known also as a tangible asset. This is an assets which has an intrinsic value such as a factory, a mine, or even a work of art. The opposite is an intangible asset which has a value that cannot be measure by physical properties, such as a copyright.

Hedging - A strategy designed to reduce investment risk using call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits.



Illiquid - An asset not readily convertible to cash.

Incentive stock option - A compensation plan that gives executives the right to purchase stock at a specified price during a specific period of time. The options are free of tax when they are granted and when they are exercised.

Index - A composite of securities (stocks, bonds, etc.) selected to represent a specific market, industry or asset class. Investors use these composites to measure the overall health of specific markets and as benchmarks of comparison.

Index fund - An index fund that seeks to produce the same return that investors would get if they owned all the securities in a particular index.

Individual retirement account (IRA) - A tax-deffered retirement plan that can help build a "nest egg." Individuals can contribute $2,000 and married couples up to $4,000 annually. The contributions grow tax deferred until withdrawal (at age 59 and 1/2) when they are subject to income taxes. The theory is that when you are that old you will be at a lower marginal tax rate and pay less. There are variations on this theme such as the Roth IRA discussed later.

Inflation - The rate at which the general level of prices for goods and services is rising. Inflation is measured by the Consumer Price index. You need to keep the rate of inflation in mind when investing because it has the ability to erode your gains. If your investment (savings account for example) is growing at 2%, but inflation is 3%, then your net investment is -1%.

Initial public offering (IPO) - The first time that a company issues its stock to the public. In the lingo, this is "going public." A company may decide to go public in order to raise capital for a large project.

Insider trading - On one hand, it refers to legal trading of company securities by corporate officers based on information available to the public. On the other hand, it refers to the illegal trading of securities based on information not available to the public, such as a tip from from a friend inside the company to buy or sell based on upcoming news.

Intangible assets - Assets that have no physical substance, such as a patent. They are, thus, subject to some accounting manipulation. Generally accepted accounting principles require that these assets be amortized over 40 years.

Interest rate - The rate of interest charged for the use of money, usually expressed as an annual rate. Interest rates are quoted on bills, bonds, notes, credit cards, and all kinds of loans. Rates in general reflect the Federal Funds Rate targeted by the Federal Reserve. A rise in interest rates has a negative effect on the stock market because investors can get more competitive returns from buying newly issued bonds instead of stocks, and vice-versa for interest rate cuts.

Internal rate of return - An accounting term for the rate of return on an asset. It is the discount rate on an investment that equates the present value of its cash outflows to the present value of its cash inflows.

Intrinsic value - The underlying value of a business separate from its market value or stock price. In fundamental analysis, the analyst will take into account both quantitative and qualitative aspects of a company's performance. The quantitative aspect is the use of financial ratios such as earnings, revenue, etc., while the qualitative perspective involves consideration of the company's market strength. This information is used to make a prediction about the future earnings and prospects for growth for the company to arrive at the intrinsic value of the shares. This is then compared to the market value of the stock to determine if it is undervalued or overvalued.

Inventory - The monetary value of a company's raw materials, work in progress, supplies used in operations, and finished goods. Excess inventory on a company's balance sheet could indicate a slowdown in sales and lack of pricing power.

Inventory turnover - For a company, the ratio of annual sales to inventory; or, the fraction of that year that an item remains in inventory. Both give the same result. Low turnover is a sign of inefficiency, since inventory usually has a zero rate of return.

Investment bank - A firm that helps take companies public or helps them to issue new shares of stock. An investment bank purchases the new shares from the issuer and then distributes them to dealers an investors, profiting on the spread between the purchase price and the offering price. Most investment banks also have brokerage houses attached to them, and offer other financial services.

As a result of banking deregulation, commercial banks (your local bank where you have your checking account) and investment banks were permitted to merge. This has led to a number of problems where banks would offer perks to companies and executive (like loans with favorable rates) to try to win investment banking business.



Leading economic indicators - A composite of eleven economic indicators that forecast likely changes in the economy, compiled by the Conference Board. The components are:

Leverage - The degree to which a company is using borrowed money. It is measured by the debt to equity ratio, calculated by dividing long-term debt by stockholders equity from the company's balance sheet. The more long-term debt, the greater the leverage and the greater the risk that a company will have to default. However, leverage also helps boost profits for a company, so it is really about finding the right mix between the two.

Liabilities - The financial claims against a company. They include accounts payable, wages and salaries, dividends, taxes, and debt obligations.

Limit order - The order to buy or sell a stock at a specified price or better. The broker is instructed only to execute the trade within the price restriction given by the investor. Using a limit order provides the investor more control than a market order, which will tells the broker to buy or sell at any price.

Liquidation - The process of converting stock or other assets into cash. When a company goes bankrupt (one bankruptcy option, or chapter of the bankruptcy code requires liquidation of a company's assets to meet obligations) and has to be liquidated the cash obtained from selling the assets is used first to pay bondholders and holders of preferred stock. Whatever is left, if any, is distributed to holders of common stock.

Liquidity - The ease with which an asset can be converted to cash without creating a substantial change in price or value.

Load fund - A mutual fund that charges a sales commission, as opposed to a no-load fund, which does not levy a fee when you buy or sell. To compensate brokers, load funds usually charge either a front-end sales commission when you buy the fund, or a back-end sales commission when you sell.

Long-term debt - Debt that must be paid in one year or more. There are a number of types of long term debt, such as bonds, bank loans, and debentures.



Margin - To buy on margin means to borrow money to do so from the broker. The margin is the amount that you must deposit in order to borrow. Buying on margin is risky as you run the risk of losing the money you deposited, but also the money you borrowed. People buying on margin was in part responsible for the stock market crash in 1929.

Market capitalization - The total market value of a company or stock. It is calculated by multiplying the number of outstanding shares by their current price. Investors generally divide the U.S. market into three basic categories: large cap, mid cap, and small cap, based on a firm's market capitalization.

Market order - A market order is an order to buy or sell a stock at the going price at the time of the transaction. You have no control over the price that you will pay, but you do at least know that you will get the shares if they are available.

Maturity date - The date that a bond comes due and the principle is paid back in full. The further away the maturity date, the greater the risk that the issuer will default, so the interest rates are higher. Additionally, interest rates are higher due to uncertainty about interest rates in the future (you might be exposed to inflation).

Merger - When two or more existing companies come together to form one company. This is usually done through pooling of common stock, a direct cash payment, or some combination of both.

Monetary policy - The regulation of the money supply and interest rates by a control bank (in the United States that is the Federal Reserve) in order to control price levels and stabilize the currency. The Fed in the United States will remove money from the banking system when the economy is growing too quickly, and can add money to the system when it wants to stimulate growth. This is the most common tool of monetary policy, and what is most widely discussed in the papers after the Fed meets every six weeks.

Money-market account - A federally insured account available at many banks that is liquid, because you can write checks on them, but earns interest through investment in short term securities. Still, the accounts have a low rate of interest, so you have to be careful of inflation.

Municipal bond - Bonds issued by local authorities, including states, cities, and local government agencies.

Mutual fund - An investment company pools money from a number of different investors in order to buy large quantities of securities. The main benefits of purchasing a mutual fund are that it is professionally managed, and because your money is pooled with that of other investors, it can be diversified very effectively. The managers, however, collect a fee for their services. There are two types of funds, open ended and closed ended. An open-end fund will issue new shares when investors put in money and redeem shares when investors withdraw money. The price of a share is determined by dividing the total net assets of the fund by the number of shares outstanding. Closed-end funds issue a fixed number of shares in an initial public offering, trading thereafter in the open market. Open-end funds are the most common type of mutual fund.



NASDAQ - An electronic stock market, meaning that brokers get price quotes through a computer network, and trade via that network rather than in person like the New York Stock Exchange where the traders directly interact on the trading floor. This system is often referred to as an over-the-counter market. The NASDAQ has risen to prominence as many of the stocks listed on that exchange are technology-related.

NASDAQ Composite Index - An index that covers the price movements of all stocks traded on NASDAQ.
Net asset value - Net asset value is also known as the price per share, or the value of a fund's assets divided by the number of its outstanding shares.

Net income - The so-called "bottom line," the profit that a company has after paying all expenses, dividends, and taxes. Net income is not the end all be all of evaluating a company, as it can be manipulated by company management, as we saw with Enron. Net income is also referred to as profit or earnings.

Net margin - Calculated by dividing net income by revenue and multiplying by 100, to express the number as a percentage. This number is usually used to comparing operating efficiency between companies.

New York Stock Exchange (NYSE) - The building that gave Wall Street its fame, this is the oldest stock exchange in the United States. This is where many of the largest companies in America are listed. When people talk about the Big Board, this is what they are referring to.



Open-end mutual fund - A type of mutual fund that issues as many shares as investors demand. The share price is determined by dividing the total assets of the fund by the number of shares outstanding. Most mutual funds follow this model.

Operating income - A measure of a company's earning power from ongoing operations. This is found by subtracting cost from revenue, but not interest paid, dividends, or taxes. For companies that have high levels of debt payments, this figure may be cited to show how the company is performing.

Operating margin - Profitability after all operating costs have been paid, found by dividing cash flow by revenue and then multiplying by 100. This is a good indication of a company's profitability, because it is calculated before the accountants can use depreciation and amortization accounting procedures to distort a company's financial position.

Option - An agreement that gives an investor the right, but not the obligation, to buy or sell securities at some specific point in the future for a price that is determined now. A call option is an option to buy, and a put is an option to sell. Options have an expiration date, and if not exercised by that time, they are void, and the holder loses the amount that (s)he paid to purchase the option.



Par value - The face value of a bond. This is the amount that is due to the holder at the date of maturity. The actual market value of the bond may differ, depending on prevailing interest rates.

Payout ratio - The percentage of a company's earnings paid to shareholders as dividends. To calculate, divide the quarterly dividend by the quarterly earnings-per-share and multiply by 100.

Penny stocks - While many penny stocks have a share price lower than $1, the term is used loosely for stocks with a share price less than $5. These companies are generally highly speculative, but an investor can win big.

Portfolio - A collection of securities owned by an investor. The thinking is that a portfolio includes a variety of financial instruments (stocks, bonds, cash to name a few) in order to diversify risk.

Preferred stock - A share of stock that pays dividends at a special rate, and that have preference in the payment of dividends over common stock. If the company is forced into liquidation, preferred stock holders are higher than common stockholders, and thus are slightly more likely to get some of the proceeds of the liquidation (this is still, however, highly unlikely).

Premium bond - A bond that sells at a higher price than its face value. Bonds will sell at a premium when the prevailing interest rate is lower than the rate on the bond.

Price-to-book ratio - Stock price divided by it's per share book value.

Price-to-earnings-growth ratio (PEG) - The PEG ratio (price-to-earnings-growth) is calculated by dividing a stock's forward P/E by its projected three to five year annual earnings-per-share growth rate. Generally speaking, the higher the PEG, the pricier the stock.

Price-to-earnings ratio (P/E) - A ratio to evaluate a stock's worth. It is calculated by dividing the stock's price by an earnings-per-share figure. If calculated with the past year's earnings, it is called the trailing P/E. If calculated with an analyst's forecast for next year's earnings, it is called a forward P/E.

Price-to-sales ration (P/S) - The ratio of a stock's latest closing price divided by revenue per share. (Sales are the same thing as revenues.) Revenue per share is determined by dividing revenue for the past 12 months by the number of shares outstanding. This ratio is particularly useful for companies that have little or no earnings.

Prime rate - The interest rate banks charge their most creditworthy commercial customers. Banks use the prime as a base to set rates for credit cards, home-equity loans and other loans, including loans to small and medium-size businesses. The rate is determined by general trends in interest rates. Normally, the prime rate will move in steps and then remain constant until a major rate change has been made. This usually happens when the Federal Reserve makes major changes in monetary policy.

Principle - The face value or par value of a bond. It represents the amount of money you are owed when a bond reaches its maturity.

Profit - The earnings a company realizes after all costs, expenses and taxes have been paid. It is calculated by subtracting business, depreciation, interest and tax costs from revenues. Profit is the supreme measure of value as far as the market is concerned. Profit is also called earnings or net income.

Profit margin - A measure of a company's profitability, cost structure and efficiency, calculated by dividing earnings or cash flow by revenue. There are four basic types of profit margin: gross, operating, pre-tax and net. Net margin is the one investors pay the most attention to. It shows a company's profitability after all costs, expenses and taxes have been paid. The net margin is calculated by dividing earnings by revenue and then multiplying by 100. Margins are particularly helpful since they can be used to compare profitability among many companies.

Pro-forma results - A projection of a financial statement that shows how the actual statement would look under certain conditions. Many companies that rose and fell in the dot com bubble reported pro-forma results, rather than their actual results.

Prospectus - A formal, written offer to sell securities that sets forth the plan for a proposed or existing business. The prospectus must be filed with the Securities and Exchange Commission and given to prospective buyers. A prospectus includes information on a company's finances, risks, products, services and management. Prospectuses are also used by mutual funds to describe the fund objectives, risks, fees and other essential information.

Proxy - A proxy is the authorization or power of attorney, signed by a stockholder assigning the right to vote their shares to another party. A company's management mails proxy statements to registered stockholders prior to the annual shareholder meetings. The statement contains a brief explanation of proposed management-sponsored voting items, along with the opportunity to vote for or against each individual issue or transfer the right to vote to company management or another party.

Proxy statement - Information that the Securities and Exchange Commission (SEC) requires must be provided to shareholders before they vote by proxy on company matters. The statement contains proposed members of the board of directors, inside directors’ salaries and any resolutions of minority stockholders or management.

Put option - An agreement that gives an investor the right, but not the obligation, to sell a stock, bond, commodity or other instrument at a specified price within a specific time period.



Qualitative analysis - Qualitative analysis is security analysis that uses subjective judgment in evaluating securities based on non-financial information such as management expertise, cyclicality of industry, strength of research and development, and labor relations.

Quantitative analysis - A research technique that deals with measurable values as distinguished from such qualitative factors as the character of management or labor relations. Quantitative analysis uses financial information derived from company balance sheets and income statements to make investment decisions. Examples of quantitative analysis include a review of company financial ratios, the cost of capital, asset valuation, and sales and earnings trends. Although quantitative and qualitative analysis are distinct, they must be used together to arrive at sound financial judgments.



Recession - A downturn in economic activity, broadly defined by many economists as at least two consecutive quarters of decline in a nation's gross domestic product (GDP).

Return on assets (ROA) - The rate of investment return a company earns on its assets. An indicator of profitability, ROA is determined by dividing net income from the past 12 months by total assets and then multiplying by 100. Within a specific industry, ROA can be used to compare how efficient a company is relative to its competitors.

Return on equity (ROE) - The rate of investment return a company earns on shareholders’ equity. An indicator of profitability, ROE is determined by dividing net income from the past 12 months by net worth (or book value). This statistic shows how effectively a company is using its investors' money. Within a specific industry, it can be used to compare how efficient a company is relative to its competitors.

Return on investment (ROI) - A measure of how much the company earns on the money the company itself has invested. It is calculated by dividing the company's net income by its net assets.

Revenue - Revenue is the earnings of a company before any costs or expenses are deducted. It includes all net sales of the company plus any other revenue associated with the main operations of the business (or those labeled as operating revenues). It does not include dividends, interest income or non-operating income. Also called net sales.

Roth IRA - A type of IRA established in the Taxpayer Relief Act of 1997 that allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. Taxes are paid on contributions, but withdrawals, subject to certain rules, aren't taxed at all. A single person can contribute up to $2,000 and a married couple up to $4,000 annually to this type of individual retirement account.

R-squared - A measure of a fund's correlation to the market calculated by comparing monthly returns over the past three years to those of a benchmark. The benchmark for equity funds is the S&P 500. For fixed-income funds, it is the T-bill. The R-squared number ranges from zero to 100. A score of 100 means a perfect correlation with the benchmark. A score of 85 means an 85% correlation. Generally, a higher R-squared will indicate a more useful beta figure. For instance, if a fund is earning a return near its most closely related index (indicated by an R-squared near 100), yet has a beta below one, it is probably offering higher risk-adjusted returns than the benchmark. If the R-squared is lower, then the beta is less relevant to the fund's performance.



Sales - Money a company receives from the goods and services it sells. In some cases, the amount includes receipts from rents and royalties. Also called revenue.

Sales growth - The annualized growth rate of sales or revenue expressed as a percentage. Sales growth can be useful for measuring the growth rate of young companies with no earnings. It is also harder for accountants to manipulate sales figures than earnings.

Savings bond - Similar to zero-coupon bonds, savings bonds are sold at a discount to their face value, which is fully paid at maturity. They are exempt from state and local taxes and you can defer paying federal taxes until maturity.

Secondary market - The market where previously issued securities are traded. Most trading is done in the secondary market. The New York Stock Exchange, Amex, NASDAQ, the bond markets, etc., are secondary markets.

Securities and Exchange Commission (SEC) - The federal agency that enforces securities laws and sets standards for disclosure about publicly traded securities, including mutual funds. It was created in 1934 and consists of five commissioners appointed by the U.S. President and confirmed by the Senate to staggered five-year terms. To ensure its independence, no more than three members of the commission may be of the same political party.

Security - Generally, a stock or a bond. Specifically, a piece of paper that indicates the holder owns a share or shares of a company (stock) or has loaned money to a company or government organization (bond).

Share - A unit of ownership in an equity or mutual fund. This ownership is represented by a certificate, which names the shareowner and the company or fund.

Shareholders' equity - The amount by which total assets exceed total liabilities. Also known as net worth or book value, shareholders’ equity is what would be left over for shareholders if the company were sold and its debt retired. It takes into account all money invested in the company since its founding, as well as retained earnings.

Short selling - A trading strategy that anticipates a drop in a share's price. Stock or another financial instrument is borrowed from a broker and then sold, creating a short position. That position is reversed, or covered, when the stock is repurchased to repay the loan. If the stock price falls, the short seller will profit by replacing the borrowed shares at a lower cost.

Spinoff - A form of corporate divestiture that results in a subsidiary or division becoming an independent company. In a traditional spinoff, shares of the new company are distributed to the parent corporation’s shareholders.

Spot market - A market for buying or selling commodities or foreign exchange for immediate delivery and for cash payment. Trades that take place in futures contracts expiring in the current month are also called spot market trades.

Spot price - The price of a commodity or currency available for immediate sale and delivery.

Spread - In stocks, the difference between the bid price and ask price. In bonds, the difference between the yields on securities of the same credit rating but different maturity or the difference between the yields on securities of the same maturity but of different rating.

Standard & Poor's 500 Index (S&P 500) - An index of 500 stocks chosen for their market size, liquidity and industry group representation. Experts use the S&P 500 as a benchmark for the overall market performance. It is a broader, more comprehensive index than the Dow Jones Industrial Average, representing the largest U.S. companies in 11 diversified sectors of the market. It is also a capitalization weighted benchmark, with each stock's weight in the index proportionate to its market value. So price fluctuations in big companies in the index count proportionately more than little ones.

Stock - An investment that represents part ownership of a company’s assets and earnings.

Stock option - An option in which the underlying security is the common stock of a corporation, giving the holder the right to buy or sell its stock at a specified price by a specific date.

Stock split - A change in a company's number of shares outstanding that doesn't change a company's total market value, or each shareholder's percentage stake in the company. Additional shares are issued to existing shareholders, at a rate expressed as a ratio. Typically, management will split a stock to make the shares more affordable to a greater number of investors.

Stop order - An order to buy or sell a security when a definite price is reached, either above (on a buy) or below (on a sell) the price that prevailed when the order was given. This type of trade provides more investment control than a market order, which will buy or sell the security at any price.

Strike price - A specified price at which an investor can buy or sell an option's underlying security.

Subsidiary - A company of which more than 50% of its voting shares are owned by another corporation, called the parent company.



Tax liability - A debt to be paid in taxes. A capital gains tax liability is created every time you sell a security or mutual fund that has increased in price.

Technical analysis - The study of all factors related to the supply and demand of stocks. Unlike fundamental analysis, technical analysis doesn't look at underlying earnings potential of a company when evaluating a stock. Rather, the technical analyst uses charts and computer programs to study the stock’s trading volume and price movements in hopes of identifying a trend. Technical analysts don't care about a business’s intrinsic value, only the movements of its stock. Most technical analysis is used for short-term investing.

Ticker symbol - Letters that identify a security for trading purposes. Trades are reported on the consolidated tape and on quote machines by the company's symbol.

Total assets - A company’s total current assets plus total noncurrent assets. Noncurrent assets include property, plant and equipment, and other noncurrent receivables and investments. Total assets can be found on a company’s balance sheet.

Total invested capital - Total invested capital is a tally of all the outside investments a company’s management has used to finance its business -- everything from equity (the amount of stock sold) to long-term debt. It is calculated by taking the sum of common and preferred stock equity, long-term debt, deferred income taxes, investment credits and minority interest. Total invested capital is the denominator of the debt-to-total-capital ratio, a ratio that measures how leveraged a company is.

Total liabilities - A company’s total current liabilities plus long-term debt and deferred income taxes. Total liabilities can be found on a company’s balance sheet. Total assets minus total liabilities equals book value or net worth.

Total return - The full amount an investment earns over a specific period of time. When dealing with mutual funds or securities, total return takes into consideration three factors: changes in the NAV or price; the accumulation/reinvestment of dividends; the compounding factor over time. The return is presented as a percentage and is usually associated with a specific time period such as six months, one year or five years. Total Return can be cumulative for the specific period or annualized. If it is cumulative, it describes how much your investment grew in total for the entire period. If it is annualized, it describes the average annual return over the period of years described.

Treasuries - Debt securities issued by the U.S. Department of the Treasury. Treasurys are widely regarded as the safest bond investments, because they are backed by the "full faith and credit" of the U.S. government.

Treasury Bills (T-Bills) - Debt obligations of the U.S. Treasury that have maturities of one year or less. Maturities for T-bills are usually 91 days, 182 days or 52 weeks. Unlike Treasury bonds and notes, which pay interest semiannually, Treasury bills are issued at a discount from their face value. Interest income from Treasury bills is the difference between the purchase price and the Treasury bill's face value. Bills are issued in denominations of $10,000 with increments of $5,000 for amounts above $10,000.

Treasury Bonds (T-Bonds) - Debt obligations of the U.S. Treasury that have maturities of 10 to 30 years. Treasury bonds pay interest semiannually and can be purchased in minimum denominations of $1,000 or multiples thereof. Until recently, the 30-year Treasury bond was considered the benchmark bond in determining trends in interest rates. (It was replaced by the 10-year Treasury note.) It typically has a higher interest rate than other Treasurys, but more inflation and credit risk.

Treasury Notes (T-Notes) - Debt obligations of the U.S. Treasury that have maturities of two to 10 years. Treasury notes pay interest semiannually and can be purchased in minimum denominations of $1,000 or multiples thereof. Treasury note yields typically are lower than Treasury bonds, which have longer maturities, but notes typically are about half as volatile as long bonds. The 10-year note now is considered the benchmark for determining interest rates.

Turnover - In accounting terms, the number of times an asset is replaced during a set period. In trading, the volume of shares traded on the exchange on a given day. In employment matters, turnover refers to the total number of employees divided by the number of employees replaced during a certain period.

Turnover ratio - A measure of a fund's trading history that is expressed as a percentage. A fund with a 100% turnover generally changes the composition of its entire portfolio each year. A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities.



Venture capital - Financing for new businesses. Start-up companies that receive venture capital are perceived to have excellent growth prospects but don't have access to capital markets because they are private companies. In return for venture capital, investors may receive a say in the company's management, as well as some combination of profits, preferred shares or royalties. Sources of venture capital include wealthy individual investors, investment banks, and other financial institutions that pool investments in venture-capital funds or limited partnerships. The risks and rewards of venture-capital investing can be extreme.

Volatility - The characteristic of a security or market to fall or rise sharply in price in a short-term period. A measure of the relative volatility of a security or mutual fund to the overall market is beta.

Volume - Number of shares traded in a company or an entire market during a given period. Unusually high volume days typically correspond with the announcement of company news, either positive or negative. In the absence of news, high volume can indicate institutional (or professional) buying and selling. Technical analysis places a great emphasis on the amount of volume that occurs in the trading of a security. A sharp rise in volume is believed to signify future sharp rises or falls in price because it reflects increased investor interest in a security or a market.



Working capital - The excess of current assets over current liabilities. This statistic shows a company's level of solvency. A company with a lot of working capital has cash to reinvest and make its business grow.



Yield - The annual rate of return on an investment, as paid in dividends or interest. It is expressed as a percentage, generally obtained by dividing the current market price for a stock or bond into the annual dividend or interest payment.

Yield curve - This is a graph showing the yields for different bond maturities. It can be used, not only to show where the best values in bonds are, but also as an economic indicator. A normal yield curve is upward sloping, with short-term rates lower than long-term rates. An inverted yield curve is downward sloping, with short-term rates higher than long-term rates. A steep upward sloping yield curve indicates the bond market anticipates an economic expansion. An inverted yield curve anticipates an economic decline.



401(k) plan - An employer-sponsored retirement-savings plan funded by employees with contributions that are deducted from pretax pay. Employers frequently add matching contributions up to a set limit. Employees are responsible for managing the money themselves, allocating the funds among a selection of stock, bond and cash investment funds. Investment gains aren't taxed until the money is withdrawn.