50, 200-day Average Price The price of a company’s stock, averaged over the latest 50-day or 200-day period. These are moving averages, which means they change every day as they are updated. Technical analysts often use 50-day and 200-day averages to help decide when they will buy or sell a stock. When these lines cross, it indicates a change away from trend. The 50-day moving average is considered an appropriate gauge for intermediate-term trading, while investors tend to prefer the 200-day average for long-term trend analysis. If the price rises above the averages, it is an indicator that the stock is on the move. If the price drops below the averages, it may spell trouble for the stock.
52-week range A stock’s high and low prices for the year. By comparing the current price with the 52-week range, investors see where a stock’s current price falls relative to its 52-week extremes.
AIMR Association for Investment Management and Research
Aggressive investment A volatile, hard-to-predict investment subject to rapid gain or loss. This type of investment is generally appropriate for long-term holdings (1 or more years) and for investors willing to accept fluctuations in the value of their investments.
Alpha coefficient Measures the extent to which a security’s performance exceeds or falls short of the return you would expect given its level of risk (beta). An investment with a positive alpha has delivered more return than would have been predicted by its beta. A negative alpha denotes performance that is below what you would expect given its risk level.
American Stock Exchange (ASE or AMEX) One of the major stock exchanges in the United States. The AMEX is a central auction market, which means it conducts business on a trading floor where traders buy and sell securities from specialists, or market makers in a specific stock. The AMEX is well known as a major market for options as well as stocks.
Annual report A document sent to shareholders communicating a public company’s version of operations and performance. Information includes earnings, revenues, balance sheet data, an auditor’s statement, and management’s discussion of the company’s track record and future direction.
Annualized gain In a portfolio, this calculation converts the price gain or loss of a security held for more than one year into a compound annualized gain. Annualized gains offer investors a way to compare holdings that have been owned for different lengths of time. The calculation factors in the commission paid to purchase securities, but does not include the reinvestment of dividends.
Annualized return The yearly increase (or decrease) in the value of an investment, including the effects of compounding. Annualized returns are a bit more complicated than average returns, which you can get by adding up the annual returns of a stock or fund and dividing by the number of years. Securities that have the same average return may have very different annualized returns, especially if one security is volatile. For example, it’s possible for a stock or fund to have a respectable average return but a negative annualized returned if gains in the first two years are offset by a big drop in the third.
Annuity A type of investment that guarantees payment of specific amounts at specific times, or a single lump sum payment. Annuities are sponsored by insurance companies and other financial instituitions and sold by agents, banks, savings and loans, stockbrokers, and financial planners. Fixed annuities work like certificates of deposit (CDs). Variable annuities let you direct your investment into fund-like portfolios of stocks, bonds, and cash equivalents. Your return, as with a fund, depends on the performance of the portfolios you choose. Variable annuities come with annual charges.
Ask The lowest price a seller will accept for a security.
Asset allocation The division of holdings among different types of assets, such as domestic stocks, international stocks, bonds, real estate, and cash.
Asset class Typically refers to securities that have similar features. For example, stocks and bonds are the two main classes. They may be subdivided into other classes like mortgages, common stock, and preferred stock. Typical asset classes are cash (money market), domestic bonds, international stocks, large cap stocks, and small cap stocks. Asset classes are used in the process of asset allocation to control the risk and return characteristics of a portfolio. In the long run, with a diversified portfolio, over 90 percent of the returns are determined by asset allocation. The remaining percentage of your return depends on which specific stock, bond or mutual fund you buy within asset classes, and when you buy it.
Average annual return A calculation that converts a cumulative total return into an annualized figure. For example, an investment that has a cumulative return of 30% over three years–meaning it has gained 30% for the entire three-year period–has an annualized gain (average annual return) of 9.1%.
Back-end load A fee to sell shares in a mutual fund.
Balanced fund A mutual fund that typically buys a mixture of bonds, preferred stock, and common stock to achieve the highest return with the lowest risk. It blends long-term growth from stocks with income from bonds.
Basis The price paid for an investment when it was originally purchased, including any commission or fees you paid for the trade.
Bear market A bear market is a period during which stock prices are generally declining.
Beta coefficient A measure of a stock’s volatility relative to the overall stock market. The beta coefficient of the S&P 500 is 1. Any stock that is more volatile than the market as a whole has a beta value higher than 1. If the beta coefficient is less than 1, the security is considered to be less risky than the market.
Bid The price that a potential buyer is willing to pay for a security.
Block trade At least 10,000 shares of stock bought or sold by institutional investors. Individual investors sometimes watch block trades to determine a stock’s attractiveness. Rising institutional interest in a stock is a positive sign.
Blue-chip stocks Stocks of seasoned companies that have paid regular dividends in both good and bad years. Investments in blue-chip stocks are relatively conservative. Some examples of blue-chip stocks are the 30 securities used to calculate the Dow Jones Industrial Average. The term “blue chip stocks” is derived from poker since the poker chip with the highest value is blue.
Bond A type of security that pays a fixed amount of interest at a regular interval over a certain period of time. Bonds are essentially loans given to companies and government entities promising to pay back the loan at a specified interest rate. Bonds are considered less risky investments than stocks. When interest rates are rising, bond prices go down; when rates are falling, bond prices rise.
Suppose you own a $1,000 bond that pays 6% interest over 10 years. In this case, assuming you bought the bond at its par value of $1,000 and held it for 10 years, you would receive $60 a year (6% of $1,000) for 10 years. At the end of the 10 years, you would have received $600 in interest ($60 x 10 years), and you would also get the $1,000 back.
Bond rating Indicates the risk of default on municipal or corporate bonds. Rating agencies, such as Moody’s and Standard & Poor’s, assign a rating when a bond is issued. They continue to monitor the bond and will change the rating if the issuer’s financial condition changes. The highest rating is AAA (Aaa for Moody’s). Bonds rated BBB (or Baa) and above are considered investment grade. Anything below is considered junk, which typically carries a higher interest rate to compensate for risk. Bonds with a D rating (C for Moody’s) are in default.
Broker A broker is someone who handles the transfer of a security from a seller to a buyer. Brokers must be licensed by the Securities and Exchange Commission (SEC).
Bull market A market in which prices are moving upward.
Business plan A written proposal for a new business or new direction in a previously established business. Business plans typically include a description of the company and its products or services, a budget, an overview of current and projected financing, a market analysis and marketing strategy, and projected profits and losses. Business plans serve as an operating model for the business and outline financial expectations for potential investors.
Buying on margin When an investor borrows money from a broker to buy a security. You can borrow up to 50% of the purchase price. If the value of the stock goes up, you earn all the gains on the investment, even though you borrowed half of the initial investment. Of course, you need to pay back the borrowed amount to the brokerage, which charges interest for the amount you have borrowed. If the value of the stock falls, you will owe the brokerage for the losses.
Call In options trading, the right to buy a specified number of shares at a set price by a specific date. Investors buy call options when they think the price of a stock is going up and want to lock in the current strike or exercise price.
Capital gain The positive difference between an asset’s purchase price and selling price.
Cash In an investment portfolio, the relatively stable investments that can be easily changed into currency, such as a checking account,
Treasury bills, a money market account, or a money market mutual fund.
Certificate of deposit (CD) An FDIC-insured investment offered by banks that guarantees a specified rate of return for a specified term. It is generally considered a conservative investment.
Closed-end mutual fund A mutual fund that has a set number of shares available to investors. You buy and sell closed-end mutual funds on the open market. The supply and demand for a closed-end mutual fund determines its price, not its net asset value.
Commissions A fee brokerages charge when securities are bought or sold
Contrarian investing A method of investing: one ignores market trends and buys neglected and depressed stocks of well-managed companies. Contrarians select the opposite of what most people are investing in at a given time by looking for healthy companies in unpopular industries or overlooked firms. A contrarian adviser tends to buy stocks with low P/Es.
Covariance A measure that reflects both the variance (volatility) of a stock’s returns and the tendency of those returns to move up or down at the same time relative to other stocks (their correlation). Covariance allows one to see if two stocks tend to move up or down together and how large those movements tend to be.
Debt-equity ratio The ratio of a company’s liabilities to its equity. Long-term debt-equity is the ratio of a company’s long-term liabilities to its equity. Total debt-equity is the ratio of a company’s long-term and current liabilities (debt that will be paid off within one year) to its equity. The higher the level of debt, the more important it is for a company to have positive earnings and steady cash flow. Debt requires the timely payout of interest to debt holders, so it is important to analyze a company within the context of the likeliness that it will have adequate resources to meet its payments in the future. Debt-equity ratio is most useful for comparing companies within the same industry.
Deflation Deflation occurs when consumer prices fall. Most people think of the Great Depression when deflation is mentioned. But mild deflation, just like mild inflation, can be good for the economy, and stocks historically have done well during such times. A severe deflation, however, can be devastating, as assets, such as real estate and stocks, decline in value along with consumer prices. People feel less wealthy and spend less money, and the economy eventually turns into a depression.
Derivative An investment contract based on an underlying investment called an “instrument.” The most common type of derivative is an option contract, which involves the right to buy or sell the underlying instrument at an agreed price. Futures contracts are also derivatives.
Dividend An amount of money or stock that a corporation pays to its shareholders quarterly. Typically, only larger companies pay dividends; smaller companies need to invest their own profits to grow.
Dollar-cost averaging An investment method in which you put the same amount of money into an investment at regular intervals, such as every month. As the market price of the investment rises and falls, you end up buying more shares when prices are low and fewer shares when prices are high. This way, you don’t have to track the market and time your purchases (that is, buy low, sell high).
Dow Jones industrial average (DJIA) A weighted average of 30 widely-traded blue chip stocks (such as IBM and Coca-Cola). The closing prices of these 30 stocks are added and then divided by a factor that accounts for stock splits and other market changes. Because these stocks are in a variety of sectors and are actively traded, they are considered a good reflection of the market.
Earnings A corporation’s profits. An earnings report is a statement a company issues to shareholders and to the public declaring its current profits on either a quarterly or annual basis.
Earnings growth rate The percentage change in earnings per share (EPS), usually reported for a year, or on an annualized basis. The future earnings growth rate is an important component in the PEG ratio, an indicator of a stock’s potential. To calculate future EPS growth rates you need earnings estimates.
Earnings per share (EPS) The net income (earnings) of a company for the past 12 months divided by the current number of shares. For example, if a company has $8 million in net income and 4 million outstanding shares, then its earnings per share is $2.00.
Earnings yield Also known as Earnings-price ratio (EPR). A corporation’s earnings per share divided by its current stock price. It is used to compare the attractiveness of stocks, bonds, and money market instruments.
Ex-dividend (Ex-Div) Time period between a company’s announcement of a dividend and the payout date. When a stock is trading ex-dividend, it means that investors who buy the company’s stock will not be able to collect the most recently declared dividend. In stock listings, ex-dividend is indicated by a lower-case “x”.
Exercise price Also known as Strike price. In options trading, the exercise price is the specified price at which one can buy or sell the underlying security of the call or put.
Expense ratio The percentage of total investment that shareholders pay annually for mutual fund management fees and operating expenses.
First Boston High Yield Index An index of junk bonds rated BB or lower by S&P or Moody’s.
Fixed-income investment An investment that pays the same rate of income every year (for example, bonds).
Forward P/E A stock’s price-earnings ratio for the current fiscal year. The forward P/E, uses earnings estimates for the current year (versus over the last 12 months), and gives investors an even better idea of whether a stock is a good buy. If earnings estimates go up, the forward P/E will be lower than the trailing P/E. That could be a signal that it’s a good time to invest in the stock.
Front-end load A fee to purchase shares in a mutual fund.
Global fund An international mutual fund that invests in securities from around the world, including the United States.
Growth fund A mutual fund that invests in growth stocks. Investors who want high capital appreciation tend to invest in growth stocks, which are less conservative than income funds. Income from dividends usually is not a goal of these funds. Growth funds often have high P/E ratios because managers are willing to pay a premium for stocks of fast-growing companies.
Growth stock Stocks of younger or smaller companies, have relatively high risk and represent relatively aggressive investments. Usually, they have grown significantly in the past 3 to 5 years and are expected to continue growing for the next few years. Growth stocks are usually purchased as a long-term holding, with the expectation that they will pay dividends (as well as appreciate in price per share) in the future, thus providing income at a later time.
Hedge fund A type of investment fund that pools money from investors and invests in a variety of markets. Managers often use derivatives and other investment tools in the hopes of earning large returns. Hedge funds generally require a very high initial investment, charge a management fee of 1-2%, and take the first 20% of profits for themselves.
Hybrid Fund A mutual fund that invests in a mix of stocks and bonds. Many of these funds buy blue-chip stocks and high-quality bonds. Risks and returns typically are moderate, and expenses can be high.
IPO lockup period The period after an initial public offering when company insiders are prohibited from selling their shares. Lockup periods typically last 180 days, but they can be as short as 120 days and as long as 365 days. Underwriters insist that insiders such as managers, employees, and venture capitalists sign lockup agreements to shore up the stock price right after the IPO.
Illiquid investment Any investment that may be difficult to sell quickly at a price close to its market value.
Income fund A fund that invests in securities which provide investors with current income (such as bonds and stocks paying dividends).
Income stocks Stocks of stable companies, having relatively low to moderate risk and representing relatively conservative investments. Income stocks tend to be in stable service industries, such as telecommunications and utilities, and can offer both higher-than-average dividend payments and the possibility of capital appreciation.
Index A quantitative measure of the total returns that have been earned by some underlying group of securities (can be stocks or bonds) over a fixed period of time.
Index fund A mutual fund that invests in the stocks upon which an index is based. Index fund performance closely mirrors the performance of the index itself.
Inflation A rise in the price of commodities and services, which occurs when spending increases faster than supply. Moderate inflation is an expected result of economic growth.
Initial public offering (IPO) The first time a company sells shares of its stock to the public. Also known as going public, an IPO can generate funds for working capital, debt repayment, acquisitions, and a host of other uses.
Intrinsic Stock Price The true value of a company divided by the number of shares outstanding. If the intrinsic value of a stock is higher than its market price, then you have an undervalued stock that may have high potential.
Junk bonds Low-rated, high-yield securities issued by companies with low credit ratings. Junk bonds are often issued for use in takeovers and buyouts.
Large-Cap Blend Fund A mutual fund that invests in stocks with a median market capitalization of $11 billion or more, offering a blend of growth and value characteristics. Blend funds typically are less risky than growth funds, and large-cap funds typically are less volatile than mid-cap and small-cap funds, and more likely to pay dividends.
Lehman Brothers Aggregate Bond Index A popular benchmark index investors can use to gauge the performance of bonds or bond funds (like the S&P500 of bonds). The index is comprised of the Lehman’s Government/Investment Grade Corporate index, the Mortgage Backed Securities index and Asset Backed Securities index.
Listed A security that is traded on an organized stock exchange. Securities must meet certain requirements to be listed on a major exchange. A company that stumbles and no longer meets the requirements can be delisted, or taken off the exchange.
Margin account A special type of brokerage account allowing investors to buy certain securities with money borrowed from the broker. A margin account is established when an investor wants to buy securities on margin or short stocks.
When buying on margin or shorting stocks, an investor must have a minimum amount of cash or securities deposited with the broker (this amount is known as the margin). Since 1945, the initial margin required has been between 50 and 100 percent of the security’s purchase price. Minimum maintenance requirements are also imposed by the major stock exchanges and by brokerage firms.
Margin call When an investor has bought stocks on margin and the value of that stock falls too low, the broker may issue a margin call to the investor to obtain money to cover the decline. Stock exchanges, the National Association of Securities Dealers (NASD), and individual brokerages have established rules governing the percentage of a purchase that can be made on margin.
Market capitalization The total number of a company’s shares multiplied by the current price per share. For example, if a company has 15 million shares, and the current price per share is $10, then the company’s market capitalization is $150 million ($10 x 15 million).
Market index A statistical composite of representative stocks. The Dow Jones Industrial Average, the Standard & Poor’s 500, and the Nasdaq Composite are the three most widely quoted market indexes.
Market outperform An analyst’s rating that indicates a stock is expected to grow faster than the market as a whole. The benchmark index often used is the S&P 500.
Market share A measure of how dominant a company is in its industry, determined by expressing a company’s revenues, sometimes for a specific product or service, as a percentage of the industry’s overall revenues for similar products or services. Growing market share is a bullish sign while declining market share can be a negative indicator.
Market value The market value of a security equals the market price per share times the number of shares.
Mid-Cap Blend Fund A mutual fund that invests in stocks with a median market capitalization between $2 billion and $11 billion that blend growth and value characteristics. Blend funds typically are less risky than growth funds.
Mid-cap stock A company with a market capitalization of between $1 billion and $5 billion.
Money market A market for short-term debt instruments (generally of less than one year) such as certificates of deposit, commercial paper, banker’s acceptances, Treasury bills, and discount notes of the Federal Home Loan Bank and the Federal National Mortgage Association. Money markets offer safety and liquidity.
Morgan Stanley Capital International All Country Index A market-weighted index of stocks from 45 countries.
Morgan Stanley Capital International EAFE ex-Japan Index An aggregate of 21 individual country indexes (excluding Japan). This index is considered a general benchmark for international stocks.
Morgan Stanley Capital International Europe Index An index of stocks in 15 developed European markets.
Morgan Stanley Capital International Pacific Ex-Japan Index An index of stock markets in Australia, Hong Kong, New Zealand, Singapore and Malaysia.
Morgan Stanley Capital International Pacific Index An index of stock markets in Australia, Hong Kong, Japan, New Zealand, Singapore and Malaysia.
Morgan Stanley Capital International World Ex-U.S. Index An index of stocks from 21 developed-country markets, excluding the United States.
Morningstar One of the leading mutual fund rating services. A five star rating is Morningstar’s top rating. Morningstar’s rating has two distinct parts: a risk-assessment measure and a load-adjusted performance (return) measure. Morningstar calculates each rating for three time periods: three, five, and ten years, when available. (A fund must have at least a three-year track record before Morningstar will rate it.)
Morningstar categorizes funds in terms of investment philosophy. The various classes are developed by Morningstar and range from classes such as “Growth” and “Foreign Stock” to “Specialty-Communications.” Morningstar determines a fund’s extended asset class by reviewing information in the fund’s prospectus or studying how a fund is marketed.
Mutual fund A group of securities owned by a group of investors and managed by investment professionals who make buy and sell decisions for the group. Investors benefit from mutual funds in two ways: they can diversify their holdings more easily with a smaller amount of money (because the fund has the money to buy shares in many different types of securities); and they can rely on investment professionals to make trading decisions for them.
Nasdaq Stock Market The second largest stock market in the United States. Launched in 1971, the National Association of Securities Dealers Automated Quotation (Nasdaq) market is the nation’s first electronic stock market, linking buyers and sellers via a computer network. Brokers and dealers make a market in individual stocks by maintaining an inventory in their own accounts. They buy or sell when they receive orders from investors.
National Association of Securities Dealers (NASD) The nonprofit organization that runs the Nasdaq Stock Market and the American Stock Exchange under its Nasdaq-Amex Market Group subsidiary. The Securities and Exchange Commission must approve any rule changes affecting trading or listing qualifications.
Net asset value (NAV) The value of one share of a mutual fund. Except for money-market funds, the value of a mutual fund share usually changes daily. The net asset value comes from dividing the value of all the fund’s holdings by the number of shares in the fund.
New York Stock Exchange (NYSE) The largest and one of the oldest stock exchanges in the world. The NYSE traces its beginnings to 1792 when brokers and merchants on Wall Street signed the Buttonwood Agreement, detailing how they would trade securities. As a central auction market, the NYSE conducts business on a trading floor where traders buy and sell securities from specialists, or market makers in a specific stock. It has the most rigorous listing requirements of any U.S. market, looking at a company’s financial strength, its position in its industry, and the direction of the industry. Qualifying companies must pay a fee to list their stocks and an annual fee to keep the listing current.
Nikkei Stock Average The most widely quoted Japanese stock market index. Nihon Keizai Shimbun, parent of the major business newspaper of the same name, calculates the Nikkei. The Nikkei shows the average price for 225 issues, weighted in much the same way as the Dow Jones Industrial Average. The companies that make up the Nikkei are chosen to reflect the overall performance of the Japanese stock market.
No-load mutual fund A fund that has no sales fees to purchase or sell shares of the fund.
OTC Bulletin Board An electronic, regulated quotation service for National Association of Securities Dealers market makers. The service displays real-time quotes, last-sale prices, and volume information for more than 6,500 national, regional, and foreign securities that are not traded on an organized stock exchange. Sometimes called penny stocks as a result of their often low prices, these thinly traded securities are considered highly speculative because they are often issued by small, untested companies.
Open-end fund The most typical type of mutual fund, with the number of shares available to investors limited only by the fund manager’s discretion and the amount of money coming in to the fund from investors. You buy and sell open-end mutual funds directly through mutual fund companies or brokers. The net asset value (NAV) for an open-end mutual fund determines its price.
Option The right to buy or sell an investment instrument, usually a security, at a previously agreed price known as the strike price. The option buyer or seller pays a premium to lock in the price of the underlying investment without initially having to buy or sell the investment.
Order type The kind of order you wish to place for a securities trade. Market orders are orders to buy or sell at the best available price at the time the order is placed. If you place a market order outside market hours, the order will be executed at the best available price when the market opens. When you place a limit order, you specify a price at which you want your order to be executed. When you place a stop order, you specify a price (called the “stop price”) at which the stock must trade. Your order will be executed at the market price once the security has traded at the stop price. Unlike a limit order, a stop order offers no guarantee that the trade price will be as good as or better than the stop price. An all or none order ensures complete execution; the order is not executed unless it can be executed in full. Limit orders, stop orders, and all or none orders remain open through the end of the day or until cancelled (maximum 90 days), depending on the duration you specify. A fill or kill is an order to place a trade at a price you specify, immediately and in entirety. If the fill or kill cannot be executed immediately and completely, it is automatically cancelled.
Outstanding shares Shares of stock that are owned by investors.
Over-the-counter (OTC) A stock that is not listed on any national stock exchange. OTC stocks are often from young, untested companies that are unable to meet Nasdaq or exchange listing requirements. While investing in them is considered risky, the shares are usually cheap. Price quotes can be found on the OTC Bulletin Board or in the Pink Sheets.
PEG ratio An indicator of whether a stock is undervalued or overvalued. To obtain the PEG ratio, a stock’s price/earnings ratio (P/E) is divided by its forecasted earnings growth rate. A fairly valued stock would have a PEG ratio of 1, because its current P/E and future earnings growth rate being equal. A ratio of less than 1.0 can be an indication that the stock is undervalued, and poised to grow.
Preferred Stock A stock with a fixed dividend that is paid before common stock dividends. Generally, the preferred dividend is higher than the common stock dividend, in addition to being cumulative, meaning the company will make up any missed payments. Preferred stockholders do not have voting rights. In the event that a company liquidates its assets through bankruptcy, preferred stockholders receive payment before common stockholders.
Price/Book Ratio (P/B) The price-book ratio compares a stock’s market value (or current price) to its per share book value. Price-book ratios are best used for comparisons within an industry rather than between industries. Applied to mutual funds, the P/B ratio is the weighted average of all the stocks in the mutual fund’s portfolio.
Price/Cash Flow The ratio is determined by dividing the stock’s price by the cash flow per share of the most recent fiscal year. Investment bankers often use this measure to determine whether a company is priced fairly in an acquisition. In addition, it is a meaningful number in valuing international stocks because earnings are reported in different ways around the world.
Price/Earnings Ratio (P/E) To figure out the price-earnings ratio, you divide the stock’s price by its earnings per share for a 12-month period. For example, if a stock is selling for $40 and is earning $4 a share, its P/E ratio is 10 (40/4). Applied to mutual funds, the P/E ratio is the weighted average of all the stocks’ P/E ratios in the mutual fund’s portfolio. Stocks with high P/Es compared to the overall market are typically growth stocks. Investors are willing to pay a premium because they expect the company’s earnings and stock price to rise. Stocks with low P/Es are sometimes considered overlooked value stocks.
Prospectus A document that must be filed with the Securities and Exchange Commission when a company issues stocks or bonds to the public. In addition to telling how the deal is structured, the prospectus provides information on the company’s management and operations. A mutual fund prospectus provides information about a specific fund and includes information on investments and redemption policies.
Put In options trading, the right to sell a specified number of shares of an investment instrument at a set price by a certain date. Investors buy puts when they are bearish on the price of a security.
Regional fund An international mutual fund that invests in securities from one particular area, such as Latin America.
Relative strength A stock’s price movement, compared to the change in a relevant market index, such as the S&P 500. The typical timeframe is 12 months. Momentum investors like to buy stocks with high relative strength because they believe a stock that has a strong relative strength rating will continue to move higher.
Research Report A document summarizing a stock’s investment potential. Written by securities analysts at brokerage firms and other investment companies, research reports advise clients on whether they should buy, hold, or sell a stock. Agency problems can arise, and because of this, investors should not take the information in these reports as the absolute word, and should always obtain information from various sources.
Return on assets (ROA) The amount of profits earned (before interest and taxes), expressed as a percentage of total assets. This is a widely followed measure of profitability, and the higher the number the better. As long as a company’s ROA exceeds its interest rate on borrowing, it’s said to have positive financial leverage.
Return on equity (ROE) The result of dividing net earnings by common stockholders’ equity. The ROE is used for measuring growth and profitability and measures how well common stockholders’ invested money is being used. You can compare a company’s ROE to the ROE of its industry to determine how a company is doing compared to its competition.
Reverse Split A reduction in the number of shares of stock in which shareholders will hold fewer shares, although the value of their investment remains the same. Companies use various formulas to determine how much stock each shareholder should have, such as 1-for-2 or 1-for-5.
Russell 2000 A market index considered to represent the market of small cap stocks.
S&P 500 An index of 500 large capitalization domestic stocks that represents the overall stock market. Also known as the Standard & the index is market-value weighted, which means that stock prices are multiplied by the number of shares outstanding. A Standard & Poor’s Corp. committee chooses stocks from leading companies in leading industries to reflect the U.S. stock market. The S&P 500 is the most widely followed benchmark for portfolio performance. The U.S. component of the S&P Global Index, the S&P 500 is divided into four industry groups: Industrials, Financial, Transportation, and Utilities.
S&P Index The Standard & Poor’s Corp. calculates a number of indexes designed to track daily changes in the entire market or a segment of it. S&P indexes are market-value weighted, which means that stock prices of the companies within an index are multiplied by the number of shares outstanding to calculate the index. Consequently, the largest companies have the greatest influence on an index’s movement. A Standard & Poor’s Corp. committee determines the actual companies that make up the S&P indexes. Other S&P indexes include the MidCap 400, an index of 400 domestic companies with an average market capitalization of $2 billion, and the SmallCap 600, an index of 600 widely held companies.
Salomon Brothers Non-Dollar World Government Index An index of 13 government bond markets.
Sector A common way to group a broad array of companies that are in the same line of business. Within a sector you can have many industries. And each industry consists of well-defined industry groups. For example, Technology is a sector. Internet is an industry subset of Technology, and Internet Service Providers is a specific industry group within the Internet category.
Securities A general term for publicly traded stocks, bonds, and other financial instruments.
Securities and Exchange Commission (SEC) A federal agency that regulates federal securities laws, including the trading of public company securities, the firms that handle these transactions, and most professionals who provide investment advice.
Sharpe ratio A measure of performance that takes risk into account. Developed by William F. Sharpe, this ratio divides an investment’s excess return (above the guaranteed return of the 90-day Treasury bill rate) by its standard deviation, which is an indicator of volatility. The result is a raw number, and the higher the more favourable, because it means that an investment had a high return relative to its risk. The ratio gives investors an idea whether an investment is worth the risk and allows investors to compare the risk-adjusted performance across a variety of investments.
Shorting stocks Instead of purchasing shares of a stock you think is going up in price, you borrow shares, sell them immediately, wait for the price to go down, and then buy them at the lower price and return the shares to the broker. The advantage of shorting stocks is that you can make a profit without an initial cash investment. Shorting stocks is considered riskier than buying stocks because the price of the stock could rise, resulting in unlimited losses, as opposed to buying long, where your downside is limited to the amount you paid for the stock.
Small cap Small caps are stocks with a total market capitalization of less than $3.5 billion. Investment advisers sometimes recommend that investors interested in long-term growth invest in small cap stocks because they often have the greatest potential for growth. However, these stocks are typically more volatile than stocks of larger companies and are less likely to pay dividends.
Small-Cap Blend Fund A mutual fund that invests in stocks with market capitalizations of less than $2 billion that offer a blend of growth and value characteristics. Blend funds typically are less risky than growth funds. Small-cap funds generally do not seek income from dividends.
Split The issuance of more stock to shareholders. Companies use various formulas to determine how much stock each shareholder should get, such as 2-for-1 or 3-for-2.
Spread The difference between the ask
and bid price for an investment instrument.
Standard & Poor’s Midcap Index An index of 400 mid-sized U.S. stocks.
Standard deviation Standard deviation is a common statistical tool used to measure the volatility in the performance of a single security or an entire portfolio, typically by calculating monthly returns over a period of 36 months. The result is usually reported on an annualized basis. A security with a high standard deviation has a lot of variation in its monthly returns.
Stock A share of ownership, or equity, in a corporation.
Stock exchange A market with a trading floor where securities are bought and sold. In the United States the major exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). There are several regional stock exchanges in Los Angeles, San Francisco, Chicago, Boston, Philadelphia, and Cincinnati. Stock exchanges also operate in Tokyo, London, and dozens of cities worldwide.
Strike price (Also known as Exercise price). In options trading, the exercise price is the specified price for the investment instrument underlying a call or put at which you would buy or sell the underlying security.
Target Price A projection of a stock’s price. Analysts include target prices for stocks they follow in their research reports. Typically, the target price is for a specific period of time, such as a year.
Time the market Some people attempt to invest by timing market highs (“sell” points) and market lows (“buy” points).
Total return The average annualized rate-of-return over a specified time period.
Treasury bills (T-bills) A short-term government security, sold through the Federal Reserve Bank by competitive bidding at weekly and monthly auctions, in denominations from $10,000 to $1 million. T-bills are the most widely used of all government debt securities and are a primary instrument of Federal Reserve monetary policy. Treasury bills are backed by the full faith and credit of the U.S. government.
Undervalued A stock that is potentially worth more than the market currently recognizes. An undervalued stock has a lower price-earnings ratio than other stocks in its industry or the market as a whole.
Value Fund Value fund managers buy stocks that have relatively low P/E ratios or are undervalued by other objective measures, such as price-to-book ratios. The underlying company must be fundamentally strong even though the stock is low. Fund managers hope that over time the stock price will rise as a better reflection of the company’s performance.
Venture capital A mid-to-long term start-up or expansion loan extended to a growing business in exchange for equity in the business.
Volatility Measurement of the tendency of a stock, bond, mutual fund, commodity, or market to rise or fall sharply in price.
Volume The total number of shares of stock transacted during an average day for a particular company.
Wilshire 4500 Equity Index A proxy for the extended market, comprised of the large and small cap stocks in the Wilshire 5000, minus the stocks in the S&P 500 index.
Wilshire 5000 Total Market Index A market index that includes all companies headquartered in the United States with a readily available stock price. In general, the Wilshire 5000 includes all U.S.-based companies traded on the New York Stock Exchange, American Stock Exchange, and Nasdaq stock market. There are now more than 7,000 companies in the index, which is weighted according to company capitalization. The index is considered a measure of the entire U.S. stock market.
Yield The interest earned on a bond, or the dividend paid on a stock or mutual fund. Total return is the combination of yield plus any change in the underlying value of a security.
Zero Coupon Bonds Bonds that are sold at a significant discount to their face value. They pay no interest, but you receive the full value of the bond when it reaches maturity. Issued by corporations, municipalities, and the federal government, zeroes provide a predictable return for investors who want a lump sum of money by a specific date.