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Glossary

12b-1 plan
Permits a mutual fund adviser to use fund assets to pay for distribution costs. The 12b-1 fee is an annual charge based on the value of the investment. Named after the rule adopted by the SEC.
 
401(k) plan
A defined-contribution retirement plan that allows an employee to contribute pretax dollars to a company pool that is invested in stocks, bonds, or money market instruments. Named after the section of the Internal Revenue Code that created it.
 
403(b) plan
A defined-contribution retirement plan available to employees of public schools, certain tax-exempt entities (including churches), and educational institutions. Allows an employee to contribute pretax dollars to a company pool that is invested in stocks, bonds, or money market instruments. Named after the section of the Internal Revenue Code that created it.
 
 A
 
accounts receivable
The credit extended to customers to purchase goods. The accounts receivable balance is the total money owed to the company by customers at the end of the reporting period. A low accounts receivable balance may indicate that the firm is efficient in its collections or that credit standards are too restrictive and depressing sales. A large balance may indicate that the company is having difficulty collecting the money it is owed and its credit standards are too lax. Once a company recognizes that an accounts receivable will not be collected, it must reduce the value of the account and write the uncollectable accounts off. The recognition of this charge will ultimately impact the company.
 
accrued interest
Interest accumulated between the most recent payment and the date that the fixed income security is sold. Calculated by multiplying the coupon rate by the number of days since the last payment.
 
alpha
A coefficient measuring the risk-adjusted performance, considering the risk due to the specific security rather than the overall market. A large alpha indicates that the stock or mutual fund has performed better than would be predicted given its beta (market volatility).
 
American depositary receipt (ADR)
Security representing the ownership interest in a foreign company's common stock. ADRs allow foreign shares to be traded in the United States much like any other security.
 
annuity
A series of fixed-amount payments paid at regular intervals over the period of the annuity.
 
ask price
The price a seller is willing to accept for the security; also called the offer price.
 
asset
A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.
 
asset allocation
Dividing your investment portfolio among the major asset categories such as stocks, bonds, and cash. Determines the risk and return of your portfolio.
 
automatic reinvestment plan
A plan offered by a mutual fund in which the fund automatically reinvests all distributions to a shareholder account.
 
 B
 
balance sheet
The firm's financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.
 
balanced fund
Mutual fund that combines investments in common stock, bonds, and preferred stock. Its goal is to provide income plus some capital appreciation.
 
beta
A measure of a stock's risk relative to the market, usually the Standard & Poor's 500 index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.
 
bid price
The price a buyer is willing to pay for a security.
 
blue-chip stock
Stock of large, well-known companies with a history of growth and dividend paying and that offer quality management, products, and services.
 
bond
A security that obligates the issuer to repay the principal amount upon maturity and to make specified interest payments over specified time intervals to the bond holder. The issuer can be a corporation or a governmental entity. A bond is a debt obligation; the bondholder is a lender to the issuer and there is no ownership position.
 
bond amortization
Each year a portion of the bond's original issue discount must be accrued and included in gross income.
 
book value
Total stockholder's equity minus preferred stock and redeemable preferred stock. Also known as common stock equity. Tangible book value subtracts goodwill and intangible assets from book value.
 
book value per share
The accounting value of a share of common stock. It is determined by dividing the net worth of the company (common stock plus retained earnings) by the number of shares outstanding.
 
business and industry risk
Uncertainty of an investment's return due to a fall-off in business that is firm-related or industry-wide.
 
buy-and-hold approach
A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.
 
 C
 
call date
The date at which some bonds are redeemable by the issuer prior to the maturity date.
 
call option
The right to purchase stock at a specified (exercise) price within a specified time period.
 
callable bond
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.
 
capital gain
An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a "realized" capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year.)
 
capitalization-weighted
Weighting the holdings of a fund or index based on market capitalizations (larger companies take a larger position in the portfolio).
 
cash
The most liquid of a firm's assets and carefully watched by equity and credit analysts. A company's cash component includes marketable securities and other cash-equivalent interest-bearing accounts. Too little cash may make it difficult for a firm to meet its cash obligations, such as the interest payment on a bond. However, too much cash reduces the potential earnings of the firm. Attractive companies should be able to earn more in their normal business lines than the prevailing short-term interest rate.
 
cash flow per share
Earnings after taxes plus depreciation, on a per share basis. A measure of a firm's financial strength.
 
cash investment
Very short-term (usually 90 days' maturity or less) obligation such as money market fund or very short-term CD that provides a return in the form of interest payments.
 
cash per share
Total cash and marketable securities divided by the number of shares outstanding.
 
cash value
In a life insurance policy, cash value is the build-up in the owner's cash savings. At any point in time, it represents the amount of money (before adjustments) that would be returned to the policy owner upon cancellation of a policy.
 
certificate of deposit (CD)
Savings certificate that entitles the holder to the receipt of interest. CDs are issued by commercial banks and savings and loans (or other thrift institutions).
 
closed-end fund
A pooled investment fund that has a fixed capitalization after the initial issue. Fund shares are traded on an exchange (see open-end fund).
 
collateralized mortgage obligation (CMO)
Specialized instrument designed to even-out the cash flow payments of mortgage-backed securities. CMOs are backed by pools of mortgages and are not riskless.
 
commercial paper
Unsecured short-term obligations with maturities ranging from 2 to 270 days issued by banks, corporations, and other borrowers.
 
commission
Broker's fee for buying or selling securities.
 
commodity futures
A contract to buy or sell a commodity, such as meats, grains, metals, and energy products, in the future at a given price.
 
common stock
A security issued by a corporation that represents ownership.
 
compound sum of an annuity
Constant payments are made at equally spaced time periods and grow to a future value.
 
compounding
The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).
 
continuing operations
When used in the context of financial statements, figures from continuing operations exclude the financial impact of extraordinary items and gains or losses of discontinued operating segments.
 
conversion premium
The amount, expressed as a dollar value or as a percentage, by which the price of a convertible security exceeds the current market value of the common stock into which it may be converted.
 
convertible security
A corporate bond or a share of preferred stock that can be converted into shares of common stock of the issuing corporation.
 
correlation
The relationship between two assets. Correlation coefficients are used to measure how closely a pair of asset classes tends to move in relation to each other. A perfect positive correlation of 1.0 indicates identical fluctuations: both classes tend to move up and down at the same time by similar amounts. The lower the correlation, the better the diversification; -1.0 means perfect negative correlation.
 
cost of goods sold
The cost of raw materials plus the cost of producing the finished goods. For a software vendor such as Microsoft, it also includes the cost of providing technical support that comes with the purchase of a product.
 
coupon
The rate of interest payable annually. Where the coupon is blank, it can indicate that the bond can be a "zero-coupon," a new issue, or that it is a variable-rate bond.
 
current assets
Short-term assets having a life of one year or less, or the normal operating cycle of the company. Made up of cash, marketable securities, accounts receivable, and other assets such as inventory that are likely to be converted into cash, sold, or exchanged in the normal course of business.
 
current liabilities
Debt or any other obligations coming due within a year. Made up of items such as accounts payable, short-term notes payable, accrued expense payable, etc.
 
current ratio
Current assets, including cash, accounts receivable and inventory, divided by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller the current assets relative to the current liabilities, the greater the risk of credit failure.
 
current yield
Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield. Or, a bond with a current market price of $1,000 that pays $60 per year in interest would have a current yield of 6%.
 
cyclical industry
An industry, such as automobiles, whose performance is closely tied to the condition of the general economy.
 
 D
 
debenture
A long-term debt instrument that is not secured by a specific asset. In the event of default, the holder does not have a claim against any specific asset(s) of the issuing firm.
 
debt-to-equity ratio
Long-term debt divided by stockholder's equity. The ratio identifies the relationship of debt to ownership interest in the firm's financial structure. A measure of financial risk.
 
deep discount bond
A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.
 
default risk
The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.
 
defined-benefit plan
Pension plan that pays a specified amount to employees who retire after a set number of years of service. Plans do not pay taxes on investments; usually all contributions are made by the employer.
 
defined-contribution plan
A type of retirement plan where the ultimate benefits that are paid out depend on the level of contributions made to the plan and the investment performance of those contributions.
 
discount bond
A bond that is valued at less than its face amount.
 
discount broker
A stockbroker who charges a reduced commission and provides no investment advice.
 
discount rate
The interest rate used in discounting future cash flows; also called the "capitalization rate."
 
diversification
The process of accumulating securities in different investments, types of industries, risk categories, and companies in order to reduce the potential harm of loss from any one investment.
 
dividend
A cash payment financed by profits that is designated by a company's board of directors to be distributed among stockholders.
 
dividend growth rate
Compound annual increase or decrease in dividends per share. An indication of past company strength and dividend payment policy.
 
dividend payout ratio
Annual dividends per share divided by annual earnings per share.
 
dividend reinvestment plan
When company applies shareholder dividends to the purchase of additional shares instead of sending cash. Usually little or no commission is paid.
 
dividend yield
Annual dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return.
 
dollar cost averaging
A system of putting equal amounts of money in an investment at regular time intervals to lessen the risk of investing a large amount of money at a particularly inopportune time.
 
Dow Jones industrial average (DJIA)
Price-weighted average of 30 actively traded blue-chip stocks, traditionally of industrial companies.
 
duration
A measure of bond maturity that accounts for the dates on which interest is paid and the amount of interest along with the redemption date. It is the time-weighted present value of all cash flows divided by the bond price.
 
 E
 
earnings multiplier
An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Benjamin Graham’s formula relating value to recent earnings and expected earnings growth rates.
 
earnings per share
The net income of the firm divided by the number of common stock shares outstanding. Evaluates earnings stability and the trend in earnings when compared over each quarter or year.
 
earnings per share growth estimate
Consensus earnings per share growth estimate--the median (midpoint) of analysts' expected long-term (three to five years) growth rate in earnings per share. An indication of earnings growth expectations for the firm among Wall Street analysts.
 
earnings per share growth rate
Compound annual increase or decrease of total earnings per share. A measure of how successful the company has been in generating the bottom line, net profit.
 
earnings surprise
The percentage by which announced earnings exceeded or fell short of the median analysts' estimate for the latest fiscal quarter. Positive earnings surprises tend to have a positive impact on stock price.
 
earnings yield
Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.
 
equity
Another word for stock, or similar securities representing an ownership interest.
 
equity risk premium
An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.
 
excess returns
Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.
 
exchange privilege
A feature offered by a mutual fund in which a shareholder is able to move money between various funds at a very minimal processing charge and without a commission.
 
exchange-traded fund
Passively managed portfolio of securities that tracks an index and trades on an exchange.
 
expected return
The average of a probability distribution of possible returns.
 
 F
 
face value
The stated principal amount of a debt instrument.
 
family of funds
A group of mutual funds under the same management company.
 
financial planner
An investment professional generalist who helps individuals delineate financial plans with specific objectives and helps coordinate various financial concerns.
 
fixed-income security
An investment vehicle that provides a return in the form of fixed periodic payments and return of principal; examples are bonds and certificates of deposit.
 
float
The number of freely tradable shares in the hands of the public. Computed by subtracting shares held by insiders from total shares outstanding.
 
foreign currency effects
To the extent a foreign currency appreciates relative to the dollar, returns on foreign investments will increase in terms of dollars. The opposite would be true for declining foreign currencies.
 
free cash flow per share
Net income plus all non-cash expenses, less dividends and capital expenditures, on a per share basis. A measure of a firm's financial flexibility.
 
front-end load
Initial sales commission at the time of the purchase of mutual funds.
 
fundamental analysis
The valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.
 
 G
 
general obligation bond (GO)
A municipal bond backed by the full faith, credit, and "taxing power" of the issuing unit rather than the revenue from a given project.
 
GNMA (Ginnie Mae) pass-through certificate
Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association.
 
going public
Selling privately held shares to new investors for the first time.
 
goodwill
The excess value of a firm over its value as an operating business. Intangible assets created when a firm buys another firm and pays a premium above the firm's fair market value.
 
government bond
A debt obligation issued by the U.S. government.
 
gross domestic product (GDP)
A measure of output from U.S. factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets.
 
gross profit margin
Gross income divided by sales for the same time period. Gross income is computed by subtracting cost of goods sold from sales. When compared against industry norms and over time, it provides an indication of the competitive nature of the industry and the company's competitive position.
 
growth flow
The sum of research and development per share and earnings per share over the last 12 months. Used in the Michael Murphy approach to valuing technology stocks.
 
growth stock
The shares of a company whose earnings are expected to grow at an above-average rate.
 
guaranteed investment (interest) contract (GIC)
Debt instrument sold in large denominations often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk.
 
 H
 
holding period return/yield
Income plus price appreciation during a specified time period divided by the cost of the investment.
 
 I
 
income statement
The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss.
 
income stock
Those stocks having a history of regular dividend payments that contribute the largest proportion of the stock's overall return.
 
index
A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the U.S.
 
index fund
A mutual fund whose portfolio is designed to track a particular market index.
 
indicated dividend
The anticipated dividend per share payout over the next year. Computed by taking the most recent quarterly dividend and multiplying by four.
 
individual retirement account (IRA)
Personal retirement account that an employed person can set up with a deposit that is tax deductible up to a set maximum per year. Such deposits qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn at age 59 1/2 or later. Early withdrawals are subject to a penalty. (See also Roth IRA.)
 
inflation risk
Uncertainty over the future real (after-inflation) value of your investment.
 
initial public offering (IPO)
The process of bringing private companies to the public market for the first time.
 
insider ownership
The percentage of common stock held by all officers and directors as a group, plus beneficial owners who own more than 5% of company's stock as disclosed in the most recent proxy statement.
 
insider trading
Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.
 
institutional ownership
The percentage of common stock held by all reporting institutions (pension funds, mutual funds, etc.) as a group; or the number of reporting institutions holding shares. Provides an indication of the level of Wall Street interest in the stock.
 
intangible asset
A right or non-physical asset that is presumed to represent an advantage to the firm's position in the marketplace. Such assets include copyrights, patents, trademarks, etc.
 
investment adviser
A person who manages assets, making portfolio composition and individual security selection decisions for a fee, usually a percentage of assets invested.
 
 J
 
junk bond
Bond purchased for speculative purposes. Usually rated BB and lower, and has a higher default risk.
 
 K
 
Keogh
A tax-deferred retirement account designated for employees of unincorporated businesses or for persons who are self-employed (either full-time or part-time).
 
 L
 
lagging indicator
Economic indicator that changes directions after business conditions have turned around.
 
leading indicator
Economic indicator that changes direction in advance of general business conditions.
 
limit order
An order placed with a broker to buy or sell at a price as good or better than the specified limit price.
 
limited partnership
An arrangement between a general partner and a limited partner. The general partner manages the project, and collects fees and a percentage of profits and income. Limited partners invest in the project but have limited liability; they are not involved in the day-to-day management of the project, and they receive a percentage of the profits and income. In general, they also receive tax benefits.
 
liquidity
The degree of ease and certainty of value with which a security can be converted into cash.
 
load
A sales commission to buyers that a mutual fund may charge.
 
long-term debt
Liabilities due in a year or more. Includes bonds payable, deferred taxes, minority interests, and future policy benefits.
 
low-load fund
A mutual fund that charges a small commission for investment.
 
lump-sum distribution
A single payment to a beneficiary covering the entire amount of an agreement. Participants in individual retirement accounts (IRAs), pension plans, profit-sharing, and executive stock option plans generally can opt for a lump-sum distribution if the taxes are not too burdensome when they become eligible.
 
 M
 
margin
The use of borrowed money to purchase securities (buying "on margin").
 
market capitalization
Number of common stock shares outstanding times share price. Provides a measure of firm size.
 
market order
An order placed with a broker to buy or sell a security at whatever the price may be when the order is executed.
 
market risk
The volatility of a stock price relative to the overall market as indicated by beta.
 
market timing
Attempting to leave the market entirely during downturns and reinvesting when it heads back up. Requires a crystal ball to be effective.
 
maturity
The length of time until the principal amount of a bond must be repaid.
 
maturity date
The date when the principal amount of a security becomes due and payable.
 
Medicare
A U.S. Social Security Administration program that reimburses hospitals and physicians for certain medical care to qualifying persons over the age of 65.
 
modern portfolio theory (MPT)
Overall investment strategy that seeks to construct an optimal portfolio by considering the relationship between risk and return, especially as measured by alpha, beta, and R-squared. This theory recommends that the risk of a particular stock should not be looked at on a stand-alone basis, but rather in relation to how that particular stock's price varies in relation to the variation in price of the market portfolio. The theory goes on to state that given an investor's preferred level of risk, a particular portfolio can be constructed that maximizes expected return for that level of risk.
 
money market mutual fund
A mutual fund that invests in very short-term financial securities, usually of less than 30 days maturity.
 
municipal bond
Tax-free debt instrument issued by a state or local government.
 
mutual fund
A pool of investors' money invested and managed by an investment adviser. Money can be invested in the fund or withdrawn at any time, with few restrictions, at net asset value (the per share market value of all securities held) minus any loads and fees.
 
 N
 
NASDAQ
U.S. electronic stock market where trades are executed through a sophisticated computer and telecommunications network.
 
net asset value
The market value of a mutual fund's total assets, after deduction of liabilities, divided by the number of outstanding shares; the per share price of no-load mutual funds.
 
net income
Sales less all expenses and taxes.
 
net profit margin
Net income divided by sales for the same period. When compared against industry norms and over time, it provides an indication of the competitive nature of the industry and the company's competitive position.
 
New York Stock Exchange index
A market value-weighted measure of stock market changes for all stocks listed on the NYSE.
 
no-load fund
A mutual fund that sells its shares at net asset value, without the addition of a sales fee (load).
 
 O
 
odd lot
A transaction involving fewer shares than in a "round" lot, which for most stocks is 100 shares.
 
open-end fund
A mutual fund that continuously sells shares to investors and redeems shares when investors wish to sell. Open-end funds have no limit to the number of shares they can issue.
 
operating profit
Sales less cost of goods sold, general selling and administrative expenses, depreciation, research and development, interest expense and other unusual operating expenses.
 
operating profit margin
Operating profit divided by sales for the same period. When compared against industry norms and over time, it provides an indication of the competitive nature of the industry and the company's competitive position.
 
over-the-counter market
A communications network through which trades of bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).
 
 P
 
par value (bond)
The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.
 
payout ratio
Dividends per share divided by earnings per share. Provides an indication of how well earnings support the dividend payments. The lower the ratio, the more secure the dividend.
 
PEG ratio (P/E to EPS growth)
Stock's price-earnings ratio divided by earnings per share growth rate. Provides an indication of the price the market has put on earnings expectations relative to what the firm has actually produced. As a rule, a PEG ratio of 1.0 is considered fairly priced, while ratios below 1.0 may point to undervalued stocks and ratios above 1.0 are potentially overvalued.
 
pension
Fund set up by a corporation, labor union, governmental entity, or other organization to pay the pension benefits of retired workers.
 
portfolio manager
One responsible for managing large pools of funds. Portfolio managers may be employed by insurance companies, mutual funds, bank trust departments, pension funds, and other institutional investors.
 
preferred stock
A security representing prior claim to common stock on the firm’s earnings and assets. Preferred stockholders normally forgo voting rights and receive a fixed dividend that takes precedence over payment of dividends to common stockholders.
 
premium bond
A bond that is valued at more than its face amount.
 
present value
The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.
 
price-earnings ratio (P/E)
Market price per share divided by the firm's earnings per share. A measure of how the market currently values the firm's earnings growth and risk prospects. High P/E stocks carry with them high expectations as to future growth potential, while low P/E stocks are perceived to have lower future potential or greater risk.
 
price-earnings relative
Stock's price-earnings ratio divided by the price-earnings ratio for the market as measured by a broad market measure such as the S&P 500 index or the Value Line index. A method for judging whether a price-earnings ratio is reasonable based on current market conditions and historical relationships.
 
price-to-book ratio
Market price per share divided by book value (tangible assets less all liabilities) per share. A measure of stock valuation relative to net assets. A high ratio might imply an overvalued situation; a low ratio might indicate an overlooked stock.
 
price-to-cash-flow ratio
Price per share divided by cash flow per share. A measure of the market's expectations regarding a firm's future financial health. Provides an indication of relative value, similar to the price-earnings ratio.
 
price-to-growth-flow ratio
Current price per share divided by the sum of research and development per share and earnings per share over the last 12 months. As a rule of thumb, stocks with ratios between 10 and 14 are considered fairly valued; companies with ratios below 8 are considered attractively priced and companies with ratios above 16 are considered expensive.
 
price-to-sales ratio
Current market price per share divided by the sales per share for the most recent 12 months. Used similarly to price-earnings ratios to identify "out-of-favor" stocks.
 
principal
The amount owed; the face value of a debt; the amount invested.
 
profit margin
Net income divided by sales. Measures the bottom-line profitability of a firm. A high margin may indicate that a company has a proprietary edge because it can deliver its products at a substantial profit. A high margin also validates the significance of the sales growth rate.
 
prospectus
The written statement that discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus.
 
put option
The right to sell stock at a specified (exercise) price within a specified period of time.
 
 Q
 
quick ratio
The sum of cash, equivalents and receivables, divided by short-term liabilities. Tries to answer the question: If sales stopped, could this firm meet its current obligations with convertible assets on hand?
 
 R
 
real rate of return
The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.
 
redemption fees
Charges assessed upon redemption of mutual fund shares.
 
REIT
Real estate investment trust. Similar to a mutual fund, except it invests in real estate enterprises, primarily the ownership, renting and managing of properties. Characteristically, REITs have higher dividend yields than common stocks.
 
relative strength
Price performance of a stock divided by the price performance of an appropriate index over the same time period. A measure of price trend that indicates how a stock is performing relative to other stocks. Zero percent indicates price performance equal to that of the index.
 
required rate of return
The rate of return demanded to induce investors to invest in a security.
 
retention ratio
The percent of earnings retained in the firm for investment purposes.
 
return
Consists of income plus capital gains relative to investment.
 
return on assets
Net income divided by total assets. Provides a measure of management's efficient use of assets.
 
return on equity (ROE)
Net income after all expenses and taxes divided by stockholder's equity (book value). An indication of how well the firm used reinvested earnings to generate additional earnings.
 
return on investment (ROI)
Total capital divided by earnings. A means of evaluating the efficiency of management and the development of product lines for the comparison of companies.
 
revenue
Also called net sales. Gross sales less returns, allowances, and freight out. Returns are goods returned for credit, allowances are deductions for goods lost or damaged in transit, and freight out is shipping expense passed on to the customer.
 
revenue bond
A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.
 
risk
Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.
 
risk/return trade-off
The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.
 
RiskGrade
A measure that standardizes risk by taking the average standard deviation of all the world's equities and assigning it a standard deviation value of 100. All other standard deviations are expressed as a percentage of that figure. Developed by RiskMetrics Group (www.riskgrades.com).
 
Roth IRA
Individual retirement plan. Contributions are not deductible, but qualified distributions are tax free.
 
round lot
The basic trading block for stocks--usually 100 shares.
 
R-squared
A measurement of how closely a portfolio's performance correlates with the performance of a benchmark index, such as the S&P 500, and thus a measurement of what portion of its performance can be explained by the performance of the overall market or index.
 
 S
 
sales
Net sales is sales less allowance for returns and discounts.
 
sales growth rate
Compound annual increase or decrease in sales. Provides a confirmation of the quality of the historical earnings per share growth rate.
 
secondary market
A market in which an investor purchases an asset from another investor rather than the issuing corporation. An example is the New York Stock Exchange.
 
sector
The broad general industry classification for stocks.
 
security analyst
One who studies various industries and companies and provides research reports and valuation reports.
 
shares outstanding
Total number of shares held by shareholders. Provides an indication of the trading liquidity of the firm.
 
short sale
A market transaction in which an investor sells borrowed securities in anticipation of a price decline.
 
short-term debt
Liabilities that are due in less than one year. Also includes that portion of long-term debt that will become due within the next year.
 
sinking fund provision
A means of repaying funds advanced through a bond issue. The issuer makes periodic payments to the trustee, who retires part of the issue by purchasing the bonds in the open market.
 
spread
The difference between the bid and asked price of a security.
 
Standard & Poor’s 500 index
A broad-based, market-cap-weighted index based on the average performance of approximately 500 widely held common stock.
 
standard deviation
A measure of the degree to which returns of an asset vary around the mean.
 
stock dividend
A dividend paid in additional shares of stock rather than in cash.
 
stock split
The division of a company's existing stock into more shares. In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held.
 
stockbroker
An agent who handles the public's orders to buy and sell securities for a commission.
 
stockholder's equity
Total assets less total liabilities.
 
stop-limit order
An order placed with a broker to buy or sell at a specified price or better after a given stop price has been reached or passed.
 
stop-loss order
An order placed with a broker to buy or sell when a certain price is reached; designed to limit an investor's loss on a security position.
 
sustainable growth rate
Return on equity multiplied by one minus the average payout ratio. Used as a measure of a firm's ability to finance its long-term capital requirements internally.
 
 T
 
technical analysis
An analysis of price and volume data as well as other related market indicators to determine past trends that are believed to be predictable into the future. Charts and graphs are often utilized.
 
term life insurance
A type of life insurance where the insured only pays for the cost of protection of death. No cash value is built up, so term insurance is cheaper; however, as the insured gets older, the cost of premiums increases.
 
ticker
Letter or group of letters that designates a security for trading purposes.
 
time horizon
The length of time an investment is held.
 
total assets
The sum of current assets; investments; property, plant & equipment; and tangible assets.
 
total capital
Long-term corporate financing of a firm. Equals the sum of long-term debt, preferred equity, and equity.
 
total debt to total assets
Short-term and long-term debt divided by total assets of the firm. A measure of a company's financial risk that indicates how much of the assets of the firm have been financed by debt. Also referred to as total liabilities to total assets.
 
total liabilities
Current liabilities and long-term debt.
 
trading range
The spread of prices that a stock normally sells within.
 
transaction costs
Costs incurred buying or selling securities. These include brokers' commissions and dealers' spreads (the difference between the price the dealer paid for a security and the price for which he can sell it).
 
Treasury bill
Short-term debt security issued by the federal government for periods of one year or less.
 
Treasury bond
Longer-term debt security issued by the federal government for a period of seven years or longer.
 
Treasury note
Longer-term debt security issued by the federal government for a period of one to seven years.
 
 U
 
unit investment trust
A company that purchases securities (usually fixed income) and sells shares representing proportional interest in the portfolio of those securities. The trust is liquidated when the securities mature.
 
universal life insurance
A form of whole life insurance in which premium payments and coverage is more flexible, allowing increases and decreases without additional sales charges.
 
unseasoned issue
An issue that has not been formerly traded in the public markets.
 
upward revisions in current year EPS estimate
The number of analysts who revised their current fiscal year earnings estimates for the stock upward last month. Companies with upward earnings revisions often experience positive price strength.
 
 V
 
valuation
The process of determining the current worth of an asset.
 
Value Line index
The index represents 1,700 companies covered in the The Value Line Investment Survey. It is an equal-weighted index, which means each of the 1,700 stocks, regardless of market price or total market value, are weighted equally.
 
value stock
Stock of companies whose price looks cheap relative to earnings, assets, dividends or cash flow
 
variability
The possible different outcomes of an event. As an example, an investment with many different levels of return would have great variability.
 
variable annuity
A life insurance company investment product that combines a savings plan with a small life insurance component to provide certain tax benefits. The savings portion can be invested in a choice of pooled vehicles, including stock funds.
 
variable life insurance
A form of whole life insurance that allows the cash value portion to be invested in stock, bond or money market portfolios.
 
 W
 
warrant
A long-term option that guarantees the right to purchase a stated number of shares of common stock in a company at a specified (exercise) price.
 
whole life insurance
Insurance that provides protection if the insured dies while also building up cash value. Premiums are high but level, and include the cost of term insurance plus a savings component.
 
Wilshire 5000 index
A broad-based, market-cap-weighted index of stocks. Includes virtually all liquid securities (about 7,000).
 
working capital
Net short-term company assets; it is calculated as current assets minus current liabilities.
 
 Y
 
yield
The amount of interest paid on a bond divided by the price. A measure of the income generated by a bond. A yield is not a total return measure because it does not include capital gains or losses.
 
yield curve
A curve that shows interest rates at a specific point for all securities having equal risk but different maturity dates. Usually, government securities are used to construct such curves.
 
yield to maturity
The yield on a security assuming that interest payments will be made and reinvested until the final maturity date, at which point the principal will be repaid by the issuer.
 
 Z
 
zero-coupon bond
A bond that generates no periodic interest payments and is issued at a discount from face value. All return is realized at maturity.