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Glossary of Terms
A-K
| L | M | N | O
| P | Q | R
| S | T | U | V
| W | Y | Z
L
Large
Capitalization Stock: a well-known company that has over
one billion in market capitalization. Examples of large
capitalization stocks: Phillip Morris, General Electric and Wal-Mart
Stores.
Leading
Economic Indicators: a statistic reported by the
government that tries to predict if the economy will expand or
contract.
Lead
Underwriter: In many IPOs, there will be more than one
underwriter to help sell the new shares. However, there will be a
managing underwriter, called the lead underwriter.
Letter of
Intent: This is the agreement between a company and an
underwriter to perform services for a public offering.
Leverage:
another name for debt.
Leverage
Buyout: when a group of investors borrows huge sums of
money to buy a company.
Liquidation:
to sell all of a stock, bond or mutual fund.
Listed
Stock: stocks that are on organized exchanges, such as
the New York Stock Exchange or the American Stock Exchange. Unlisted
stocks are on the Over the Counter Market--which is a computer
network that spans the country.
Load:
the commission charged on mutual funds.
Long-Bond:
any bond that has a maturity of ten or more years. Though, when
investors talk about the long bond, they are usually referring to
the 30-year Treasury bond.
Lump-Sum
Distribution: when a person cashes out of a retirement
plan. Much of a stockbroker's business is derived from lump-sum
distributions.
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M
Macroeconomics:
study of the whole economy (which now means the global economy).
Margin:
when an investor borrows money to buy stock.
Market
Maker: This is a securities firm that posts bid and ask
prices for companies on the Over the Counter Market.
Market
Timing: when an investor tries to predict the direction
of the market and invest accordingly. Unfortunately, this is a
difficult strategy and has had limited success.
Market Top:
when the stock or bond market has reached its highest level--and is
thus ready for a fall.
Maturity:
the date on which the issuer will pay off the face value of its
bonds.
Medium-Term
Bond: a bond that matures between one to ten years.
Member Firm: a brokerage firm that
owns a seat (membership) on the New York Stock Exchange.
Merger:
when two or more companies agree to combine their operations and
form a larger corporation.
Merit
Review: In many states, the authorities will require that
there be a review of an offering for its fairness.
Minimum
Investment: most mutual funds will require a minimum
investment. Fortunately, these minimums are usually affordable for
most investors. What is the typical minimum? Many will range between
$250 to $2,500.
Monetary
Policy: when the Federal Reserve Board changes the money
supply so as to change the direction of the economy.
Money Market
Fund: a mutual fund that invests in short-term debt
instruments of governments and large corporations. In essence, the
purpose of a money market fund is to collect interest from these
short-term debts and pass them on to the investors of the fund.
M1:
a statistic that shows how much coins, currency and checking
deposits there are in the economy.
Multiple:
see PRICE-EARNINGS RATIO.
Municipal
Bond: a bond issued by a locality, city or state so as to
finance public projects, such as roads, hospitals, and schools. The
interest a client earns on municipal bonds is exempt from federal
taxes. Moreover, if the client is a resident of the state in which
the municipal bond was issued, then the interest will also be exempt
from state taxes. In fact, some states will even allow a client to
exempt interest from local taxes--such as New York (this type of
bond is known as triple exempt municipal bond).
Mutual Fund:
will pool investor money and hire one or more money managers to buy
and sell stocks and bonds.
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N
NASD:
stands for National Association of Securities Dealers. This private
organization helps regulate the stock and bond markets.
National
Association of Securities Dealers Automated Quotation Service
(NASDAQ): the NASDAQ, which was created in 1971 by the
National Association of Securities Dealers, is an extensive
electronic system that links many traders who deal in over the
counter stocks. Stocks on the NASDAQ tend to be smaller and more
speculative.
NAV:
stands for net asset value, which is the price of a mutual fund.
Net Income:
the profits of a corporation after taxes.
New Issue:
This is a company that has gone public recently.
No-Load:
a mutual fund without a commission.
Note:
a short or medium maturity bond.
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O
Obligation:
a debt owed to someone else. For example, a bond is an obligation.
Odd Lot:
when an investor buys fewer than 100 shares.
Offering
Circular: This is a disclosure of material financial
information for potential investors in a Regulation A new offering.
Offering
Price: This is the price at which a company will go
public.
On the
Sidelines: when a client waits for prices to drop before
he or she buys any more stock.
OPM:
stands for "other people's money."
Option:
a contract that gives the investor the right to buy (known as a call
option) or the right to sell (known as a put option) 100 shares of a
stock over a period of time (usually three months).
Out of
Favor: a stock that the investment community has a
negative view.
Outstanding:
the number of shares that are in investor hands.
Overbought:
when a stock price is at speculative levels.
Overheated:
when the economy is growing fast and inflation is beginning to
accelerate.
Oversold:
when a stock is at unreasonably low levels.
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P
Paper profit
or paper loss: when the value of a client's stocks go up
or down, but he or she does not sell them. However, if the client
did sell them, then there would have been realized capital gains or
losses.
Paper Tiger:
an investment that looks strong, but is actually weak.
Parent
Company: a company that controls and owns another
company.
Par Value:
see FACE VALUE.
P-E Ratio:
see PRICE-EARNINGS RATIO.
Penny Stock:
a small company that has a share price of $5 or lower. These are
speculative investments and are not for the faint of heart.
Pink Sheet
Stocks: penny stocks whose prices are published by the
National Quotation Bureau.
Plow Back
Earnings: growth companies usually do not pay dividends
because they want to use their profits to plow back into the
corporation and increase investment in plant, equipment and
research.
Point:
for stocks, one point equals one dollar; for bonds, one point equals
ten dollars.
Portfolio:
the composition--stocks, bonds, mutual funds, etc.--of a client.
Preferred
Stock: similar to common stock, but usually pays higher
dividends. Also, preferred stockholders get their dividends before
common stockholders.
Prefiling
Period: This is the period between the decision to go
public and the necessary filings for the offering.
Price-Earnings
Ratio (PE ratio): calculated by dividing the stock price
by the earnings per share. For example, if a company is selling for
$50 and has earnings per share of $5, then the PE ratio is 10 ($50
divided by $5). Many analysts use the PE ratio to indicate if a
stock is undervalued (e.g., if the PE ratio is over 5 or 10) or
overvalued (50 to 100).
Prime Rate:
a rate charged by banks to their best customers (such as major
corporations, like AT&T and Phillip Morris).
Private
Corporation: also known as a closed corporation. A
private corporation is not listed on a stock exchange or on the Over
the Counter Market.
Proceeds:
The amount of money a company receives from its offering of stock to
the public.
Profit
Taking: after a stock has increased in value, some
investors will take their gains by selling some of their stock.
Program
Trading: sophisticated computer-generated investment
strategies used by major institutions that try to find profits by
investing quickly in a basket of stocks, such as the S&P 500.
Prospectus:
a document that discloses material financial information to those
people who want to invest in initial public offerings.
Proxy:
giving authorization to someone else to vote common stocks, such as
at a company's shareholder meeting.
Public
Offering: This is the issuance of stock to the public.
Pure Play:
a company that has only one product or service.
Put Option:
see OPTION.
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Q
Qualified Plan: a plan that allows
the client to shelter investment income for retirement. Examples of
qualified plans: Keoghs and 401(k)s.
Quant: an investor who uses complex
mathematical and statistical analysis to select stocks and bonds.
Quarter: equivalent to three months.
Quote: the price of a stock or bond.
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R
Rally:
when the stock or bond markets undergo strong increases in value.
Random Walk:
a theory that states people cannot, over the long-term, beat the
market averages (like the S&P 500).
Range:
the difference between a stock's highest and lowest price during the
last 52 weeks.
Rating:
an analysis of whether a bond has sufficient backing to guarantee
its payment to investors. For example, if a bond has a rating of AA,
then it will most likely be safe for investors. However, if the bond
has a C rating, then there may be problems for investors.
Real Estate
Investment Trust (REIT): a company that invests in real
estate properties and passes the profits (such as from leases) to
investors.
Real Rate of
Return: profit that is adjusted for inflation.
Realized
Gain or Loss: see CAPITAL GAIN OR CAPITAL LOSS.
Recession:
when the economy's Gross Domestic Product (which measures the total
value of goods and services produced by the economy) falls for two
consecutive quarters.
Red Herring:
This is a preliminary prospectus that has been filed with the
Securities and Exchange Commission, but is used before the effective
date.
Registered
Representative: another name for a stockbroker.
Registrar:
This is the company that keeps track of the ownership of a company's
stock.
Registration
Statement: This is the necessary document to be filed
with the Securities and Exchange Commission so as to go public.
Regulation
A: This is a less onerous means of going public, for
those companies under $5 million. There is no requirement to file a
registration statement with the Securities and Exchange Commission.
Reorganization:
when a company undergoes tremendous change, such as layoffs, cost
cutting, or mergers.
Revaluation:
the increased purchasing power of a country's currency relative to
other countries.
Revenue
Bond: a bond that is not backed by a municipality's
taxing power, but by the revenue capacity of the project that the
revenue bond financed. For example, a revenue bond is issued to
finance a civic center and the money generated from the civic center
will be used to pay bondholders.
Reversal:
the change of direction of a stock's price.
Rider:
a modification to an insurance policy--such as an increase or
decrease in benefits.
Risk:
the probability that a client will lose money on an investment.
Road Show:
These are the promotional activities to generate interest in a new
offering.
Rotation:
when investors sell stocks of one industry and invest this money in
stocks of another industry.
Round Lot:
buying stocks in 100 increments.
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S
Schedule
13D: if someone buys five percent or more of a company's
stock, then this investor must, within ten days, file a notice with
the Securities and Exchange Commission.
SCOR:
This stands for Small Corporate Offering Registration: This allows
companies of under $1 million to issue new stock to the public.
There need be no registration statement filed with the Securities
and Exchange Commission.
SEC:
see SECURITIES AND EXCHANGE COMMISSION.
Secondary:
a small company stock.
Secondary
Offering: This is when an already public company issues
more stock to the public.
Sector:
an industry, such as the airlines or retailers.
Secular:
a long-term trend in a market or economy.
Securities:
stocks and bonds.
Securities
and Exchange Commission: a government agency that
regulates stocks and bonds.
Securities
Investor Protection Corporation (SIPC): a non-profit
corporation that insures, in case of bankruptcy, $100,000 in cash
and $500,000 in securities for brokerage accounts.
Self-Directed
IRA: a retirement account that allows the client to make
his or her own investment decisions.
SEP:
See SIMPLIFIED EMPLOYEE PENSION PLAN.
Selling
Short: a way to make money if a stock is falling in
price. For example, Joe will sell stock he does not have for $50 per
share (that is, he will borrow the stock from a brokerage and sell
it). Then, within three months, the share price declines to $40. He
will then buy back this stock and cover his short (that is, return
the stock he borrowed). Therefore, he will have made $10 per share
($50-$40).
Share:
see COMMON STOCK.
Shareholders:
the investors who own common stock in a company.
Simplified
Employee Pension (SEP): a retirement plan for small
companies (less than 25 employees).
Sleeper:
a stock that is believed to be selling cheap.
Specialist:
a person who uses his or her own money to invest in securities on
the floor of the New York Stock Exchange. These people "make
markets" in stocks. In other words, when people sell,
specialists buy and vice versa.
Special
Situation: a major change for a company--such as a
merger--that will have a significant effect on its stock price.
Spin Off:
when a corporation sells a subsidiary to its current shareholders by
issuing new stock.
Split:
when a corporation issues more stock to its shareholders. For
example, if a corporation initiates a 2-for-1 stock split, this
company will issue two stocks for every stock a current shareholder
owns.
Stagflation:
when the economy suffers from both inflation and unemployment.
Standard
& Poors 500 (S&P 500): a market index that shows
the value of 500 major corporations (400 industrial stocks, 20
transportation stocks, 40 financial stocks and 40 public utilities).
This is used to indicate which direction the market is going.
Street Name:
when a client's stocks are registered with a brokerage firm. That
is, the client does not hold the stock certificates; rather, the
brokerage firm does.
Syndicate:
a group of institutions that pool their resources together to do an
initial public offering.
Synergy:
a merger of companies which results in a higher value and
performance than if they remained separate.
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T
Take a Bath:
a huge loss in a stock.
Tax Basis:
see BASIS.
Technical
Analysis: a method of valuing stocks by considering a
stock's price pattern on a chart over time.
Technical
Rally: a temporary rise during a bear market.
Tender
Offer: when someone offers to buy another company by
going directly to the shareholders.
Term
Insurance: life insurance that lasts for a specified
period of time. However, term insurance does not have any cash
value.
10-K Report:
see ANNUAL REPORT.
Thin Market:
when volume of trading is low.
Tick:
a change in price.
Tight Money:
when the Federal Reserve increases interest rates to combat
inflation.
Tombstone
Ad: This is an announcement-usually in a paper, such as
the Wall Street Journal-of a new offering.
Total
Return: a calculation that includes both the money a
client makes from an investment's increase in value, as well as its
dividends or interest payments.
Trader:
a short-term investor.
Transfer
Agent: This is the company that is responsible for
transferring stock from buyers to sellers.
Treasury
Bond: a long-term bond (10 to 30 years) issued by the
federal government.
Treasury
Bill: a short-term bond (3 months to 1 year) issued by
the federal government.
Treasury
Note: a medium maturity (1 to 10 years) bond issued by
the federal government.
Trough:
that point at which the economy hits its lowest.
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U
Undercapitalized
Company: a company that does not have sufficient cash to
run properly.
Underwriter:
This is a securities firm that helps a company go public. In most
cases, the underwriter will buy all the stock in a company and
resell it to investors at a higher price.
Uniform Gift
to Minors Act (UGMA): a custodian account that allows
minors to purchase stocks, bonds and other investments.
Uniform
Transfer to Minors Act: see UNIFORM GIFT TO MINORS ACT.
Unloading:
massive selling of stocks or bonds.
Unsecured
Debt: bonds not backed by assets of a company, but by the
company's credit worthiness.
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V
Value
Investor: a person who tries to find companies that are
selling below their actual worth.
Variable
Annuity: an annuity whose value is based on stocks, bonds
or mutual funds.
Volume:
how many stocks or bonds that have been traded (that is, bought and
sold).
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W
Waiting
Period: This is the time between the filing of the
registration statement with the Securities and Exchange Commission
and the effective date.
Warrant:
a security that allows an investor to purchase a fixed number of
shares for a fixed price over a period of time (usually 10 to 15
years).
Wash Sale:
a strategy in which an investor sells securities at the end of the
year so as to take a tax-loss and then immediately buys back the
same securities. The IRS does not allow this.
Windfall:
when a person or corporation receives an unexpected large amount of
profits.
Window
Dressing: happens at the end of the quarter, in which
major institutions sell securities that have not done well.
Whole Life:
an insurance policy, in which the insured (the person being insured)
will make fixed premium payments until age 100. Over time, the
insurance policy will accumulate cash values, which can be borrowed
or used to help pay the premiums on the policy.
Write:
to sell insurance.
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Y
Yield: see CURRENT YIELD.
Yield-to-Maturity (YTM): the yield on
a bond if the client holds it until maturity.
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Z
Zero-Coupon Bond: a security that
does not pay interest but is sold at a deep discount to its face
value. However, usually within five to 25 years, the bond will
mature and the investor will receive the face value. The difference
between the original price of the bond and the face value is the
amount of interest earned.
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