Glossary of Financial Terms

A

annual report:

The write-ups and financial statements given every year to investors and inquiring members of the public concerning a corporation's business

asset:

A resource of money value, including cash, accounts receivable, inventory, real estate, machinery, collectibles, and securities

B

balance sheet:

A firm's financial statement that provides a picture of its assets, debts, and net worth at a specific time

bankruptcy:

A term that describes the legal process governed by the U.S. bankruptcy code for companies unable to meet financial obligations

beta:

The indicator used by Value Line to measure a stock's risk relative to the market, in this case the NYSE Index. The market's beta is always 1.0 (Based on past statistical records, a beta higher than 1.0 indicates that when the market rises, the stock will rise to a greater extent than that of the market; likewise, when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that the stock will usually change to a lesser extent than that of the market. The higher the beta, the greater the investment risk.)

bid price:

The price one is willing to pay for a security

book value per share:

The accounting value of a share of common stock, determined by dividing the company's net worth by the number of shares that are circulating

buy-and-hold:

A strategy in which the stock portion of one's portfolio is fully invested, including dividends reinvestments, at all times.

buy and sell orders:

An intent to buy or sell a security

C

call option:

The right given a buyer to buy stock at a specified price within a certain time period

callable bond:

A bond that can be officially repaid by the issuer prior to its maturity date (Out of courtesy, a premium is usually paid when the bond is repaid.)

capital gain:

An increase from the purchase price to the selling price of common stock or any other capital asset; profit from the sale of investments or property (A capital gain that persists for one year or less is called a short-term capital gain. Likewise, one that persists for more than one year is called a long-term capital gain.)

capital loss:

A decrease from the purchase price to the selling price of common stock or any other capital asset; a loss from the sale of investments or property

cash flow per share:

Earnings after taxes and depreciation, divided by the number of a firm's shares

certificate of deposit (CD):

An interest-bearing bank receipt for a specified amount of money (CD's usually mature between three months and three years. The interest rate depends on the amount of money and length of time of the deposit.)

commission:

A broker's fee is given for assisting in buying or selling securities

common stock:

Shares in a company that represent part ownership of that company

compounding:

The paying of interest on the accrued interest as well as on the principal

corporation:

An association of individuals, under authority of law, whose powers and liabilities are distinct from those of its individual members

current assets:

Assets that can be converted to cash within a year

current liabilities:

Liabilities that must be paid within a year

current ratio:

The worth of a company (contained as current assets, including cash, accounts receivable and inventory,) divided by current financial liabilities, including all short-term debts (This ratio roughly measures a company's financial risk: logically, the more the financial liabilities, the riskier the company. Thus, small current ratios indicate high risk.)

current yield:

The amount produced by dividing the annual income, both from interest and dividends, by the current price of the security (Stocks do not gain interest; the current yield for stocks is equal to the dividend yield.)

cyclical industry:

An industry whose success is closely linked to the rise and fall of the general economy (The auto industry is a cyclical industry.)

D

debt-to-equity ratio:

The ratio found by dividing long-term debt by the equity (all assets minus debts) held in stock (This is a measure of financial risk.)

default:

A term that denotes the failure to pay the principal or interest on a financial obligation (such as a bond).

default risk:

The risk that a company will default, or fail to meet its financial obligations, i.e., fail to pay the interest or principal on its bonds

depreciation:

The decrease in value due to wear and tear, decay, decline in price, e.g., a new car purchased at $20,000 depreciates to $5,000 in five years

discount bond:

A bond whose value is less than its face amount

discount broker:

A stockbroker who charges a smaller commission than other brokers, but provides no counsel in investment

diversification:

The process of buying securities in different investment types, industry types, risk levels, and companies in order to reduce the loss from a possible company-local or industry-local loss of business (Diversification is illustrated by a famous saying, "Don't put all your eggs in one basket.")

dividend payout ratio:

The ratio found by dividing the annual dividends per share by the annual earnings per share.

dividend yield:

The yield found by dividing the annual dividends per share by the price per share (This yield is an indication of the income from a share of stock. Since return on a stock is comprised of capital gain plus dividends, the total return is comprised of dividend yield plus the capital gains percentage for stock.)

dividend:

A sum of money, determined by a company's directors, paid to shareholders of a corporation out of earnings

dollar cost averaging (DCA):

A system of buying securities at regular intervals, using a fixed amount of cash over a considerable period of time regardless of the prevailing prices of the securities (DCA protects against the risk of losing a sum of money invested all at once at an inopportune time, e.g., right before a price drop.)

Dow Jones industrial average (DJIA):

An indicator showing generally how well the market is going, found by averaging the prices of 30 industrial blue-chip stocks trading in the New York Stock Exchange

E

earnings per share:

Earnings found by dividing the net income of the company by the number of shares of common outstanding stock

earnings yield:

Yield found by dividing the earnings per share for the last 12 months by the market price per share

equity:

(1) Value determined by subtracting debts from assets
(2) An alternate term for stock or similar securities which denote a partial ownership

F

face value:

The value printed on the face of a stock, bond, or other financial instrument or document

financial strength:

A company's financial condition as seen by its analysts (Value Line rates financial strength on a scale from A++ to C.)

financial planner:

An investment professional who helps with financial plans for specific goals and assists in the coordination of financial concerns

fixed assets:

Any long-term asset, such as a building, tract of land, or patent that will not be converted to cash within a year

fundamental analysis:

An analysis of stocks based on fundamental factors, such as company earnings, growth potential, etc., to determine a company's worth, strength, and potential for growth

G

going public:

An expression used to describe the first public selling of shares of an institution that previously sold shares privately

gross domestic product (GDP):

The total value of goods and services produced by a nation. In the U.S. it is calculated by the Commerce Department, and it is the main measure of U.S. economic output (In other countries, the GDP is called the gross national product (GNP).)

H

holding period return/yield:

The yield calculated by dividing the income plus price appreciation during a specified time period by the cost of the investment

I

income statement:

The financial statement of a firm that presents both revenues and expenses during a specified time period

index:

A quantity whose variation represents market fluctuation (The Standard & Poor's 500 index measures the overall change in the value of 500 stocks of the largest firms in the US.)

industry rank:

Value Line's ranking of a company within its own industry

inflation risk:

The uncertainty of the future real (after-inflation and -tax) value of an investment

investment adviser:

A professional who, for a fee, manages an investment portfolio

issuer:

One who under writes (issues) and distributes a company's securities

 

J

junk bond:

A weak bond, rated BB or lower, that has a high default risk, and thus carries a high interest rate

K

L

liabilities:

The claims of those who have loaned to a company; debts

limit order:

An order to buy stock once the price has dropped below the price limit

liquidity:

The ability or ease with which assets can be converted into cash; also the degree to which one can obtain the full cash value of an investment

long-term debt:

A debt owed over a relatively long period of time

M

market capitalization:

The value found by multiplying the number of outstanding common stock shares by the share price; indicates firm size and total value held in stock

market order:

An order to purchase or sell stock at a current price

market risk:

The movement of a stock price relative to the overall market; indicated by beta

market timing:

The selecting of the best time for leaving or reentering the market in order to achieve the maximum result

maturity:

The time a note or bill of exchange becomes due

money-market fund:

A type of mutual fund that invests in short-term securities such as Certificates of Deposits and Treasury Bills

N

National Association of Securities Dealers Automated Quotations System (NASDAQ):

A "virtual stock exchange"--that is, a stock market without a trading floor whose orders are made through a computer network (Usually, high-tech stocks are listed here.)

net income:

Profit after taxes

net profit margin:

A measure of a company's profitability and efficiency, calculated by dividing a measure of net profits (operating profit minus depreciation and income taxes) by sales

net sales:

Amount of sales found by subtracting returns and allowances from money collected for goods and services

net worth:

Value found by subtracting all liabilities from all assets

New York Stock Exchange (NYSE):

The largest stock exchange in the U.S. located in New York City (Also known as "Wall Street," this stock exchange carries stocks of well-established companies on its trading floor.)

New York Stock Exchange index:

A market-value-weighted measure that indicates stock market changes for all NYSE stocks

O

odd lot:

A lot that is less than 100 shares, or less than a round lot

over-the-counter market:

A communications network, supervised by the National Association of Securities Dealers (NASD), which trades bonds, non-listed stocks, and other securities

operating costs and expenses:

The costs and expenses necessary to operate a company; includes manufacturing, marketing, research and development operating costs

operating income:

The income derived after subtracting operating costs and expenses from net sales

operating margin:

A measure of a company's profitability and efficiency, calculated by dividing a measure of operating profit (sales minus cost of producing goods and operating expenses) by sales

P

par value (bond):

The face value of a bond, usually $1,000 for corporate bonds, and generally higher denominations for many government bonds

payout ratio:

The ratio found by dividing the dividends per share by earnings per share (Shows how well earnings support dividends, or how secure the dividend is. The lower the ratio, the more secure the dividend.)

portfolio:

The securities an investor holds

premium bond:

A bond whose value is greater than its face value

preferred stock:

Stock whose holders have precedence over common stock in claiming dividends and assets

present value:

The amount invested at a certain interest rate

price-earnings ratio (P/E):

The ratio found by dividing market price per share by earnings per share (This ratio indicates what investors think of the firm's earnings' growth and risk prospects.)

price-earnings ratio to earnings per share growth (P/E to EPS growth):

The ratio found by dividing a stock's price-earnings ratio by its earnings per share growth rate, indicating the company's profits relative to investors' expectations

price-earnings relative:

The relative amount found by dividing a stock's price-earnings ratio by that of the market as given by a widespread market yardstick such as the S&P 500 or the Value Line index (This relative suggests to the investor whether his investment's price is reasonable compared to the market. Also can be used for historical comparison with P/E relatives of recent years.)

price-to-book ratio:

The ratio found by dividing a stock's market price per share by its book value (defined as being assets minus all liabilities) per share (This ratio measures the stock's value relative to its net assets. A high ratio, for instance, might suggest that a stock is overvalued.)

price-to-cash-flow ratio:

The ratio found by dividing a stock's price per share by its cash flow per share (This ratio, similar in type to the price-earnings ratio, serves as a measure of investors' expectations on a firm's future financial success.)

principal:

The amount owed, invested, or the face value of a debt

private corporation:

A corporation which does not offer stock for public sale (Private corporations are not required by law to provide information about their financial conditions.)

public corporation:

A corporation which offers stock for public sale (Public corporations are required by law to provide information about their financial condition, operations, and such.)

profit margin:

The margin found by dividing a firm's post-tax net earnings by sales (Profit margin measures how well a firm can earn money from sales relative to others.)

prospectus:

The written statement disclosing the terms of a mutual fund or the offering of securities

put option:

The right given a buyer to sell stock at a specified price within a specified period of time

Q

R

real rate of return:

The percentage of return on an investment over one year after adjustments for inflation or deflation

retention ratio:

The percent of a firm's earnings kept for investment purposes

return:

The sum of the income plus capital gains

return on equity (ROE):

The value found by dividing the company's net income by its net assets (ROE measures the amount a company earns on investments).

revenue bond:

A municipal bond (muni) backed by the revenue gained from a specific project such as the building of a stadium

risk/return trade-off:

The compromise made between high- and low-risk investments (High-risk investments generally generate more earnings, while low-risk ones generate a lower rate of return.)

risk:

The chance that an original investment might lose value

round lot:

Generally 100 shares, the basic trading unit for stock

S

safety:

Value Line's measure of stock volatility (magnitude of beta), measured from 1 to 5, 5 being most volatile

securities:

A financial that indicated the holder owns a share or shares of a company (stock) or has loaned money to a company or government organization (bond)

Securities and Exchange Commission (SEC):

The federal agency that regulates the sale of securities

security analyst:

A person who specializes in evaluating information regarding stocks and bonds

shareholder:

See stockholder

shareholders' equity:

The sum of preferred and common stock equity held by shareholders

Standard & Poor's 500 index (S&P 500):

A well-known, value-rated index of 500 major US companies: 400 industrial firms, 20 transportation firms, 40 utilities firms, and 40 financial firms

stock dividend:

A dividend paid in shares of stock as a substitute for cash (Stock dividends allow dividends to make money on themselves.)

stock split:

The splitting or dividing of shares to reduce the price needed for the formation of a round lot (To illustrate, in a 2-for-1 split, when 1 shares splits into 2, an investor would receive one additional share for each he formerly owned.)

stockbroker:

A broker who buys and sells stocks and other securities for his customers, charging commission

stockholder:

A holder or owner of shares of stock; also referred to as shareholder

stop-limit order:

An order placed with a stockbroker to buy or sell at a certain price or better during a limited period of time

stop-loss order:

An order placed with a stockbroker to buy or sell a designated stock once a designated price has been reached (This order limits the amount an investor can lose on that investment.)

T

technical analysis:

The analysis of historical trends of price, volume, and other related market indicators to aid in predicting future trends; commonly includes tables and graphs

timeliness:

Value Line's measure of a stock's price performance for the upcoming year

total assets:

The sum found by adding property, plant, and equipment asset values to current asset values

total debt to total assets:

The ratio found by dividing short- and long-term debts by the total assets of the firm (This ratio measures a company's financial risk, showing how much of the firm's property has been financed by debt.)

total liabilities:

The liabilities found by adding current liabilities to long-term debts

trading range:

The range of prices within which a stock is normally traded

transaction costs:

The costs that are brought about by the buying or selling of securities, including broker commissions and the difference between dealer buying and selling price (called a dealers' spread)

Treasury bill (T-bill):

A certificate representing a short-term loan to the federal government for periods not exceeding one year

Treasury bond (T-bond):

A certificate representing a long-term loan to the federal government for periods exceeding ten years

Treasury note (T-note):

A certificate representing a median-term loan to the federal government for a duration of between two and ten years

U

V

valuation:

The process of determining the current value of stock or other assets

Value Line index:

An index representing 1700 equally-weighted companies from the NYSE, AMEX, and the over-the-counter markets

W

Wilshire 5000 equity index:

A stock market index composed of approximately 7000 securities, including most issues from NYSE, AMEX, and the over-the-counter markets (This index formerly consisted of only 5000 securities.)

X

Y

yield to maturity:

The return expected on a bond held until the maturity date

yield:

The value found by dividing the amount of interest paid on a bond by the price, thus measuring the income from a bond (The term also refers to the dividend from stock divided by its price. Yield, however, is not a measure of total return since it does not include capital gains or losses.)

Z