Glossary

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Zero Coupon Bond
A bond that has no coupon payments. It pays only a single cash flow at maturity.

Yankee Bond
A dollar-denominated bond issued in the US by a non-U.S. borrower.

Yelling Markets
Also referred to as “public outcry,” refers to markets where transactions involve the yelling of prices and quantities, just as in the movies.

Yield to Maturity (YTM)
The rate of return the investor will earn if the bond is held to maturity.

Yield Curve
The return on debt securities with different maturities, for a level of default risk.

Yield to Maturity (YTM)
The market interest rate on a bond. It is the yield an investor would receive in the bond is held to maturity.

None

Warrant
A financial asset, issued by the firm, which gives its holder the right to purchase a fixed number of shares of common stock at a predetermined price.

White Knight
A firm that comes to the rescue of a corporation that is being taken over.

Wilshire 5000
An equity index comprising more than 6000 US listed stocks. The index originally included only 5000 companies, thus the number in the name.

Working Capital
Current assets minus current liabilities.

Variance
A measure of a variable’s volatility relative to its average.

Venture Capital
Capital supplied to particularly high-risk projects, such as start-ups or to companies denied conventional financing.

Vertical Integration
Merger between a supplier and its customers. An example would be when an oil-refining firm acquires a firm that owns oil fields.

Visible Hand
The phrase comes from Adam Smith’s “Invisible Hand,” whereby markets alone do the job of resource allocation. With “visible hand” the government intervenes in the market, which suggests a belief in the market’s failure in that particular area.

Volatility
The range of possible outcomes. A measure of risk of an individual asset when held in isolation, i.e., not as part of a portfolio.

Volume
The number of shares or contracts traded in a security or an entire market during a given period, typically a day.

Under-Perform
A security whose expected (average) return is below its required return. Also called over-priced, over-valued, or under-rewarded.

Under-Rewarded
A security whose expected (average) return is below its required return. Also called overpriced.

Under-Valued
An asset that is selling at a price below its intrinsic (theoretical or formula) value.

Underpricing
Issue of securities below their market value.

Underwriter (Investment Banker)
Firm that buys an issue from a company and resells it to investors; a primary market activity.

Underwriter Discount
Underwriters buy the to be issued securities at a reduced (discounted) price. This discount is usually measured as a percent of the price of the issue.

T-Bill (Treasury Bill)
Debt issued by the U.S. Treasury with maturity less than a year.

T-Bond (Treasury Bond)
US Treasury debt with maturities of more than 30 years.

T-Note (Treasury Note)
Debt issued by the US Treasury with maturity between a year and 15 years.

Tender Offer
Offer made directly to a firm’s shareholders to buy their shares.

Tick
This refers to a change in the price of a security. An uptick occurs when the last trade in a security takes place at a higher price than the prior trade. A downtick occurs when the last trade in a security takes place at a lower price than the prior trade. An indicator may be fashioned from the difference between the number of NYSE issues showing upticks on the last trade and the number of NYSE issues showing downticks on the last trade. This indicator is known as the TICK, and is found on many quote screens. A TICK of +236 means 236 more NYSE issues last traded on upticks than those trading on downticks.

Today’s High
The intra-day high trading price.

Today’s Low
The intra-day low trading price.

Tombstone
Advertisement listing the issuing firm, type of security, its issuing price, number of securities to be issued, and names of underwriters of a new issue.

Trading Halt
The temporary suspension of trading in a Nasdaq security, usually for 30 minutes, while material news from the issuer is being disseminated over the news wires. A trading halt gives all investors equal opportunity to evaluate news and make buy, sell, or hold decisions on that basis. NASDAQ or the SEC may also impose a trading halt for purely regulatory reasons.

Transaction Costs
The cost of buying or selling financial securities.

Treasury Stock
Shares that are re-purchased by the issuing company. They are equivalent to unissued stock.

Triple Witching Hour
Slang used for the last hour of trading before the simultaneous expiration of stock options, index options, and index futures. This occurs four times a year on the third Friday of each quarter’s end.

TSE
Tokyo Stock Exchange or the Toronto Stock Exchange.

S&P 500
Standard and Poor’s stock price index comprising the 500 largest companies in the US.

Salvage value
Scrap value of a plant or equipment.

Seasoned New Issue
Additional issue of shares.

Seat
A figure of speech for a membership on an exchange.

SEC (Securities and Exchange Commission)
The federal agency created by the Securities Exchange Act of 1934 to enforce federal securities laws.

Secondary Market
Where trading (exchange of ownership) of financial assets takes place.

Seesaw Finance
Issues related to daily movements in stock prices. “The market went down yesterday due to profit taking,” or “The market did not go up yesterday despite US invasion of Mars.”

Selling Group
A collection of investment bankers who participate in the distribution of new issues to potential investors.

Senior Debt
Debt which, in the event of liquidation, must be repaid before subordinated debt receives any payment.

Settlement Date
In US financial markets, an investor must pay for the purchase of shares by the third business day after securities are bought. An investor is also obligated to deliver an investment that he or she has sold by the third business day after the transaction.

Share
A unit of measuring ownership in a company (i.e., if a firm has 1,000 shares outstanding and if you own 100 of them, then you have a 10% claim on the firm’s net income (NI) and assets).

Shark Repellents
Legal anti-takeover mechanisms devised by management to deter potential takeovers.

Shelf Registration
A procedure that allows firms to file one registration statement covering several future issues of the same security.

Shogan Bond
Dollar-denominated bond issued in Japan by a non-resident.

Short Interest
The total number of shares of a security that have been sold short by customers and securities firms.

Short Sale
Sale of an asset that the investor does not own or any sale that is completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading strategy. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short.

Short Term Gain (Loss)
The gain (loss) realized from the sale of securities or other capital assets held six months or less.

Sinking Fund
A requirement specified in a bond indenture that obligates the firm to annually retire a specified portion of the debt.

SML (Security Market Line)
Line representing the relationship between required return and beta.

Small Cap Stocks
Stocks of companies that have small capitalization, i.e., those that are small in terms of market value.

Sole Proprietorship
A business owned by a single individual. The sole proprietor pays no corporate income tax but has unlimited liability for business debt and obligations.

SPDRs “Spiders”
The acronym for Standard & Poor’s Depository Receipts. It is a basket of the 500 stocks in the S”P 500 index.

Spin-Off
A newly created company that used to be part of a parent company. Parent company shareholders receive a pro rata ownership in the new company.

Stock Split
An accounting transaction that increases the number of shares held by existing shareholders in proportion to the number of shares currently held.

Stocks
Equity claims on the net income (NI) and assets of a corporation.

Stock Symbol
A unique four or five-letter symbol assigned to a Nasdaq security. If a fifth letter appears, it identifies the issue as other than a single issue of common stock or capital stock.

Stock Ticker
This is a lettered symbol assigned to securities and mutual funds that trade on US financial exchanges.

Strike Price
Exercise price of an option.

Student Loan Marketing
A privately owned, government-sponsored corporation that provides a secondary market for government-guaranteed student loans. It issues bonds to raise funds necessary for the purchase of student loans from financial institutions.

Subordinated Debt (Junior debt)
Debt whose holders, in the event of liquidation, get paid only after senior debt is paid off in full.

Sunk Cost
Cost that has been incurred and cannot be recoverable.

Sushi Bond
Eurodollar bonds issued by Japanese corporation.

Syndicate
A group of investment bankers who together underwrite and market a new issue of securities or a large block of an outstanding issue.

Raiders
Investors who attempt to acquire other firms in an unfriendly takeover.

Rally
An increase in the price of a stock or the level of the market.

Rating Agency
Companies that rate the likelihood of a firm to default on its debt obligations.

Real Assets
Tangible assets include: plant and equipment; intangible include: technical expertise, trademarks & patents.

Real Interest Rate
Interest Rate that is adjusted for inflation.

Record Date
Date set by the company when dividends are declared. Owners who are registered on this date receive dividends.

Red Herring
A preliminary prospectus.

Refunding
Replacement of existing debt with a new issue of debt.

Regression Analysis
A statistical technique for fitting best line through data.

Regular Dividend
Dividend that is expected to be maintained at regular time intervals.

Reorganization
Financial restructuring of a firm under bankruptcy. Both the firm’s assets and its financial structure are modified.

Repo (Repurchase Agreement)
Purchase of Treasury securities from a securities dealer with an agreement that the dealer will repurchase them at a specified price.

Required Return
Minimum return required by investors to compensate them for assuming risk.

Residual Dividend
An approach to dividends that suggests a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.

Retained Earnings
Earnings not paid out as dividends.

Risk Premium
Additional return, over the risk-free rate, to compensate investors for accepting (holding) risk.

Risk Aversion
The dislike of risk. For risk averse investors, the pain from losing $1 is greater than the pleasure of winning $1. Thus, such investors have to be compensated with additional return to induce them to hold risky assets.

Round Lot
The purchase or sale of a quantity of stocks that is in multiples of 100, such as 200, 1,000, etc.

Russell 2000
An equity index comprising 2000 mid-capitalization U.S. listed stocks.

Quant Finance
Quants are the “rocket scientists” of Wall Street. They use Quantitative techniques to solve financial problems.

Quote
The highest bid to buy and the lowest offer to sell a security at a given time.

PA (Professional Association)
A type of corporation that provides most of the benefits of incorporation but do not relieve the participants of professional (malpractice) liability. This type of organization is common among accountants, doctors, and lawyers. Also called Professional Corporation (PC).

P/E Ratio
Price to earnings ratio. The price of a share of stock divided by earnings per share of stock for a twelve-month period.

PacMan
The name comes from the video game. It is another takeover repellent devised by management. For example, Bendix Corp. tried to take control of Martin-Marietta by a tender offer. When the takeover effort failed, Martin-Marietta counterattacked by buying Bendix stock in an attempt to take control of Bendix. Thus, Martin-Marietta became the PacMan. To counter, Bendix successfully courted Allied Corporation to come to its rescue. Allied bought Bendix so that Martin-Marietta could not buy enough control. In this case Allied was a White Knight.

Par Value
(1) A stock’s par value is the minimum price at which more shares can be issued. (2) A bond’s par value = $1,000 to be paid at maturity.

Partnership
A form of organization with two or more persons associate to conduct a non-corporate business. Its main disadvantage is unlimited liability. The tax treatment of a partnership is similar to that for a proprietorship, in that the business avoids corporate taxes.

Passive Management
An investment strategy that does not involve the periodic shuffling of a portfolio’s components. A buy-and-hold strategy.

Patient Capital
Investors interested in long-term value maximization.

Payment Date
Date on which dividends are paid to registered owners.

Payout Ratio
Percent of earnings that is paid out as dividends.

Pension Fund
Assets held in trust to cover the costs of pension benefits to participants.

Pension Plan Sponsor
A group of employees with a pension plan under management. The California Public Employees’ Retirement System (Calipers) is an example.

Pension Plan
A plan established by a firm, labor union, government, or other organization to provide for the payment of benefits to the plan participants over a period of years after retirement.

Poison Pill
An anti-takeover plan devised to automatically be activated when the company gets bought over in an unfriendly takeover. A Golden Parachute is one such device. Another might be a plan whereby all the firm’s debt becomes due if the current management is removed.

Portfolio
A combination of assets.

Preemptive Right
The right of a shareholder to purchase newly issued shares of the company before the general public.

Premium
(1) This generally refers to extra money an investor is willing to pay to buy something. (2) For a bond, a premium is the amount for which the security sells above its par value.

Primary Market
Where firms sell new financial assets typically with the assistance of an investment banker.

Principal Orders
Refers to activity by a broker/dealer when buying or selling for its own account and risk.

Preemptive Right
Common shareholder’s right to subscribe to any new issue of stock so as to maintain, undiminished, their fraction of total number of shares outstanding.

Preferred Stock
Stock that takes priority over common stock in regard to dividend and liquidation. The dividend is usually fixed at time of issue.

Prime Rate
The interest rate that banks charge their “best” clients, , i.e., those with the lowest possibility of default.

Principal
(1) Shareholders; (2) Amount of debt that must be paid at maturity.

Private Placement
A direct sale, by the issuing firm, of newly issued securities to a small group of investors.

Probability Distribution
A graph that shows the different possible outcomes of a single variable and the probability of getting the outcome.

Profit Taking
Selling stock after a period of rising prices to realize the profit. The term is used to explain a downturn in the market.

Pro Forma
Projected

Promissory Note (PN)
Promise to pay.

Prospectus
Summary of the registration statement providing information to investors on an issue of securities.

Protective Covenants
Clauses in a loan agreement aimed at reducing default risk to the bondholders.

Proxy Statement
Information provided to stockholders in conjunction with the solicitation of proxies.

Proxy Vote
Vote cast by one person on behalf of another at the company’s annual meeting.

Put
Option Option to sell an asset at a specified excise price on or before a specified exercise date.

Odd Lot
Refers to buying stocks in a quantity that is not a multiple of 100.

Off-Balance-sheet Financing
Financing that is not shows as a liability in a company’s balance sheet.

OID Debt
Original Issue Discount Debt

Open
The price at which a security opens the trading day.

Open-End Fund
A mutual fund that stands ready to redeem stocks and issue new stock.

Open Order
An order to buy or sell a security that remains in effect until it is either canceled by the customer or executed.

Operating Leverage
Amount of fixed operating costs.

Opportunity Cost of Capital
The expected return that is foregone by investing in a project rather than a financial security with comparable risk.

Option
The choice to take a specific action in the future. The action considered in finance are the purchase (call option) or sale (put option) of an asset.

Out-of-the-money Option
An option that would not be worth exercising if it matured immediately.

OTC (Over The Counter Market)
Financial markets that are not located in a single physical area. NASDAQ is an example.

Organized Market
A central physical location where exchange of securities takes place under a set of rules and regulations. This type of market is also referred to as “Auction Market.”

Over-Rewarded
A security whose expected (average) return is above its required return.

Over-Valued
An asset whose market value is greater than its intrinsic (formula or theoretical) value.

Overbought
Typically a reference to a security or the general market after it exhibits a sharp rise in prices.

Oversold
Opposite of overbought.

NAV (Net Asset Value)
The market value of a fund share, synonymous with a bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions.

NASD
National Association of Securities Dealers

NASDAQ
National Association of Securities Dealers Automated Quote

Nasdaq SmallCap Market
The Nasdaq SmallCap Market comprises of over 1,400 companies that want the sponsorship of market makers, have applied for listing and meet specific and financial requirements. Once a company is approved and listed on this market, market makers are able to quote and trade the company’s securities through a sophisticated electronic trading and surveillance system. The Nasdaq SmallCap Market operates from 9:30 A.M. to 4:00 P.M. EST., with extended trading in SelectNet from 8:00 A.M. to 9:30 A.M. EST and from between 4:00 P.M. and 5:15 P.M. EST.

Negotiated Underwriting/Deal
A means by which firms choose the underwriter for a new security issue.

Net Asset Value (NAV)
The market value of a fund share, synonymous with a bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions.

Net Change
The difference between today’s price of last trade and the previous day’s last price. For mutual funds, it is the difference between today’s closing Net Asset Value (NAV) and the previous day’s closing. The previous day’s close on the Nasdaq web site, for example, is updated at 3:30 A.M.

Net Present Value (NPV)
A project’s net contribution to shareholders wealth, which is determined by the present value of a project’s cash flows less initial investment.

New Working Capital (NWC)
Current assets minus current liabilities.

Net Worth
Book value of a company’s common stock, surplus, and retained earnings.

NL
No Load

Nominal Interest Rate
Interest as expressed in money terms.

NPVGO
Net Present Value of Growth Opportunities. A firm valuation model where NPV of investment opportunities is explicitly examined.

NWC
Net Working Capital is the difference between current assets and current liabilities.

NYSE
New York Stock Exchange

Maintenance Margin
Minimum margin that must be maintained on a futures contract.

Majority Voting
Voting system under which each board of director is voted upon separately.

Margin
Cash or securities set aside by an investor as evidence for ability to honor a financial commitment.

Margin Account
When an investor borrows from his/her broker to finance the purchase of an asset. The Fed determines what the maximum borrowing rate is.

Marginal Tax Rate 
The tax rate that would be applied to the next dollar of income.

Marked-to-Market
An arrangement whereby the profits or losses on a futures contract are settled up each day.

Market Makers
The exchange member firms that use their own capital to represent a stock and compete with each other to buy and sell the stocks they represent. There are over 500 member firms that act as NASDAQ market makers. One of the major differences between The NASDAQ Stock Market and other major markets in the US is Nasdaq’s structure of competing market makers. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds.

Market Cap
This is the company’s market capitalization. If a company has 1 million shares and the company’s shares are selling for $10, the market cap is $10 million. Also called Market Capitalization.

Market Order
When an investor instructs his/her broker to buy or sell an asset at the price prevailing in the market. In such a case, the investor, unlike the case of the limit order, does not put any restrictions on price.

Market Risk
Uncertainty from factors influencing a large number of stocks, such as inflation, interest rates, oil-shocks, etc.

Market Portfolio
A conceptual construct of a value-weighted index of all securities. In practice, the S&P 500 index is used as a proxy, to represent the average investor’s return.

Market Timing
Ability to determine the time occurrence of peaks and troughs of stock markets.

Market Value
The value observed in the market place, whereby buyers and sellers negotiate mutually acceptable price for the asset.

Marketable Securities
Security investments that the firm can quickly convert into cash balances.

Material News
News released by a NASDAQ company that might reasonably be expected to affect the value of a company’s securities or influence investors’ decisions. Material news includes information regarding corporate events of an unusual and non-recurring nature, news of tender offers, unusually good or bad earnings reports, and a stock split or stock dividend. (See also Trading Halt.)

Maturity Matching
The practice of financing long-term projects with long-term assets, while financing short-term projects with short-term financing.

Maturity Date
The date on which the last payment on a bond is due.

Maturity Risk Premium (MRP)
Risk associated with interest rate uncertainty. The longer the time to maturity, the higher the premium.

MBO (Management Buyout)
An LBO with the new investor group is the firm’s management.

MBS (Mortgage Backed Securities)
Mortgage “pass-through” securities.

Medium-term Note
Debt with a typical maturity of 1 to 10 years at the time of issue that is offered by a company.

Merger
Acquisition in which all assets and liabilities of a company are absorbed by the buyer to form a combined business entity.

MITI
Japan’s Ministry of International Trade & Industry.

Monitoring Costs
An agency cost that arises when bondholders take steps to ensure that protective covenants in the bond indenture are adhered to by the firm. Similarly, shareholders take steps to ensure that management is acting in the best interest of the owners, i.e., that managers are maximizing the wealth of shareholders.

Moral Hazard
Refers to human nature’s increased incentive to take risk when insured.

MRP (Maturity Risk Premium)
Risk associated with interest rate uncertainty. The longer the time to maturity, the higher the premium.

Municipal Bond (Muni)
State or local government offer “muni” bonds, as they are called, to finance special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Mutually Exclusive Projects
Two projects that cannot both be undertake as they perform essentially the same task.

Mutual Fund
Managed investment fund whose shares are sold to investors.

Mutually Exclusive Projects
Two projects that cannot both be undertaken.

LEAP
A LEAP is a long-term option contract for a company’s stock. They usually run for one year or more and are available on several U.S. exchanges.

Letter of Credit
Letter from a bank stating that it has established credit in the company’s favor.

LBO (Leverage Buyout)
A corporate restructuring where the existing shareholders sell their shares to a small group of investors. The purchasers of the stock sue the firm’s unused bet capacity to borrow the funds to pay for the stock. Typically the company becomes private.

Leverage
Use of debt financing.

LIBOR
London InterBank Offered Rate. The lending rate among international banks in London.

Limit Order
When you instruct your broker to buy or sell a given security at a specific price.

Limited Liability
Limitation of a shareholder’s losses to the amount invested.

Liquidity
refers to an investor’s ability to convert an asset into cash. The faster the conversion the more liquid the asset. Illiquidity is a risk in that an investor might not be able to convert the asset to cash when most needed. Moreover, having to wait for the sale of an asset can pose an additional risk if the price of the asset decreases while waiting to liquidate.

Liquidity Risk Premium (LP)
The additional return required by investors in securities that cannot be converted into cash at a reasonably predictable price or time.

Liquidation Value
The amount that could be realized if an asset were sold independently of the going concern.

Listing
When a company’s stock trades on an official exchange.

LLC (Limited Liability Company)
also called Limited Liability Partnership (LLP) It a new type of partnership that is now permitted in many states. Unlike a regular and limited partnership, in an LLC, all partners enjoy limited liability with regard to business’s liabilities, and, in that regard, they are similar to shareholders in a corporation.

Load
A commission paid by an investor to a broker for the purchase or sale of a mutual fund.

Long
Investors who go “long” own stock or another financial security. It is a term that means the opposite of “short.”

Long-term Gain
A gain on the sale of a capital asset where the holding period was six months or more and the profit was subject to the long-term capital gains tax.

LP (Liquidity Premium)
Additional return required to compensate investors for purchasing illiquid assets.

Keiretsu
Japan’s industrial structure.

Junk Bond
A bond that is not of investment quality, with rating below BBB.

Income Stocks
Companies with high dividend yield or no NPV > 0 opportunities.

Indenture
The legal agreement between the firm issuing the bond and the bondholders, providing the specific terms of the loan agreement.

Index
A yardstick to measure change from a base year.

Index Funds
Mutual funds whose objective is to replicate the performance of an index. The most popular equity index is the S&P 500.

Inflation
A general increase in prices of goods and services.

Inflationary Premium (IP)
Additional compensation over the T-bill that levers require to compensation them for the risk of expected inflation.

Inside Market
The highest bid and the lowest offer prices among all competing dealers in a Nasdaq security, i.e., the best bid and offer prices.

Insiders
These are directors and senior officers of a corporation — in effect those who have access to inside information about a company. An insider also is a shareholder who owns more than 10 percent of the voting shares of a company.

Interlocking Directors
When competing companies (say, IBM and Apple) have a common Board of Directors. This is illegal in the US but is common practice in Japan.

Internal Financing
Financing projects through retained earnings.

In-the-money Options
An option that would be worth exercising if it expired immediately. Also see out-of-the-money options.

Investment Banks
Firms that assist companies in initial sale of securities in primary market.

Investment Company
A company that uses its capital to invest in other companies. There are two types: the closed-end and the open-end, or mutual fund.

Investment-Grade Bonds
Bonds rated Baa or above.

IP (Inflationary Premium)
Additional return required to compensate asset holders for inflation uncertainty.

IPO (Initial Public Offering)
Securities are offered for the first time to the public.

Hurdle Rate
The minimum required return on a project.

Hedging
The purchase or sale of a derivative security (such as options or futures) in order to reduce or eliminate risk associated with undesirable price changes of another security.

Horizontal Merger
Merger between two companies that produce similar products. Also referred to as horizontal integration.

Horizontal Integration
When firms in the same industry merge. Also referred to as horizontal merger.

Hostile Takeover
A merger or acquisition in which management resists the group initiating the transaction.

Golden Parachute
A plan devised by existing management stipulating that an acquiring company has to pay executives of the acquired company a substantial sum of money in the event of removing the former.

Government National Mortgage Association (“Ginnie Mae”)
A government-owned corporation that purchases mortgages and re-packages them as pass-through securities. The holder of a pass-through bond owns a portion of the underlying mortgages.

Greenmail
In a typical greenmail, the acquiring firm has already purchased a number of shares of the target firm’s stock. Management of the target company offers to buy back the stock, at a price higher than the market.

Growth Stocks
Stocks of companies that have an opportunity to invest in projects that earn more that the required rate of return.

Face Value
Value of security shown on certificate. Also called par value , which is typically $1,000.

Family of Funds
Group of mutual funds managed by the same investment management company. Each fund typically has a different objective; one may be a growth-oriented stock fund, whereas another may be a bond fund or an index fund. Shareholders in one of the funds can usually switch their money into any of the family’s other funds, sometimes at no charge.

Fed (Federal Reserve Bank)
Refers to the U.S. Central Bank, whose functions include interest rate policy, regulation of banks, and “stabilization” of foreign exchange (FX).

Federal Funds
Non-interest-bearing deposits of banks with the Federal Reserve. Banks lend excess reserves out to each other.

Federal Funds Rate
Rate at which banks charge each other for lending out excess reserves.

Federal Home Loan Bank
A Federally chartered, privately owned company charged with regulating the S&L industry.

Financial Assets
Securities that have a claim on assets.

Financial Investment
Investment in financial assets.

Financial Intermediaries
Financial institutions that assist the transfer of savings from economic agents with excess savings to those that need capital for investments.

Financial Markets
Markets or exchanges where financial assets are traded. The largest two in the U.S. are the NYSE and Nasdaq.

Financial Risk 
Additional risk borne by shareholders because of a firm’s use of debt.

Firm Commitment
Agreement between a company and its lead investment banker in which the latter is obligated to sell all the shares to be issued.

Firm Specific Risk
Uncertainty in returns due to factors specific to the company.

Fixed Assets (overhead)
A cost that is fixed for a given period of time. It is not dependent on the amount of goods and services produced during the period. Tangible fixed assets include real estate, plant and equipment. Intangible assets include patents, trademarks, and customer loyalty.

Float
The float is the number of shares of a security that are outstanding and available for trading by the public.

Floatation Cost
The underwriter’s revenue associated with assisting a firm in issuing and marketing new securities.

FNMA “Fannie Mae” Federal National Mortgage Association
A publicly owned corporation sponsored by the federal government that provides liquidity in the mortgage market. It buys mortgages from mortgage underwriters financed by issuing bonds.

Footnote A
To be used if the fund’s return to shareholders may differ due to capital gains or losses. This footnote applied to money market funds only.

Footnote B
To be used if there are any sales charges or account charges which impact yield. This footnote applies to money market funds only.

Footnote C
Capital gains figure includes return of capital.

Footnote D
To be used on any day that a mutual fund’s net asset value is reduced by a capital gains distribution.

Footnote F
To be used by any type of fund that reports quotations as of the day prior to the day of reporting.

Footnote G
To be used if the fund’s capital gains figure includes short-term gains.

Footnote N
To be used by mutual funds when the fund does not have a sales load, i.e. there is no front-end and no contingent deferred sales load.

Footnote P
To be used by mutual funds if the fund has adopted a rule 12(b)1 distribution plan under which a specific charge is made against the net assets of the fund.

Footnote R
To be used by mutual funds with redemption fees, contingent deferred sales charges, or other charges deducted from net asset value upon redemption other than charges for special services such as wire transfer).

Footnote S
To be used on the ex-date for stock splits or stock dividends.

Footnote T
To be used if the fund began reporting prices to Nasdaq during the current year.

Footnote X
To be used by mutual funds on any day a fund goes ex-dividend.

Foreign
A non-U.S. company with securities trading on Nasdaq.

Free Cash Flow Value
The value of a firm based on the cash flow available for distributing to any of the providers of long-term capital to the firm. The free cash flows equal operating cash flow less any incremental investments made to support a firm’s future growth.

Front Running
Refers to situations when a manager who has private information about the direction of movement of an asset takes a private position in the asset before purchasing it for the fund.

Full-Service Broker
Brokers who provide services in addition to assisting in buying and selling of securities in the secondary market. Services can include providing company profiles and investment strategy recommendations.

Fund Supermarkets
Mutual fund “supermarkets,” the likes of Charles Schwab and Fidelity Investments, are financial services companies that “sponsor” mutual funds, i.e., they provide investors with easy access to a broad range of mutual funds.

Futures Contract
This is an agreement that allows an investor to buy or sell a commodity, like gold or wheat, or a financial instrument, like a currency, at some time in future. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying asset. These contracts trade on organized futures exchanges.

Futures Exchange
Traded contracts specifying a future date of delivery or receipt of a specific product or asset. The assets include agricultural products like, pork bellies and oranges; metal; and financial instruments and indices. They are used by firms to hedge against potentially unfavorable price changes, and by speculators who hope to benefit from betting on the direction or magnitude of change.

Futures Market
Where futures contracts are traded.

Earnings Per Share (EPS)
Company’s earnings divided by the number of shares outstanding.

Earnings Report
A financial statement, also called Income Statement, issued by a company showing its earnings or losses over a given period.

EBIT
A company’s Earnings Before Interest and Taxes.

EDGAR (Electronic Data Gathering, Analysis, and Retrieval)
An electronic system implemented by the SEC that is used by companies to transmit all documents required to be filed with the SEC in relation to corporate offerings and ongoing disclosure obligations. EDGAR became fully operational mid 1995.

Efficient Market
A market in which information is instantaneously reflected in the price.

Efficient Market Hypothesis (EMH)
A hypothesis that U.S. equity markets are efficient.

Economic Investment
Investment in real assets: plant, equipment, and intangible assets.

Ending Net Asset Value
The market value of a fund share on a predetermined end date.

Eurobonds
Bonds that are marketed internationally.

Eurodollar Market
A banking market in U.S. dollars outside the U.S.

Exercise Price
The price at which a call option or put may be exercised. Also called strike price.

Exchange
There are three main U.S. stock exchanges on which securities are traded. The American Stock Exchange (AMEX), Nasdaq is the National Association of Securities Dealers, and the New York Stock Exchange (NYSE).

Exchange Rate Mechanism (ERM)
ERM is a system that limits currency fluctuations to a range of 15 percent in either direction.

Ex-Dividend Date
The date which determines ownership of stock for the purpose of paying dividends. Owners purchasing shares on or after the ex-dividend date do not receive the dividends. Only owners before this date would be registered to receive the declared dividend. The date is set at four business days prior to the record date.

External Financing
Financing projects through new issues of securities; debt and/or equity.

Extra Dividend
Dividend that is not expected to be repeated.

Date of Record
The date on which a shareholder must officially own shares in order to be entitled to a dividend.

Day High
This is the highest price that a security has traded at during the day.

Day Low
This is the lowest price that a security has traded at during the day.

DCF
Discounted Cash Flows

Dealer
A person (or firm) who facilitates transactions in the secondary market. They make their living on the difference between the prices they pay for the assets in their inventory and what they sell them for.

Debentures
Unsecured debt

Debt
IOU, such as bank loans, bonds, commercial paper, government bonds and bills.

Declaration Date
The date on which a firm announces a future dividend payment.

Default Risk
Uncertainty of a firm’s ability to meet its debt obligations on time and in full.

Default Risk Premium (DRP)
The additional return lenders require to compensate them for default risk.

Deleted
A security is no longer included in The Nasdaq Stock Market.

Depreciation
(1) Reduction in the book or market value of an asset. (2) Portion of an investment that can be deducted from taxable income.

Derivative Security
A financial asset whose value is based on an underlying asset. Options and futures are examples.

Dilution
(1) A decrease in the proportion of income to which each shareholder is entitled, (2) A decrease in the % ownership of individual shareholders.

Diversification
The act of not putting all your investments in only one or few assets.

Discount
(1) The amount by which a bond or preferred stock may sell below its par value. (2) The notion that market prices “takes into account@ or include all publicly available relevant information.

Discount Bond
A bond that sells at value below par value.

Discount Broker
Brokerage services provided at a cost lower than full-service brokers.

Discounting
The inverse of compounding. This process is used to determine the present value of a cash flow.

Discount Rate
(1) The interest rate used in calculating the present value of cash flows. The rate reflects the time value of money and risk of the cash flows. (2) The interest rate charged by the twelve Federal Reserve Banks for short-term loans made to member banks.

Distribution Date
Date on which the payout of realized capital gains on securities in the fund portfolio occurred.

Diversifiable Risk
The components of an asset’s risk that can be eliminated when the asset is combined in a well-diversified portfolio.

Divestiture
A division of a company that is sold out to new investors.

Dividend
Distribution of wealth by firm to shareholders based on number of shares owned.

Dividend Yield
Dividends per share divided by the price of the security.

DJIA (Dow Jones Industrial Average)
This is the best known U.S. index of stocks. It contains 30 stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.

Duration
A measure of a bond price’s sensitivity to a 100-basis point change in interest rates. A duration of 7 would mean that, given a 100-basis point change up/down in rates, a bond’s price would move up/down by 7%.

C/A
Current Assets

Call Premium 
The difference between then call price and the security’s value.

Call Provision
A provision that entitles the corporation to repurchase its bonds or preferred stock from their holders at stated prices over specified periods.

Callable Bond
A bond that the issuing company has the right to buy back at a pre-specified price.

Capital Asset
All property used in conducting a business other than assets held primarily for sale in the ordinary course of business or depreciable, and real property used in conducting a business.

Capital Asset Pricing Model (CAPM)
An equation relating an asset’s relative riskiness (beta) to its required return.

Capital Budget
List of planned investment projects, usually prepared annually.

Capital Budgeting
The decision-making process with respect to investment in fixed-assets. It involves measuring the additional cash flows associated with investment proposals and evaluating the viability of those proposed investment.

Capital Gains or Loss
The profit or loss made when an asset is sold for more than the purchase price is a capital gain. If the sale price is less than the purchase price, this is a capital loss.

Capital Gains Distribution
Payments to mutual fund shareholders of profits from the sale of securities in a fund’s portfolio. Capital gains distributions (if any) are usually made annually.

Capital Markets
Markets for long-term financial securities.

Capital Rationing
Shortage of funds that forces a company to choose between projects.

Capital Structure
Mix of different securities issued by a company.

Capitalization
A company’s amount of capital. Usually measured as the sum of a company’s market value of equity and debt.

Cash Budget
A detailed plan of future cash flows. This budget is composed of four elements: cash receipts, cash disbursements, net change in cash for the period, and new financing needed.

CD (Certificate of Deposit)
Receipts for funds deposited in bank or S&L for a fixed period. The funds earn a fixed interest rate.

Chaebols
South Korea’s industrial giants.

Change
This shows the change in price of a security from the previous day’s closing price. For instance, -1 means the security has fallen $1.00.

Characteristic 
The line of “bet fit” through a series of historical returns for the firm’s stock relative to the market returns. The slope of this line, called beta, represents the average movement of the firm’s stock returns in response to a change in the market’s returns.

Cheap
An asset is said to be cheap when it is worth (intrinsic value) more than its market value.

Closed-End Fund
An investment fund that does not stand ready to purchase its own shares from its owners. Its shares can trade on an exchange.

Closing Price (alternatively close)
The price at which the last trade took place on a given day in a particular security.

Collar
An upper and lower limit on the interest rate on a floating-rate note.

Collateral
Assets that are used as security for a loan.

Commercial Paper
Unsecured debt (IOU), issued by large corporations, with maturities (at time of issue) less than a year. They can be traded on OTC.

Commission
The brokers fee for purchasing or selling assets.

Commodity
A commodity is food, a metal or another physical substance that investors buy or sell, usually via futures contracts.

Common Shares
These are securities that represent equity ownership in a company. Common shares topically allow an investor to vote on such matters as the election of board of directors. They also give the holder a share in a company’s profits via dividend payments or the capital appreciation of the security.

Competitive Bid
A mechanism to select a lead investment bank in which investment banks submit a bid representing their compensation. The issuing firm solicits bids on the underwriting and chooses the underwriter who offers the most favorable terms.

Compounding
The process of determining the future value of a payment or a series of payments when applying the concept of compounding interest. This process is the opposite of discounting.

Conglomerate Merger
Merger between two corporations in unrelated business.

Consol
A perpetual bond issued by the British government. Sometimes used as a general term for perpetuity.

Consumer Price Index (CPI)
The CPI measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S. Department of Labor publishes the CPI every month.

Conversion Ratio
The number of shares of common stock for which a convertible security can be exchanged for.

Convertible Bond
Bond that can be converted to equity at a pre-specified conversion ratio.

Core Investor
A shareholder or a group of investors that holds enough shares to be able to influence management decisions.

Corporation
A legal entity that functions separate and apart from its owners.

Coupon
Interest payment on debt.

Cost Budgets
Budgets prepared for every major expense category of the firm, such as administrative cost, financing cost, production cost, selling cost, and research and development.

Cost of Capital
The rate that must be earned by the company to satisfy all the firm’s providers of capital. It is based on the opportunity cost of funds.

Coupon Interest
Rate The Interest to be annually paid by the issuer of a bond as a percent of par value, which is specified in the contractual agreement.

Covariance
A measure of co-movement between two variables.

Credit Scoring
A procedure for assigning scores to companies or individuals on the basis of the risk of default.

Credit Union
An agency providing some financial services to its members.

Cum dividend
With dividend.

Cum Rights
With rights.

Cumulative Voting
A shareholder may cast all his or her votes for one candidate for the board of directors. Also see majority voting.

Current Asset
Asset that is expected to be turned into cash within a year.

Current Liability
Liability that is expected to be paid in less than a year.

Cyclical Stock
The stock of a company whose fortunes are closely tied to the cyclical ups and downs of the economy in general. For example, General Motors is a cyclical stock since its business of selling autos is highly dependent on the general health of the economy.

Bad
Things that individuals prefer to avoid if possible, i.e., would accept only if they are compensated for accepting. For example, rational investors would not invest in risky assets unless they get compensated an amount that it commensurate with the riskiness of the asset. Thus, risk is said to be bad. Another example would be pollution.

Balance Sheet
A basic accounting statement that represents the financial position of a firm on a given date.

Balanced Mutual Fund
This is a mutual fund that buys common stock, preferred stock and bonds.

Bankers’ Acceptance
A draft drawn on a specific bank by a seller of goods to obtain payment of goods that have been sold to a customer. The customer maintains an account with that specific bank.

Bankruptcy
Re-organization under “Chapter 11.”

Basis Point
.01 percent. Used to measure changes in yields of bonds.

Bear Market
General decline in security prices.

Beginning Net Asset Value
The market value of a fund share on a predetermined start date.

Best Ask
The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time.

Best Bid
The highest quoted bid of all competing Market Makers to buy a particular stock at any given time.

Best Effort Purchase
A method of selling newly issued securities whereby the underwriters are expected to sell as many securities as possible. They are not obligated to sell the entire subscription. Also see “firm commitment.”

Beta
A relative (to a benchmark) measure of risk. Measures of an asset’s non-diversifiable — market– risk.

Bid
The lowest price anyone wants to sell the security for at a given time.

Bid-Ask Spread


The difference between the bid and the ask for a security at a given time.

Big Board
Refers to the New York Stock Exchange (NYSE).

Bill
Debt that has less than 1-year maturity at time of issue.

Blue Chips
The stocks in the Dow Jones Industrial Average.

Bond
Long-Term IOU whereby the holder (lender or buyer) is promised to receive fixed payments over a pre-specified time period. Corporate bonds are one of the available instruments that companies can resort to for their financing needs.

Bond Par Value
The face value ($1,000) that is to be returned to a bondholder at maturity.

Book to Bill
This is the semiconductor book to bill ratio. It reports on the amount of semiconductor chips that are booked for delivery as compared with those that companies already have billed for.

Book Value
The depreciated value of a company’s assets (original cost less accumulated depreciation) less the outstanding liabilities.

Broker
A person who facilitates transactions (buy and sell) in the secondary market.

Brokerage Commission
The amount of money your brokerage house would charge for a given transaction (buy/sell). This is how these firms make their living.

Brokers Calls
Individuals who buy stocks on margin borrow part of the funds to pay for the stocks they buy from their broker. The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests it. The rate paid on such loans is usually about 1% higher than the rate on short-term Treasury bills.

Bull Market
A market with the general prices advancing.

Bullish
One who believes the general market will rise.

Buyback
When a firm repurchases its own stock from the public.

Accounts Payable (Payables)
Money owed to suppliers.

Accounts Receivable (Receivables)
Money owed by customers.

ACRS (Accelerated Cost Recovery System)
Schedule of depreciation rates allowed for tax purposes.

ADR (American Depository Receipts)
A security, created by a U.S. bank, that evidences ownership to a specified number of shares of a foreign security held in a depositary in the issuing company’s country of domicile. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities. U.S. investors often prefer ADRs to direct purchase of foreign shares because of the ready availability of price information, lower transaction costs, and timely dividend distribution.

Agency Costs
Costs to the firm associated with the potential for conflict of interest between management and shareholders when these two groups are different.

Agency Theory
Theory concerning the relationship between a principal (shareholder) and an agent of the principal (company’s managers). It involves the nature of the costs of resolving conflicts between the principals and agents.

Airport Finance
Reference to books on finance that you might find at airports, with titles like “How To Buy a House with Zero Down,” or “All you need is $5,000 to Make a Million in One Year,” or “Which Investments are Best in 1990’s.”

AMEX
American Stock Exchange.

Amortized Loans
Loans that are paid off in equal periodic payments.

Annuity
Investment that generates a stream of equal cash flows.

Arbitrage (risk arbitrage)
Simultaneous purchase of a security and sale of another to generate a risk-free profit.

Arbitrageur
A person involved in arbitrage.

Arrearage
An overdue payment, generally referring to omitted preferred stock dividends.

Ask
The highest price anyone wants to pay for the security at a given time.

Asset Allocation
The process of determining the optimal division of an investor’s portfolio among different assets. Most frequently this refers to allocations between debt, equity, and cash.

Assets
Anything that the firm owns.

Asymmetric Information
One group has more information about, say, on the well being of the company, than another. An example would be managers having more intimate knowledge about the company than a typical shareholder.

Average Maturity
The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.

Average Tax Rate
The rate calculated by dividing the total tax liability by the entity’s taxable income.