(1) Entries are in
alphabetical order. (2) If a word or phrase within a definition is CAPITALIZED, that means
there's a separate Glossary entry for that word or phrase. (3) When two or more terms are
used synonymously or similarly, the definition header line first presents the most common
term and then lists synonymous terms within [BRACKETS].
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ACTIVE
INVESTING A form of investment
management that has the goal of identifying securities that will provide higher TOTAL
RETURN than the overall market within a diversified portfolio. Active managers believe
they can identify and exploit market "inefficiencies", that is, circumstances
where the true value of a security is not currently reflected in its price. These
inefficiencies may result, for instance, from a dearth of information about a security
among market participants or from investor over-reaction to news. Active managers will
tend to have higher portfolio TURNOVER which may raise transaction and tax costs; they may
also favor VALUE SECURITIES or smaller company securities since those may not be carefully
followed by the community of analysts. The contrasting philosophy is PASSIVE INVESTING. #Top of Page |
ADR [AMERICAN
DEPOSITORY RECEIPT] A
derivative form of ownership representing a position in the negotiable securities of a
foreign [non-U.S.] issuer. The underlying foreign securities are held on deposit by an
overseas custodian, typically a foreign bank, which works with a U.S. correspondent bank
to service the American Depository Receipts. ADRs are created to overcome difficulties
that a domestic shareholder would face if he/she directly owned the foreign securities.
Those difficulties include paying or being paid for the securities in foreign currency,
receiving income in foreign currency, receiving shareholder information in a foreign
language, and/or registering shareholder certificates in the issuer's foreign domicile
country. By contrast, an ADR trades much like a domestic security, with all transactions
and income flows settled in U.S. dollars, and with English translations of all issuer
communications provided. #Top of Page |
ASSET
ALLOCATION The process of
apportioning portfolio assets to different "classes" of investment securities.
Commonly used classes are equities ["stocks"], debt securities, and cash/money
market funds. Additional asset classes include real estate, precious metals, and
commodities. Asset Allocation is part of a DIVERSIFICATION strategy that spreads portfolio
assets over uncorrelated securities to lower the overall risk of ownership. #Top of Page |
ASSETS The monetary resources owned by a business so it can produce its
products or services. Assets of large companies typically include such
"tangible" items as cash, buildings, land, equipment, vehicles, inventory, raw
materials, and receivables [money due to the company by customers for products or services
already delivered]. There may also be "intangible" assets such as trademarks,
patents, name recognition, and "goodwill" [the excess of cost over accounting
value for an acquired company]. A company's Assets appear on its BALANCE SHEET.
#Top of Page |
BALANCE
SHEET One of the fundamental accounting
statements that a business maintains. The Balance Sheet shows all the business's ASSETS,
LIABILITIES, and EQUITY at the close of business on a specific date [typically a month-,
quarter- or year-end date]. The statement's name comes from the basic accounting rule that
ASSETS - LIABILITIES = EQUITY.
That is, there must be a "balance"
between these three quantities. #Top
of Page |
BOND CALL A mandatory, partial or full, redemption of a bond issue prior to
its maturity date at the option of the bond issuer. "Calls" are written into the
bond's legal description [the "Indenture"] generally as a benefit to the issuer.
Should bond market conditions or the issuer's financial condition make it favorable to
close out the indebtedness position represented by the bond, the issuer can
"call" the bond but is not required to do so. Sometimes, an Indenture states
that called bonds must be redeemed at a "call price" that is higher than the
face amount of the bond. This is a sweetener to induce lenders to buy the bonds despite
the call provision. If a partial call is made, the issuer makes a random selection among
all the outstanding units of the bond issue so that no particular lender is favored. An
investor who does not deliver a called bond to its issuer will not receive his/her
principal until the redemption is completed and will not receive any interest payments
after the call date. #Top of Page |
BOND LADDER A method for constructing a portfolio of bonds such that their
maturities are staggered or "stepped" over a time period, like the steps of a
ladder. This process provides a time-averaging of interest rates. #Top of Page |
CAPITAL GAIN/LOSS The
change in value of a security from its purchase date to the present time or to a sale
date. The value change is a consequence of market price fluctuations. Capital Gain/Loss is
one component of a security's TOTAL RETURN. Example: An investor bought 100
shares of General Electric common stock for $70 each, paying a total cost of $7,000 [100
shares times $70 per share]. At today's close, suppose the shares were selling for $105
each so the position was worth $10,500. The investor then has a $3,500 Capital Gain
[$10,500 less $7,000]. In this example the gain is "unrealized" or a "paper
gain" because the shares haven't yet been sold. Had the shares been sold today, the
investor would have a "realized" gain.
#Top of Page |
CAPITALIZATION (1) The full financial backing of a business... typically
including equity [common and preferred stock], debt [bonds, notes] and retained profits
from past operating periods. #Top of Page
(2) When used in reference to a company's common
stock, Capitalization means the current aggregate dollar value of the stock. This is
computed by multiplying the Current Share Price in dollars by the Number of Outstanding
Shares. Example: If Microsoft shares are priced at $90 each and there are
5.0 billion shares outstanding, then Microsoft's Common Stock Capitalization is $450
billion. #Top of Page |
CASH
FLOW STATEMENT One of the fundamental
FINANCIAL STATEMENTS that a business maintains. The Cash Flow Statement shows the cash
sources, uses, and cash balance for the business over a period of time such as a month,
quarter-year, or year. In computing Cash Flow, some non-cash charges such as depreciation
are added to traditional cash sources such as product sales. Since a business must have
enough cash to meet its obligations for salaries, taxes, raw material purchases, dividend
payments, etc., a weak Cash Flow can be a serious impediment to the enterprise's financial
health. #Top of Page |
CLOSED-END
FUND A pooled asset security that
offers a fixed number of shares to the public and doesn't redeem them. After their initial
offering, the shares trade continuously on a Stock Exchange, much like corporate COMMON
STOCK. The Fund's market price at any time may be greater than or less than its NET ASSET
VALUE. One advantage of a Closed-End Fund is that its assets are isolated from share price
volatility; that allows the manager of a Closed-End Fund to keep the portfolio intact
during turbulent market conditions. This may be a stabilizing influence, especially if the
fund's objective is to hold relatively illiquid securities such as foreign stocks or
bonds. There can be a price "premium" or "discount" between a
Closed-End Fund's share price and its NET ASSET VALUE because of positive or negative
investor sentiment. #Top of Page |
COMMON
STOCK A class of equity or
ownership in a corporation. Common stock has a subordinate claim on ASSETS relative to
PREFERRED STOCK's dividend claim and to all corporate creditor claims. #Top of Page |
COUPON
RATE [or FACE RATE] A bond's
legally committed annual rate of interest. #Top of Page |
DAY ORDER A
securities ORDER that's valid only to the end of the current trading day. #Top of Page |
DISCRETIONARY
TRADING AUTHORITY A legal power
granted by an asset owner to an Investment Advisor that allows the Advisor to act on the
owner's behalf. If the Trading Authority is "Limited", the Advisor can commit
the owner to the purchase or sale of securities just as if the owner had placed an order
him/herself. This allows the Advisor to act expeditiously and efficiently. A
"General" Trading Authority additionally grants the right to order a withdrawal
or transfer of client assets... this can lead to financial chicanery and should only be
used in unusual circumstances. Some Advisors do not accept "General" Trading
Authority because the Advisor is then considered to "have custody" of client
assets which deservedly triggers stronger regulatory oversight. #Top of Page |
DIVERSIFICATION The process of investing assets in a collection of financially
uncorrelated securities so that the risk of loss is reduced. On a larger scale,
Diversification may take the form of ASSET ALLOCATION which spreads assets over unrelated classes
of investment securities. On a smaller scale, Diversification may be achieved by buying a
group of uncorrelated common stocks or purchasing shares of a MUTUAL FUND that is itself
diversified. Another aspect of Diversification is balancing the capital amounts that are
applied to each portfolio asset. For example, it is not a sufficient
Diversification to own 25 unrelated common stocks if two of those positions command 75% of
the assets allocated to the common stock class. #Top of Page |
DURATION An "effective life" measure of a bond. Duration is
computed as the number of years required for the holder to receive the "present
value" of all future interest and principal payments. Duration shows the sensitivity
of a bond's price to market interest rate changes... a bond will fluctuate in value by a
percentage equal to its Duration for each 1% shift in market interest rates. #Top of Page |
EQUITY
[or COMMON EQUITY or OWNER'S EQUITY] (1)
In accounting, Equity is the amount of capital contributed by shareholders by their
original purchase of common stock plus the accumulated RETAINED EARNINGS attributable to
the common stock. #Top of Page
(2) For investments, Equity is an ownership interest in a
corporation which is acquired by buying COMMON STOCK or PREFERRED STOCK. As an owner, an
equity holder assumes the risk that the company will fail to profit from its operations,
but the equity holder also has the potential reward of increased stock value if the
company succeeds. #Top of Page |
FINANCIAL
STATEMENTS A set of basic accounting
documents that give a complete financial picture of a business. Usually the Financial
Statements consist of a BALANCE SHEET, INCOME STATEMENT, CASH FLOW STATEMENT, and Notes to
these documents that explain the accounting assumptions used and any special methods
employed to compute the financial status. #Top of Page |
FUNDAMENTAL
ANALYSIS A type of security analysis that
focuses on a study of an issuer's investment posture and financial condition. A
fundamental analyst focuses on all the data in a security issuer's FINANCIAL STATEMENTS
and may attempt to predict the future value of a security by studying its earnings
history, its regulatory filings, news releases, as well as by comparing the issuer to
other firms in its industry. A major alternative to Fundamental Analysis is TECHNICAL
ANALYSIS. #Top of Page |
GROWTH
SECURITY [or GROWTH STOCK or GROWTH INVESTING] A
security whose issuer's revenues and/or profits are expected to grow at such a high rate
that its current price is attractive. Often a Growth Stock issuer reinvests net profits
back into the business for future expansion. A proven Growth Stock may not be
"cheap" [see VALUE INVESTING] when its Sales, Earnings, or Accounting value are
judged against its current share price, but Growth investors are counting on future,
higher numbers to win CAPITAL GAINs. #Top
of Page |
GTC [or
GOOD-TILL-CANCELLED] A type of securities
ORDER that remains valid until it is cancelled by the originator or executed. The GTC
designation may be added to a Limit or Stop ORDER since those have price restrictions and
will not necessarily be executed when they're received in the marketplace. Brokers
may refuse to accept a GTC order on some securities because of the extra diligence the
order demands. In practice, a brokerage house may limit the life of a GTC order to six or
twelve months from its origination date to avoid a build-up of orders with a negligible
chance of execution. #Top of Page |
INCOME
STATEMENT One of the fundamental
accounting statements that a business maintains. The Income Statement shows the Revenues
received and the Expenses paid by the business over a specified period of time. Typically,
an Income Statement is drawn for a monthly, quarter-year, or annual period. #Top of Page |
INDEX FUNDS A specialized type of MUTUAL FUND or CLOSED-END FUND that has the
goal of creating a securities portfolio whose TOTAL RETURN closely tracks the Total Return
of a MARKET INDEX. Since most Indexes do not change their constituent assets very often,
Index Funds are a tool commonly used in PASSIVE INVESTING. #Top of Page |
LIABILITIES In accounting, the monetary obligations of a business. For a large
company, liabilities would typically include long-term debt, short-term borrowing,
accounts payable [money owed to suppliers for goods or services already delivered],
salaries earned but not yet paid, and taxes incurred but not yet paid. A company's
Liabilities appear on its BALANCE SHEET. #Top of Page |
LOAD FUND [or
SALES LOAD or LOAD] A charge paid by a
buyer to purchase MUTUAL FUND shares through a stockbroker. The Load is typically 3% to 6%
of the gross amount of the purchase and is used to compensate the selling stockbroker and
the selling brokerage firm for the research effort made to match the fund to the
customer's needs and the selling effort made to convince the customer of the fund's
merits. Some Loads are charged at the time of purchase ["Front End Loads"] while
others are charged if the fund shares are sold before a specified future date ["Back
End Loads"]. Load Funds are an alternative investment to NO-LOAD FUNDS. #Top of Page |
LONG POSITION
[or LONG or LONG BUY] An investment
position in which a security is purchased and held. This is by far the more common
security ownership mode... its opposite is a SHORT POSITION. A Long Position holder
expects to make a profit when the future price of her/his security rises above the
purchase price. The maximum loss that a Long Buyer can incur is limited to the purchase
price of the position. #Top of Page |
MARKET
INDEX [or MARKET AVERAGE or INDEX or MARKET INDICATOR] A computed number expressing the value of a collection of
securities that are chosen to reflect the behavior of a securities market segment. The
most frequently reported domestic Market Index is the Dow-Jones Industrial Average
whose 30 common stocks purport to show the behavior of long-established companies trading
on the New York Stock Exchange. Another, broader-based Market Index is the Standard
& Poor's 500 Stock Index which includes the 500 domestically-traded common stocks
with the highest market CAPITALIZATION. There are also Market Indexes of all the common
stocks trading, respectively, on the New York Stock Exchange, the American Stock
Exchanges, and the Nasdaq OVER-THE-COUNTER market. All of these indexes (but not the
"Dow") weight each component stock according to its CAPITALIZATION. The Value
Line Stock Index (Geometric) is one of the few Market Indexes that weights each
component stock equally; it includes approximately 1700 of the most widely held domestic
common stocks. Market Indexes are also computed for segments of the domestic debt
securities market, for common stocks in specific market sectors, for foreign stock and
debt markets, and for a composite of all major stock markets in the world. Two
caveats to keep in mind when using Market Indexes: (1) A capitalization-weighted index can
be a confusing "yardstick" because it's primarily moved by the action of a small
number of its highest capitalization components; (2) The Dow Jones Industrial
Average is computed by simply adding the current prices of the 30 component stocks and
dividing by a "Dow divisor" [which started out as the number 30 but because of
stock splits and corporate mergers is now about 0.3!] This Average is heavily influenced
by the highest price components since those change by a larger number of dollars
for a given price percentage change. #Top
of Page |
MUTUAL FUND [or
OPEN-END FUND] A pooled security that can
continuously issue new shares and redeem shares to meet investor demand. A Mutual Fund is
supervised by a Board of Directors that hires the Investment Manager and an Auditor,
arranges for a Custodian of Assets and for a Registrar of Shareholders. The fund manager
builds a portfolio of underlying securities intended to satisfy the investment objective
of the Fund. Mutual Fund shares can only be purchased or sold through the Fund's
Distributor, at a fixed price determined at the end of each trading day [adjusted for any
"Sales LOADs" that apply]. A Mutual Fund may be a LOAD FUND or a NO-LOAD
FUND; it may be Diversified [if it limits the amount of capital committed to any one
security issue] or Non-Diversified [see DIVERSIFICATION]. One potential drawback of mutual
funds is that a high level of redemption requests can force the Manager to liquidate
portfolio assets when market prices are low. Another drawback is the requirement that a
Mutual Fund pay its net Realized CAPITAL GAIN to shareholders annually. Current Mutual
Fund buyers may also be purchasing the tax liability of UNrealized Capital Gains achieved
before their purchase. #Top of
Page |
NET
ASSET VALUE [or NAV] For MUTUAL FUNDS and
CLOSED-END FUNDS, the per-share market value of all assets in the fund portfolio at the
day's close of trading. NAV is calculated by multiplying the price of each portfolio asset
by the quantity of that asset held; summing over all assets in the fund; then dividing
that sum by the number of outstanding fund shares. #Top of Page |
NO-LOAD FUNDS A type of MUTUAL FUND that does not levy a selling charge [see
LOAD FUND] because no financial professional or brokerage firm is helping the buyer find
the fund or convincing the buyer of the merits of purchase. Investors buy and sell No-Load
Fund shares at their NET ASSET VALUE. No-Load Funds usually deduct their marketing
expenses ["12b(1) Fees"] from the portfolio gains; these fees are typically less
than 1% of portfolio assets but they're charged every year. #Top of Page |
ORDER
[or TRANSACTION ORDER or SECURITY ORDER] The
three most common types of Transaction Orders are Market, Limit and Stop Orders. A Market
Order instructs a securities broker to buy or sell a security immediately at whatever
price is offered in the marketplace when the order arrives. A Market Order has the virtue
that it will virtually always be executed but the price of execution is uncertain. Limit
Orders instruct a broker to buy or sell a security only if the market price is equal to or
better than the Price Limit specified. In this case, the price at which the Order
will be fulfilled is entirely determined, but the Order may not be executed at all if the
security's market price never comes to the Price Limit. Finally, a Stop Order instructs a
broker to sell or buy a security when its price reaches or passes through a specified
"trigger" or "stop price". Attainment of the stop price by a security
converts the Stop Order to a Market Order. A Stop Order can be used to attempt to
"stop" CAPITAL LOSSes or capture CAPITAL GAINs by setting a stop price that's
below the current market price. However, since the Stop Order converts to a Market Order
when the stop price is reached, there is no guarantee that the transaction will be
executed just at that stop price. All these types of orders may be time limited as DAY
ORDERs or GTC orders. Brokers may refuse to accept Limit or Stop Orders on certain
volatile securities. #Top of Page |
OVER-THE-COUNTER
TRADING [or OTC TRADING or OTC STOCK MARKET] A
transaction system in which firms qualifying as "market makers" or
"dealers" in a particular security electronically post the prices at which
they're willing to buy or sell on a network that's accessible to stockbrokers around the
country. [Some infrequently traded OTC securities are priced only by telephone
communication between dealers and brokers.] Contrast this dispersed, electronic
Over-The-Counter Stock Market with the Stock Exchanges where all trading is done in one
physical location using an "open auction" between "floor
brokers" representing buyers and sellers. Thousands of common stocks trade on the
Over-The-Counter Stock Market, as do most government, municipal and corporate bonds. #Top of Page |
PASSIVE
INVESTING A form of investment management
that has the goal of keeping a diversified portfolio as little changed as possible over
long time periods. Exponents of this technique generally believe that markets
"efficiently" reflect the value of securities almost all the time so it is
pointless to seek the "best performing" securities. Passive Investing has the
advantage that transaction and investment tax costs tend to be low. One common form of
Passive Investing is the use of INDEX FUNDS. A contrasting philosophy is ACTIVE INVESTING.
#Top of Page |
PREFERRED STOCK A class of EQUITY or ownership in a corporation that has a
superior claim to dividends than the COMMON STOCK. Most Preferred Stocks pay a fixed rate
of interest, usually higher than is paid to the Common Stock holders, and they tend to
trade like bonds based on their dividend income stream. Additionally, some Preferred
Stocks are "convertible" to common stock of the same issuer in a ratio that's
fixed at their issuance. If the issuer's common stock price increases sufficiently over
time, the "conversion value" of a Preferred Stock may drive its market price
behavior. Preferred Stock may also be callable [see BOND CALL] which can limit their price
appreciation potential. #Top of Page |
PROXY [or PROXY
BALLOT] A ballot used by shareholders who
are entitled to vote at a Corporation's Annual Meeting or at a Special Meeting but who
will not be physically present at the place and time of the balloting. A Proxy is
used for the same purpose as an "Absentee Ballot" in general public elections.
#Top of Page |
REGISTERED
INVESTMENT ADVISOR [or RIA] An Investment
Advisor [Corporation, Partnership or Sole Practitioner] who is properly registered with
the U. S. Securities and Exchange Commission or, for smaller entities, registered
with a State Securities Department. Registration may require: the passage of legally
designated tests, the proper completion of public disclosure documents, the submission of
fingerprint and financial disciplinary history documents, and/or the payment of initial
and annual fees. Most Investment Advisor registrations are supervised under regulations
flowing from the U.S. Investment Advisor Act of 1940 and subsequent amendatory
legislation. After registration, Investment Advisors are subject to auditing of their
operations, advertising, recordkeeping, disclosure documents, etc. by Federal and/or State
authorities. #Top of Page |
SHORT
POSITION [or SHORT or SHORT SALE] An
investment position in which a borrowed security has been sold but not yet returned to the
lender. The intention of a Short seller is to profit from a future price decline in the
sold security. Then the borrowed, already sold, security can be purchased at a lower price
than its sale price. Conversely, a Short seller loses money if the sold security
subsequently rises in price. A Short Sale involves loan payments for the entire time that
the short position remains open; the Short seller must also have creditworthiness before
receiving a loan of stock. SHORT POSITIONS can present exceptionally high risk because
their CAPITAL LOSS can increase precipitously [in theory, the loss is unlimited!] if the
shorted stock rallies to a much higher price. #Top of Page |
SOFT DOLLAR
CONCESSIONS An incentive program in the
securities industry under which firms earn credits toward the delivery of
"rewards" for bringing transactions or assets to a brokerage house or custodian.
The rewards may include subscriptions to investment publications, receipt of free or
discounted business equipment, and/or access to financial industry research materials at
no cost or reduced cost. "Soft dollar" concessions are generally legal so
long as they don't sway a financial professional or firm to make decisions that aren't in
the best interest of their clients, and so long as the "rewards" help the
professional or firm better serve the needs of their clients. #Top of Page |
TECHNICAL
ANALYSIS A type of security analysis that
focuses on the study of a security's price and trading "volume" [number of
shares traded] history. The technical analyst typically examines charts of a security's
price history and seeks patterns of behavior that suggest future price movement.
Those patterns may include rising or falling Trend Lines, the relation between the current
price and "Moving Averages" of past prices, the prices at which high or low
trading volume were experienced, and price "Floors" and "Ceilings". In
its purest form, Technical Analysis is unconcerned with the financial condition of the
security issuer's business... a strong contrast to the methods of FUNDAMENTAL ANALYSIS.
#Top of Page |
TOTAL RETURN
[or RETURN] A measure of a security's
productivity that combines the CAPITAL GAIN/ LOSS [determined by the price change of the
security] with the income provided by the security through the payment of interest or
dividends. Example: A stock begins the year at $32 per share and closes the year
at $37. It pays quarterly dividends of $0.25 per share. For the year, each share
appreciated $5 and paid $1 in dividends, for a total $6 Return on the $32 initial share
price. Total Return in percent is 100 ($6 / $32) = 18.75%. #Top of Page |
TURNOVER [or
PORTFOLIO TURNOVER or TURNOVER RATE] A
measure of the frequency with which the assets in a portfolio are replaced, usually
computed for a one-year time period. Turnover is commonly quoted as a percentage of the
portfolio's total worth. For example, an annual Portfolio Turnover of 50% would mean
that the total value of transactions made during the year were equal to half the average
value of the full portfolio. This Turnover does NOT mean that half the assets in the
portfolio were replaced during the year, however. It could be that positions representing
just 10% of the assets were replaced during the year, but that the replacement effectively
occurred five times. In other words, a small portion of the portfolio might have seen a
lot of replacement action while the bulk of the assets were held intact. Equity MUTUAL
FUNDS that practice ACTIVE MANAGEMENT often report annual Turnover greater than 100%. In
contract, funds that practice PASSIVE MANAGEMENT may show a 5% Turnover. #Top of Page |
UNIT
TRUST An UNmanaged pool of securities that
is organized as a Trust and sold to the public in "units", typically valued at
$1,000 each at their initial offering. Any security in a Unit Trust's portfolio that
matures or is retired leads to a proportionate distribution of the capital proceeds to the
Unitholders. Over time, typical Unit Trusts return all their invested capital to
Unitholders, since no reinvestment is provided, and then terminate. There is often a 3% to
5% Sales Load [see LOAD FUNDS] on the initial offering of Trust Units to the public. There
is no public market for Unit Trusts but the issuer often provides a secondary market
facility. #Top of Page |
VALUE
SECURITY [or VALUE STOCK or VALUE INVESTING] A
security whose price is judged to be lower than its "worth". The determination
of "worth" is subjective and may involve a FUNDAMENTAL ANALYSIS or TECHNICAL
ANALYSIS of the security. Common justifications cited for a Value Stock designation
include: the stock's price is low compared to company Sales, Earnings or Accounting value;
companies in the same industry are selling at higher valuations; or, the company owns an
ASSET whose worth isn't fully appreciated by investors. The Value Security label is often
contrasted with GROWTH SECURITY. #Top
of Page |
YIELD
TO MATURITY A compound annual bond yield
that takes into account both a bond's COUPON RATE of interest and the change in the bond's
market price between the purchase date and the maturity date. #Top of Page |