Glossary (3)

 Glossary

Efficient— market hypothesis-speculative notion that all information about securities is disseminated and becomes fully reflected in security prices instantaneously 

Employee Retirement Income Security Act of 1974 (ERISA)—legislation that requires institutional investors to act as fiduciaries for future retirees by adopting the “prudent-man standard” (see prudent-man standard) 

Equity “stubs”—low priced, highly leveraged stocks, often resulting from a corporate recapitalization (see recapitalization) 

Exchange offer—an offer made by a company to its security holders to exchange new, less-onerous securities for those outstanding 

“Fallen angels”—bonds of companies that have deteriorated beneath investment grade in credit quality 

Financial distress—the condition of a business experiencing a shortfall of cash to meet operating needs and scheduled debt-service requirements 

Friendly takeover—corporate acquisition in which the buyer and seller both support the transaction enthusiastically 

Fulcrum securities—the class of securities whose strict priority bankruptcy claim is most immediately affected by changes in the debtor’s value 

Full position—ownership of as much of a given security as an investor is willing to hold 

Fundamental analysis— analyzing securities based on the operating performance (fundamentals) of the underlying business 

Ginnie Mae (GNMA)—pool of mortgages insured by the Government National Mortgage Association, a U.S. government agency 

Going long —buying a security (see short-selling) 

Goodwill amortization—the gradual expensing of the intangible asset known as goodwill, which comes into existence when a company is purchased for more than its tangible book value 

Guaranteed investment contract (GIC)—an insurance-company-sponsored investment product that automatically reinvests interest at a contractual rate 

Hedge—an investment that, by appreciating (depreciating) inversely to another, has the effect of cushioning price changes in the latter 

Holding company—a corporate structure in which one company (the holding company) is the owner of another 

Hold-up value— benefits accruing to participants in a class of securities who are able to extract considerable nuisance value from the holders of other classes of securities 

Illiquid security—a security that trades infrequently, usually with a large spread between the bid and asked prices (see liquid security) 

Income statement—accounting statement calculating a company’s profit or loss 

Indexing—the practice of buying all the components of a market index, such as the Standard and Poor’s 500 index, in proportion to the weightings of that index and then passively holding them 

Initial public offering (IPO)—underwriting of a stock being offered to the public for the first time