Glossary (7)

 Glossary

Tax-loss selling—selling just prior to year-end to realize losses for tax purposes 

Technical analysis—analysis of past security-price fluctuations using charts 

Tender offer—a cash bid to buy some or all of the securities of a target company 

Thrift conversion—the conversion of a mutual thrift institution to stock ownership 

Top-down investing—strategy involving making a macroeconomic forecast and then applying it to choose individual investments 

Torpedo stocks—stocks for which investors have high expectations and which are therefore vulnerable to substantial price declines 

Trader—a person whose job it is to buy and sell securities, earning a spread or commission for bringing buyers and sellers together 

Trading flat—available for sale or purchase without payment for accrued interest 

Treasury bills (T-bills)—noninterest-bearing obligations of the U.S. government, issued on a discount basis with original maturities ranging from three months to one year; the interest income from Treasury bills is the difference between the purchase price and par 

Treasury bonds (T-bonds) —U.S. government obligations with original maturities of ten years or more; interest is paid semiannually 

Treasury notes (T-notes) —U.S. government obligations with original maturities ranging from one to ten years; interest is paid semiannually 

Value - the worth, calculated through fundamental analysis, of an asset, business, or security 

Value investing—a risk-averse investment approach designed to buy securities at a discount from underlying value 

Value investment—undervalued security; a bargain 

Volume—the number of shares traded 

Window dressing—the practice of making a portfolio look good for quarterly reporting purposes 

Working capital—current assets minus current liabilities 

Writing call options—selling call options on securities owned 

Yield —return calculated over a specific period

 Zero-coupon bond—a bond that accrues interest until maturity rather than paying it in cash 

Glossary (6)

  Glossary

Puttable bond—bond with embedded put features allowing holders to sell the bonds back to the issuer at a specified price and time (see callable bond) 

Recapitalization—financial restructuring of a company whereby the company borrows against its assets and distributes the proceeds to shareholders 

Relative-performance orientation—the tendency to evaluate investment results by comparing one’s investment performance with that of the market as a whole 

Return—potential gain 

Rights offering—a financing technique whereby a company issues to its shareholders the preemptive right to purchase new stock (or bonds) in the company or occasionally in a subsidiary company 

Risk—amount and probability of potential loss 

Risk arbitrage—a specialized area involving investment in far-from-risk-free takeovers as well as spinoffs, liquidations, and other extraordinary corporate transactions 

Secured debt—debt backed by a security interest in specific assets 

Security—a marketable piece of paper representing the fractional ownership of a business or loan to a business or government entity 

Self-tender—an offer by a company to repurchase its own securities 

Senior-debt security—security with the highest priority in the hierarchy of a company’s capital structure 

Sensitivity analysis—a method of ascertaining the sensitivity of business value to small changes in the assumptions made by investors 

Share buybacks—corporate stock repurchases 

Shareholder’s (owner’s) equity—the residual after liabilities are subtracted from assets 

Short-selling—the sale of a borrowed security (see going long) 

Short-term relative-performance derby—manifestation of the tendency by institutional investors to measure investment results, not against an absolute standard, but against broad stock market indices resulting in an often speculative orientation 

Sinking fund—obligation of a company to periodically retire part of a bond issue prior to maturity 

Speculation—an asset having no underlying economics and throwing off no cash flow to the benefit of its owner (see investment) 

Spinoff—the distribution of the shares of a subsidiary company to the shareholders of the parent company 

Stock—a marketable piece of paper representing the fractional ownership of an underlying business 

Stock index Futures—contracts for the future delivery of a market basket of stocks 

Stock market proxy—estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market 

Subordinated-debt security - security with a secondary priority in the hierarchy of a company’s capital structure 

Tactical-asset allocation—computer program designed to indicate whether stocks or bonds are a better buy 

Takeover multiple— multiple of earnings, cash flow, or revenues paid to acquire a company 

Tangible asset—an asset physically in existence

Glossary (5)

  Glossary

Net operating-loss carryforward (NOL)—the carryforward of past losses for tax purposes, enabling a company to shield future income from taxation 

Net present value (NPV)—calculation of the value of an investment by discounting future estimates of cash flow back to the present 

Non-cash-pay securities—securities permitted to pay interest or dividends in kind or at a later date rather than in cash as due (see cash-pay securities, pay-in-kind, and zero-coupon bond) 

Nonrecourse—the lender looks only to the borrowing entity for payment 

Open end mutual fund—mutual fund offering to issue or redeem shares at a price equal to underlying net asset value 

Opportunity cost—the loss represented by forgone opportunities 

Option—the right to buy (call) or sell (put) specified items at specified prices by specified dates 

Over-the-counter (OTC)—the market for stocks not listed on a securities exchange (e.g., New York, American, Philadelphia, Boston, Pacific, Toronto) 

Par—the face amount of a bond; the contractual amount of the bondholder’s claim 

Pay-in-kind (PIK)—a security paying interest or dividends in kind rather than in cash 

Plan of reorganization—the terms under which a company expects to emerge from Chapter 11 bankruptcy 

Portfolio cash flow—the cash flowing into a portfolio net of outflows 

Portfolio insurance—a strategy involving the periodic sale of stock-index futures designed to eliminate downside risk in a portfolio at a minor up-front cost 

Post petition interest—interest accruing from the date of a bankruptcy filing forward 

Preferred stock—an equity security senior in priority to common stock with a specified entitlement to dividend payments 

Prepackaged bankruptcy—a technique whereby each class of creditors in a bankruptcy agree on a plan of reorganization prior to the bankruptcy filing 

Prepetition interest—interest accruing from the most recent coupon payment up to the date of a bankruptcy filing 

Price/earnings (P/E) ratio—market price of a stock divided by the annualized earnings per share 

Price-to-book-value ratio—market price of a stock divided by book value per share 

Principal— the face amount or par value of a debt security 

Principal-only mortgage security (PO)—principal payments stripped from a pool of mortgages which, in response to changes in interest rates, fluctuate in value in the same direction as conventional mortgages but with greater volatility 

Private-market value—the price that a sophisticated businessperson would be likely to pay for a business based on the valuation multiples paid on similar transactions 

Pro forma financial information —earnings and book value adjusted to reflect a recent or proposed merger, recapitalization, tender offer, or other extraordinary transaction 

Proxy contest—a fight for corporate control through the solicitation of proxies or the election of directors 

Prudent-man standard—the obligation under ERISA to restrict one’s investments to those a “prudent” (conservative) person would make (see Employee Retirement Income Security Act of 1974 (ERISA) 

Put option—a contract enabling the purchaser to sell a security at a fixed price on a particular date

Glossary (4)

 Glossary

Inside information—information unavailable to the public, upon which it is illegal to base transactions 

Institutional investors —money managers, pension fund managers, and managers of mutual funds 

Intangible asset—an asset without physical presence; examples include intellectual property rights (patents) or going-concern value (goodwill) 

Interest—payment for the use of borrowed money 

Interest-coverage ratio—the ratio of pretax earnings to interest expense 

Interest-only mortgage security (IO)—interest payments stripped from a pool of mortgages which, for a given change in interest rates, fluctuates in value inversely to conventional mortgages (see principal-only mortgage security) 

Interest rate reset—a promise made by an issuer to adjust the coupon on a bond at a specified future date in order to cause it to trade at a predetermined price 

Internal rate of return (IRR)—calculation of the rate of return of an investment that assumes reinvestment of cash flows at the same rate of return the investment itself offers 

Investment—an asset purchased to provide a return; investments, in contrast to speculations, eventually generate cash flow for the benefit of the owners (see speculation) 

Investment banking—profession involving raising capital for companies as well as underwriting and trading securities, arranging for the purchase and sale of entire companies, providing financial advice, and opining on the fairness of specific transactions 

Investment grade—fixed income security rated BBB or higher 

Junk bond - fixed-income security rated below investment grade 

Leveraged buyout (LBO)—acquisition of a business by an investor group relying heavily on debt financing 

Liability—a debt or other obligation to pay 

Liquidating distribution—cash or securities distributed to shareholders by a company in the process of liquidation 

Liquidating trust—an entity established to complete a corporate liquidation 

Liquidation value—the expected proceeds if the assets of a company were sold off, but not as part of an ongoing enterprise 

Liquidity—having ample cash on hand 

Liquid security—a security that trades frequently and within a narrow spread between the bid and asked prices 

Making a market—acting as a securities dealer by simultaneously bidding for and offering a security 

Margin of safety—investing at considerable discounts from underlying value, an individual provides himself or herself room for imprecision, bad luck, or analytical error (i.e., a “margin of safety”) while avoiding sizable losses 

Market price—the price of the most recent transaction in a company’s publicly traded stock or bonds 

Maturity—the date on which the face value of a debt security is due and payable 

Merchant banking—an activity whereby Wall Street firms commit their own capital while acting as principal in investment banking transactions 

Merger—a combination of two corporations into one 

Mutual fund—a pooled investment portfolio managed by professional investors 

Net asset value (NAV)—the per share value of a mutual fund calculated by dividing the total market value of assets by the number of shares outstanding 

Net-net working capital—net working capital less all long-term liabilities 

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

Glossary (2)

 Glossary 

Catalyst—an internally or externally instigated corporate event that results in security holders realizing some or all of a company’s underlying value 

Chapter 11—a section of the federal bankruptcy code whereby a debtor is reorganized as a going concern rather than liquidated (see bankruptcy) 

Closed-end mutual fund—mutual fund having a fixed number of outstanding shares that trade based on supply and demand at prices not necessarily equal to underlying net asset value (see open-end mutual fund) 

Collateralized bond obligation (CBO)—diversified investment pools of junk bonds that issue their own securities, usually in several tranches, each of which has risk and return characteristics that differ from those of the underlying junk bonds themselves 

Commercial paper—short-term loans from institutional investors to businesses 

Commission—a charge for transacting in securities 

Complex securities—securities with unusual cash flow characteristics 

Contingent-value rights—tradable rights that are redeemable for cash if a stock fails to reach specified price levels 

Convertible arbitrage—arbitrage transactions designed to take advantage of price discrepancies between convertible securities and the securities into which they are convertible 

Convertible bonds—bonds that can be exchanged for common stock or other assets of a company at a specified price 

Coupon—the specified interest payment on a bond expressed as a percentage 

Covered-call writing—the practice of purchasing common stocks and then selling call options against them 

Cram-down security—security distributed in a merger transaction, not sold by an underwriter 

Credit cycle—the ebb and flow in the availability of credit 

Debtor-in-possession (DIP) financing—loan to a bankrupt company operating in Chapter 11 

Debt-to-equity ratio—the ratio of a company’s outstanding debt to the book value of its equity; a measure of a company’s financial leverage 

Default—the status of a company that fails to make an interest or principal payment on a debt security on the required date 

Default rate of junk bonds—calculated by many junk-band-market participants as the dollar volume of junk-bond defaults occurring in a particular year divided by the total volume of junk bonds outstanding 

Depreciation—an accounting procedure by which long-lived assets are capitalized and then expensed over time 

Discount rate—the rate of interest that would make an investor indifferent between present and future dollars 

Diversification—ownership of many rather than a small number of securities; the goal of diversification is to limit the risk of company-specific events on one’s portfolio as a whole 

Dividend—cash distributed by a company to its shareholders out of after-tax earnings 

Earnings before interest, taxes, depreciation, and amortization (EBITDA)—a nonsensical number thought by some investors to represent the cash flow of a business 

Earnings per share—a company’s after-tax earnings divided by the total number of shares outstanding

Glossary (1)

Glossary 

Absolute-performance orientation—the tendency to evaluate investment results by measuring one’s investment performance against an absolute standard such as the risk-free rate of return 

Annuity—a stream of cash in perpetuity 

Arbitrage— the practice of investing in risk-free transactions to take advantage of pricing discrepancies between markets (see risk arbitrage) 

Arbitrageur—investor in risk-arbitrage transactions 

Asked price (offer)—the price at which a security is offered for sale (see bid price) 

Asset—something owned by a business or individual 

Average down—to buy more of a security for less than one’s earlier purchase price(s), resulting in a reduction of the average cost 

Balance sheet— accounting statement of a company’s assets, liabilities, and net worth 

Bankruptcy—a legal state wherein a debtor (borrower) is temporarily protected from creditors (lenders); under Chapter 11 of the federal bankruptcy code, companies may continue to operate 

Bear market—an environment characterized by generally declining share prices (see bull market) 

Beta—a statistical measure used by some academics and market professionals to quantify investment risk by comparing a security’s or portfolio’s historical price performance with that of the market as a whole 

Bid price—the price a potential buyer is willing to pay for a security (see asked price) 

Blocking position—the ownership of a sufficient percentage of a class of securities to prevent undesirable actions from occurring (a creditor owning one-third or more of a class of bankrupt debt securities is able to “block” approval of a plan of reorganization not to his or her liking) 

Bond—a security representing a loan to a business or government entity 

Book value—the historical accounting of shareholders’ equity; this is, in effect, the residual after liabilities are subtracted from assets 

Bottom—up investing-strategy involving the identification of specific undervalued investment opportunities one at a time through fundamental analysis 

Breakup value—the expected proceeds if the assets of a company were sold to the highest bidder, whether as a going concern or not (see liquidation value) 

Bull market—an environment characterized by generally rising share prices (see bear market) 

Callable bond—a bond that may be retired by the issuer at a specified price prior to its contractual maturity (see puttable bond) 

Call option—a contract enabling the owner to purchase a security at a fixed price on a particular date (see put option) 

Cash flow—the cash gain or loss experienced by a business during a particular period of operations 

Cash-pay securities—securities required to make interest or dividend payments in cash (see non-cash-pay securities)

Beginner's glossary of Investment terms

Beginner's glossary

Bear
Describing someone as bearish does not mean they are large and hairy, but that they have a cautious and conservative outlook, and are more inclined to be pessimistic. A bear market is characterised by falling share prices and poor returns. Bear times are bad times

Bear squeeze
Not a hug from a grizzly, but a slight rise in share prices after they have fallen sharply as traders who have been short selling buy back their positions

Bull market
Share prices are consistently rising. Think “bull in a china shop” – excited, but potentially dangerous

Bear market
Share prices are consistently falling. Think bear with a sore head – just sort of grumpy

Dead cat bounce
When a share rallies after a large fall, before dropping to new lows – just as a cat that falls from a height bounces on the ground when it lands, even though it is dead

Catching a falling knife
Buying more shares as the prices slump, in the belief that they may soon rebound. Likely to have the same effect on your wallet as actually catching a falling knife will have on your hand

Correction
A misleading term – it sounds minor, but it actually means quite a steep fall in the price of shares

Credit crunch
With all this free publicity it could become the name of a biscuit snack. But it refers to the seizure in the money markets caused by the fallout from US sub-prime mortgage customers defaulting on their loan payments. Big banks refused to lend each other money and while some banks hoarded their cash, others were left exposed without enough cash in their pocket. Think Northern Rock

Going long
Buying shares in the belief that the price will increase, producing a profit. A bit like buying a Hermès handbag in the hope that it will become a classic commanding a much higher price at auction. This doesn’t always work

Growth recession
Not male pattern baldness, but very slow economic growth, which can have a similar effect on consumers as a recession

Hyperinflation
When prices go up faster than people can spend their money. If you leave a wheelbarrow of cash in the street, someone steals only the wheelbarrow

Hedging
Taking two positions that will offset each other if prices change and so limiting financial risk. In roulette, the ultimate hedge bet is putting your money on red and black – but you are bound to lose half your money. Hedge fund managers are cleverer than that

Negative equity
Owing more on your home than it is actually worth. Lots of people who took out mortgages for 100 per cent or more of the value of their properties are in danger of this, especially when house prices fall

Short selling
When traders sell shares they don’t yet own as they believe prices will fall and they can buy them back at a lower price. Like selling your laptop to your mate for £1,000. Before you take it round, it breaks. You buy another in a shop for £800 and give it to your mate, making £200

Stagflation
Not a beast the Royal Family hunts, but a coalescence of stagnation and inflation – a period of slow growth with high inflation

Sub-prime mortgages
Home loans granted to people with troubled credit histories. Those who have missed a few credit card payments are classed as “light” sub-prime, while others who have become bankrupt in the past or who have court judgments against their name for nonpayments of debts are “heavy” sub-prime

Wind up
It means something else to humorists, and Jeremy Beadle. In the money world, it means when a company ceases activity with a view to shutting down. It can also refer to ending a pension scheme, or a relationship. If you want to dump someone, “I’d like to wind things up with you” should do it

http://business.timesonline.co.uk/tol/business/economics/article3234671.ece