American Depository Receipt (ADR)- A negotiable certificate issued by a U.S. bank representing a specific number of shares of a foreign stock traded on a U.S. stock exchange. ADRs make it easier for Americans to invest in foreign companies.
“Auction fever”- A situation where bidders get emotionally caught in the auctioning of certain items and pay too much.
Austrian economists- Economists who follow the works of free-market economists Ludwig von Mises and Friedrich Hayek, who taught at the University of Vienna in the early twentieth century.
Automatic investment plan (dollar cost averaging)- A program of withdrawing a certain amount of funds from a bank account or payroll and investing that amount regularly in a group of stocks or mutual funds.
Bear market- A prolonged period in which investment prices fall, accompanied by widespread pessimism. The bear, which hibernates during the winter, is an appropriate symbol of a depressed market.
Behavioral economics- The study of the psychology of individual consumers, business people, and investors who are prone to make mistakes, and how they can minimize those mistakes.
Blue-chip stock- A large publicly traded company that is considered financially sound.
Bonds- A debt instrument issued by corporations and governments for a period of more than one year with the purpose of raising capital by borrowing.
Book value- A company’s common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately.
Bull market- A prolonged period in which investment prices rise faster than their historical average. The bull, which is known for being aggressive and somewhat unpredictable, is an appropriate symbol of a booming market.
Business development companies (BDCs)- Companies that finance private firms and in return receive a fee, interest income, or equity position.
“Buy and hold”- An investment strategy in which stocks are bought and then held for a long period, regardless of the market’s fluctuations.
Capital gains- The amount by which an asset’s selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit.
Commodities- A physical substance such as food, grains, and metals that is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts.
Contrarian investing/bargain hunting- An approach by investors and security analysts that looks for oversold conditions and cheap companies compared to the market averages and historical patterns.
Day traders- Speculators who buy and sell stocks daily or even hourly, usually online.
Distribution- The payment of a dividend or capital gain. Mutual funds often pay out a taxable distribution near the end of the year.
Dividend- A taxable payment declared by a company’s board of directors and given to its shareholders out of the company’s current or retained earnings, usually quarterly. Dividends are usually given as cash (“cash dividend”), but they can also take the form of stock (“stock dividend”) or other property.
“Dogs of the Dow”- A strategy of investing in ten stocks among the thirty Dow Jones Industrials that pay the highest dividends.
Dow Jones Industrial Average (DJIA)- The most widely used indicator of the overall condition of the stock market, a price-weighted average of thirty actively traded blue chip stocks, primarily industrials. The thirty-stock index has been published by Dow Jones & Company since the beginning of the twentieth century.
Earnings- Revenues minus cost of sales, operating expenses, and taxes, usually reported quarterly by publicly traded corporations.
Earnings target- Profits of a publicly-traded company that security analysts expect to achieve in the next quarter or annual report.
Easy money policy- A policy whereby the Federal Reserve lowers short-term interest rates and expands the growth of the money supply.
Efficient market theory- The controversial theory that all market participants receive and act on all of the relevant information as soon as it becomes available. If this were strictly true, no investment strategy would be better than a coin toss. Followers of the efficient market theory argue in favor of buying an index of broadly based stocks. Also known as the “random walk” theory of investing.
Emerging markets- Financial markets of developing countries, usually small markets with short operating histories, including many countries in Latin America, Asia, and former Eastern European bloc countries.
Exchange traded fund (ETF)- A fund that tracks an index, but can be traded like a stock on stock exchanges. ETFs always bundle together the securities that are in an index; they never track actively managed mutual fund portfolios.
“Flying Five” strategy- A strategy of investing in the five highest yielding, lowest priced Dow thirty stocks.
Fundamentalist- In finance, a method of security valuation which involves examining the company’s financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, and competition.
Futures- Standardized, transferable, exchange-traded contracts that require delivery of a commodity, bond, currency, or stock index at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite.
GDP growth- Increase in Gross Domestic Product, the total value of final goods and services purchased by consumers, business, and government in one year.
“Going public”- Performing an initial public offering (IPO). Opposite of going private.
Growth stocks- Stocks of a company that is growing earnings and/or revenue faster than its industry or the overall market. Such companies usually pay little or no dividends, preferring to use the income instead to finance further expansion.
Hedge fund- A fund, usually used by wealthy individuals and institutions, that is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives.
HubbertPeaktheory- Named after American geophysicist Marion King Hubbert, who predicted that the amount of oil under the ground is finite and has probably peaked in theUnited States.
Illiquid- Not easily convertible to cash. Opposite of liquid.
Incorporating a business- The process by which a business receives a state charter, allowing it to become a corporation.
Index fund- A composition of stocks valued usually by market capitalization, such as the S&P 500 or Russell 2000.
Initial Public Offering (IPO)- The first sale of stock by a company to the public.
Junk bonds- A slang term for high-risk, non-investment-grade bonds with a low credit rating, usually BB or lower; as a consequence, they usually have a high yield. Opposite of investment-grade bonds.
Leverage- The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad, however; it can increase the shareholders’ return on their investment and there are often tax advantages associated with borrowing. Also called financial leverage.
Liquid- Easily convertible to cash. Opposite of illiquid.
Margin call- A call from a broker to a customer (called a maintenance margin call) demanding the deposit of cash or marginable securities in order to cover losses from an adverse price movement. A margin call is usually associated with the purchase of a stock or commodity on margin; that is, with borrowed money.
Marginal behavior- Price action of an investment based on a small number of buyers and sellers.
Market capitalization- The aggregate value of a company or stock. It is obtained by multiplying the number of shares outstanding by their current price per share.
Market timing- Attempting to predict future market directions, usually by examining recent price and volume data or economic data, and investing based on those predictions. Also called timing the market.
Market-weighted index- An index of stocks valued according to their market capitalization, such as the S&P 500 Index.
Money market funds- Open-end mutual funds that invest only in money markets and operate like an interest-bearing checking account. These funds invest in short-term (one day to one year) debt obligations such as Treasury bills, certificates of deposit, and commercial paper. The main goal is the preservation of principal, accompanied by modest dividends.
Mutual funds- Open-ended funds operated by an investment company that raise money from shareholders and invest in a group of assets in accordance with a stated set of objectives. Mutual funds raise money by selling shares of the fund to the public.
NASDAQ- A computerized system established by the National Association of Securities Dealers (NASD) to facilitate trading by providing broker/dealers with current bid and ask price quotes on over-the-counter stocks and some listed stocks. Unlike the Amex and the NYSE, the Nasdaq (once an acronym for the National Association of Securities Dealers Automated Quotation system) trades stocks over a network of computers and telephones.
New York Stock Exchange (NYSE)- The oldest and largest stock exchange in the U.S., located on Wall Street in New York City. The NYSE is responsible for setting policy, supervising member activities, listing securities, overseeing the transfer of member seats, and evaluating applicants. It traces its origins back to 1792.
Price-earnings ratio (P/E ratio)- The most common measure of how expensive a stock is. The P/E ratio is equal to a stock’s market capitalization divided by its after-tax earnings over a twelve-month period, usually the trailing period but occasionally the current or forward period.
Prime rate fund- Mutual fund that attempts to match the return of the prime rate by investing in high-quality corporate debt. The prime rate is the interest rate a commercial bank charges its best corporate customers. Prime rate funds tend to increase their dividends when interest rates rise.
Privately held company- A company whose shares are owned by individuals and institutions and do not trade on a publicly traded exchange.
Profits- Gain from an investment or business operation after subtracting for all expenses. See also earnings.
Publicly traded company- A company whose shares trade on an official exchange, such as the New York Stock Exchange or Nasdaq.
Quarterly report- Unaudited document required by the SEC for all U.S. public companies, reporting the financial results for the quarter and noting any significant changes or events in the quarter. Quarterly reports contain financial statements, a discussion from the management, and a list of “material events” that have occurred with the company (such as a stock split or acquisition). Also called Form 10-Q.
Real-estate investment trust (REIT)- A corporation or trust that uses the pooled capital of many investors to purchase and manage income property and/or mortgage loans.
“Regression to the mean”- In finance, this is the view held by many economists and financial analysts that the price of overvalued companies must eventually fall, and undervalued companies must rise to their intrinsic value.
REIT (equity)- Real estate investment trust that takes an ownership position in its real estate investments, as opposed to a mortgage REIT.
REIT (mortgage)- Real estate investment trust that invests in mortgages; some also borrow money from banks and re-lend it at higher interest rates.
Returns- The annual return on an investment, expressed as a percentage of the total amount invested. Also called rate of return.
Revenues- Total amount of money received by a company for goods sold or services provided, usually reported quarterly by publicly traded companies. Revenues also include sale of assets.
Rising dividends- A company policy of paying a higher dividend over time.
Securities and Exchange Commission (SEC)- Founded in 1933, the primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets.
Shorting a stock- Borrowing a security (or commodity futures contract) from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker. Short selling is a technique used by investors who try to profit from the falling price of a stock. Also called selling short.
Speculator- An individual who takes large risks, especially with respect to trying to predict the future; a person who gambles in hopes of making quick, large gains.
Standard & Poor’s 500 Index (S&P 500)- A basket of 500 stocks that are considered to be widely held. Created in 1957, the S&P 500 is weighted by market value, and its performance is thought to be representative of the stock market as a whole.
Stock market bubble- A description of rapidly rising equity prices, usually in a particular sector, that some investors feel is unfounded. The term is used because, like a bubble, the prices will reach a point at which they pop and collapse violently.
Stock option- The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt at a specified price (the strike price) during a specified period of time. For stock options, the amount is usually one hundred shares. Each option has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party.
Stock repurchase plan- A corporation’s repurchase of stock it has issued, thus reducing the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company.
Stocks- Ownership in a corporation that represents a claim on its proportional share in the corporation’s assets and profits. Also called equity.
Subprime lender- A mortgage lender to a borrower who has below-average credit.
Technical trader- A trader who uses a method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered.
Tight money policy- A policy whereby the Federal Reserve raises short-term interest rates and reduces the growth of the money supply.
Underwriter- A brokerage firm or investment banker who acts as an intermediary between an issuer of a security and the investing public in the release of an IPO.
U.S.Federal Reserve (The Fed)- The seven-member Board of Governors that oversees Federal Reserve Banks, establishes monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed by the president, subject to Senate confirmation, and serve fourteen-year terms.
U.S. Treasuries- Short-and long-term debt issued by theUnited Statesgovernment.
Value stocks- Stocks that are considered to be good stocks at a great price based on their fundamentals, as opposed to great stocks at a good price. Generally, these stocks are contrasted with growth stocks that trade at high multiples to earnings and cash.
Venture capitalist- An entrepreneur who helps other entrepreneurs financially and often plays an active role in the company’s operations (for example, by occupying a seat on the board of directors).
Volatility- The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of the daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
Yield- The annual rate of return on an investment, expressed as a percentage.
Most of these terms and definitions have been reproduced with permission from InvestorWords.com, the internet’s most comprehensive financial glossary, located at http://www.investorwords.com. Copyright 1997-2007 WebFinance Inc. All Rights Reserved.
Excerpted from the book Investing in One Lesson written by Mark Skousen, Ph.D., published by Regnery Publishing, Inc.,Washington,D.C., 2009.
With Investing in One Lesson Dr. Skousen has compiled a primer that will put even the most baffled investor on the road to success in the stock market. It is an indispensable guide for surviving and thriving in the peculiar universe of Wall Street.
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