A
Accountant’s opinion: Signed statement of opinion from an accounting firm on a corporations financial statements. The auditor must follow generally accepted accounting principles. The opinion can be unqualified or qualified. A qualified opinion calls attention to limitations of the audit or unusual items in the statement.
Accounts Payable: Money a company owes for merchandise or services bought on credit
Accounts Receivable: Money owed to a company for merchandise or services bought on credit.
Accrual basis: Accounting method in which income and expenses are accounted for as they are earned or incurred, although they may not have been received or paid yet.
Adjusted Gross Income (AGI): A measure used to calculate how much income is taxable by the government. AGI is calculated with gross income from taxable sources minus certain items, such as payments to a Keogh plan or a deductible Individual Retirement Account (IRA). AGI minus deductions and personal exemptions is taxable income.
Affiliate: An association between two companies when one owns less than a majority stake of the other, or when both are subsidiaries of a third company. Or, generally, any association between to companies that is short of a parent-subsidiary tie.
After-Hours Trading: Real time trading that takes place outside the normal exchange hours of 9:30 a.m. to 4 p.m. Eastern Standard Time. With after-hours systems, buyers and sellers may transact business before the markets open as well as after the markets have closed.
Aggregate: A total amount
Alternative minimum tax (AMT): Tax-law provision that ensures that individuals and companies pay some income tax, no matter how many deductions or credits they claim,. Under the AMT, money not usually considered taxable (such as income on tax-free bonds) and sums considered usually dedicative are treated as taxable.
American depository receipts (ADRs): Receipts held by an American bank that represent shares in a foreign company. Also called American depositary shares.
American-style Option: An option that may be exercised on or before the expiration date.
Amex Composite Index: Index that measures the aggregate value of all Amex-listed stocks.
Amortization: Accounting procedure that companies use to write off intangible rights or assets-such as goodwill, patents, or copyrights-over the period of their existence.
Annual effective yield: Measure of the actual annual return on an account after interest is compounded.
Annual percentage rate (APR): Interest rate that borrowers pay on a loan. Most of a loan’s up-front fees are factored into the APR.
Annual Report: Yearly report on a company’s financial state and organization that is prepared by management for shareholders.
Annuity: An investment contract whereby an individual makes an upfront payment now in return for a stream of monthly income in the future. It is offered by insurers, banks, brokerage firms and mutual fund companies and is commonly used to save on a tax-deferred basis for retirement.
Antitrust law: Any law that encourages competition by limiting unfair business practices and curbing monopolies’ power.
Appreciate: An increase in an asset’s value
Arbitrage: Buying and selling securities simultaneo9usly to take advantage of price differences. E.g., buying gold in London and selling it in New York; buying a basket of stocks that make up an index and selling the index itself.
Asked: Price being sought for a security by the seller. Also called the offer
Asset: Everything a company or individual owns or is owed.
Asset allocation: Investment technique of dividing investment money among a variety of instruments and markets.
Asset-backed securities: Securities backed by loans or accounts receivable. For example, an asset-backed bond is created when a securities firm bundles some type of debt, like car loans, and sells investors the right to receive the payments that consumers make on those loans.
Asset-management accounts: All in one accounts that allow customers of brokerage firms to buy and sell securities and store cash in one or more money marketing mutual funds. Asset-management accounts generally offer check writing privelages credit or debit cards, and automatic transfers from one account to another. They often come with an annual fee of up to $100.00.
At The Money: An option with a strike price equal to the current price of the instrument, such as a stock, upon which the option was granted.
Auction market: Trading securities on a stock exchange where buyers compete with other buyers or sellers compete with other sellers for the best stock price. Trading in individual stocks is managed and kept orderly by a specialist.
Auditor’s report: Independent accounting firm’s opinion on whether the company financial statements conform to generally accepted accounting principles.
Average annual yield: Measure of the return on investments of more than one year. It is calculated by adding each year’s return on investment and dividing that number by the number of years invested.
Averages: In the stock market, averages are indicators that measure price changes in representative stock prices. The most popular indicator is the Dow Jones Industrial Average, which measures the performance of 30 industrial stocks.
B
Balance Sheet: Financial statement that lists a company’s assets and liabilities as of a specified date.
Balanced Fund: Mutual fund that has three investment objectives: conserve the investors’ principal, pay steady income and promote long-term growth of both principal and income
Bankruptcy: Legal process governed by the U.S. bankruptcy code for people or companies unable to meet financial obligations. The bankruptcy code is divided into chapters that provide different types of relief. Chapter 7 governs liquidation rather than reorganization. Chapter 11 provides for reorganization and repayment for individuals, partnerships, and corporations that are domiciled in the U.S. Chapter 13 provides for individual debt adjustments and is an alternative to liquidation under Chapter 7.
Basis Point: Smallest measure used in quoting yields on bonds and notes. One basis point is 0.01 percent of yield. For example, a bond’s yield that changed from 12.72 percent to 12.52 percent has moved 20 basis points.
Bearer Stock: Stock certificates that aren’t registered in any name. They are negotiable without endorsement by any person.
Bear Market: When security prices decline 15 percent or more.
Beneficiary: A person named to receive a benefit in a will, life insurance policy, retirement plan, or other financial arrangement upon death.
Beta: An estimate of an investment’s volatility. The lower the beta, the less risky the investment.
Bid: The highest price that someone is willing to pay for a security or an asset.
Bill of exchange: Signed, written order by one business that instructs another business to pay a third business a specific amount. Also called a draft.
Block Trade: buying or selling 10,000 shares of stock or $200,000 or more worth of bonds.
Blue-chip stocks: Stocks of companies known for their long established record of earning profits and paying dividends.
Bond: Debt instrument that pays a set amount of interest on a regular basis. The issuer promises to repay the debt on time and in full. Bonds are bought and sold on the secondary market.
Bond Buyer Municipal Bond Index: An index based on 40 long-term municipal bonds that is often used to track the performance of the tax-free municipal bonds. The index is complied by The Bond Buyer, a trade publication.
Bond rating (debt rating): An assessment of the likelihood that investors will receive the promised interest and principal payments on time. Bond ratings are assigned by independent agencies, such as Moody’s Investors Service and Standard Poor’s.
Book to bill ratio: A measure of sales trends of a company or industry. A number above 1 indicates an expanding market, and a number below 1 is a contracting market. For example, a book-to-bill ratio of 1.03 means that for every 100 of products shipped, 103 in new orders was received.
Book Value: A company’s net worth (difference between a company’s net assets and its liabilities), usually expressed in per-share terms.
Bottom fishing: Buying stocks whose prices have bottomed out or fallen to low levels.
Brady bonds: securities issued by foreign governments as part of a debt-restricting program initiated by former U.S. Treasury Secretary Nicholas Brady.
Broker: A person who gives advice and handles orders to buy or sell stocks, bonds, commodities, and options.
Brokerage firm: Financial services firm that provides the service of buying and selling securities. Brokerage firms fall into two main camps, full-service brokers and discount brokers.
Bull market: A time period when securities prices increase.
C
Cafeteria Plan: Flexibile-benefit plan offered by many employers that give workers a certain number of credits and a menu of benefit options on which to spend them. The list may include medical coverage, life insurance, disability coverage, vacation days, and dental care. Employees who do not want a particular benefit can spend more on another, or receive the difference in cash.
Call: Issuer’s right to redeem a bond or preferred share before it matures.
Callable bond: A bond that can be redeemed by the issuer before it matures.
Call option: Agreement that gives an investor the right but not the obligation to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
Call risk: The risk that an issuer may redeem a security sooner than expected.
Capital Asset: an asset held for more than a year that isn’t bought or sold in the normal course of business, capital assets generally include fixed assets such as land, buildings, equipment, and furniture.
Capital Gain: Difference between the purchase price and the sale price of an asset when the asset was sold for more than it was bought.
Capital Loans: Difference between the purchase price and the sale price of an asset when the asset was sold for less than it was bought
Cash flow: Net income after depreciation and other non cash charges are included.
Cash market: The trading of securities according to their current-or spot-price. That is in contrast to trading in a security for future delivery.
Certificate of Deposit: A savings contract that pays a fixed interest rate for a specified time.
Certified Financial Planner (CFP): The best-known financial planning designation, given to qualifying planners by the CFP Board of Standards of Denver
Certified Public Accountant (CPA): An accountant who has passed an administered examination that focuses on accounting practices and taxes.
Charitable lead trust: A trust that pays a charity income from a donated asset for a set number of years, after which time the principal goes to the donor’s beneficiaries with reduced estate or gift taxes.
Charitable remainder trust: A trust that allows people to leave assets to a charity and receive a tax break but still retain income for life. This works best for people with a large appreciated asset, which, if sold, would generate large capital-gains taxes.
Chartered Financial Analyst (CFA): This qualification focuses on portfolio management and securities analysis. It also covers economics, financial accounting, securities analysis and standards of conduct.
Chartered Financial Consultant (ChFC): Financial planning designation given to qualifying planners by the American College of Bryn Mawr, Pennsylvania.
Chartered Life Underwriter (CLU): A professional designation given to qualifying life insurance agents by the American College of Bryn Mawr, Pennsylvania.
Chicago Board of Trade (CBOT): One of the oldest futures exchanges where agricultural and financial futures and options are traded.
Chicago Board Options Exchange (CBOE): An exchange set up by the Chicago Board of Trade to trades tock options. IT now has trading in a variety of options contracts including options on stock indices, interest rates and sector indices.
Churning: Excessive trading in a customer’s brokerage account, done to generate increased commission income. Churning is a securities law violation. In the stock market, it refers to a period of heavy trading activity but few sustained price trends and little overall movement in stock market indexes.
Circuit Breakers: Measures used by some major stock and commodities exchanges to restrict trading temporarily when markets rise or fall too far and/or to fast
Closed-end fund: Type of fund that issues a set number of shares and typically trades on a stock exchange.
Closely held: Companies in which stock and voting control are concentrated in the hands of a few investors, although the companies’ shares may be traded to a limited extent.
Closing price: The last traded price of a stock when the market closes.
Collaborative fund: Also known as collective intelligence funds. While these are managed by professionals, they choose the makeup of the portfolio based on recommendations from volunteer stock pickers.
Collateral: stock or other property that borrowers are obliged to turn over to lenders if they are unable to repay a loan.
Collateralized Mortgage Obligations (CMOs): Multi-class bond backed by a pool of mortgage pass-through securities or mortgage loans.
Commercial bank: A bank owned by shareholders that accepts eposits, makes commercial and industrial loans, and provides other banking services to the public. Also called a full-service bank.
Commerical paper: Unsecured short-term promissory notes used by companies to obtain cash. They are sold through dealers in the open market or directly to investors.
Commodities: Bulk goods such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa. They can either be sold on the spot market for immediate delivery or on the commodities exchanges for later delivery. Trade on the exchanges is in the form of futures contracts.
Common Stock: Represents part ownership of a company. Holders of common stock have voting rights but no guarantee of dividend payments.
Composite trading: Total amount of trading across all markets in a share that is listed on the New York Stock Exchange or American Stock Exchange. This includes transactions on those exchanges, the five regional exchanges and on the Nasdaq Stock Market.
Compounding: If your investments make 10 percent a year for five years, you earn not 50 percent but 61.1 percent. Here is the reason: as time goes on, you make money not only on your original investment but also on your accumulated gains from earlier years.
Comptroller of the Currency: A Treasury Department official, appointed by the president and confirmed by the Senate, who is responsible for chartering, examining, supervising, and liquidating national banks.
Consumer credit: Money loaned to individuals, usually on an unsecured basis, requiring monthly repayment. Bank loans, credit cards, and installment credit are examples of consumer credit.
Consumer price index (CPI): A gauge of inflation that measures changes in the prices of consumer goods. The index is based on a list of specific goods and services purchased in urban areas. It is released monthly by the Labor Department
Convertible bond: A bond that investors may exchange for stock at some future date under certain conditions.
Corporate bonds: Bonds issued by corporations.
Corporation: A business entity treated as a person in the eyes of the law. It is able to own property, incur debts, sue, and be sued.
Correction: A reverse movement, usually downward, in the price of an individual stock, bond, commodity, index, or the stock market as a whole.
Cost basis: In accounting, the valuation of an asset that includes the cost of the asset and factors in items like depreciation, capital gains, and dividends.
Cost of living: Level of prices of goods and services required for a reasonable standard of living.
Cost-push inflation: A sustained rise in prices caused by businesses passing on increases in costs, especially labor costs, to purchasers.
Coupon: The interest rate specified on a bond when it is originally issued.
Covered: An investment strategy in which the seller owns the underlying security.
Credit ratings: Formal evaluation of a government or company’s credit history and ability to repay its debts
“Curbs In”: An indication that trading curbs have been installed on the New York Stock Exchange
Currency: Money that circulates in an economy. Also refers to a country’s official unit of exchange.
Current Ratio: A measure of a company’s liquidity, or its ability to pay its short-term debts. Calculated by dividing current assets by current liabilities
Current Yield: A measure of an investor’s return on a bond. Calculated by dividing the coupon rate by the purchase price, then multiplying by $1,000.
Cyclical stocks: Shares that tend to rise during an upturn in the economy and fall during a downturn.
D
Day Order: An investor’s order to buy or sell that will be cancelled by the end of the day if not filled.
Debenture: A bond backed only by a corporation’s good credit, not by specific collateral.
Debt: Securities such as bonds, notes, mortgages, and other forms of paper that indicate the intent to repay an amount owed.
Default: Failure to pay principal or interest on a financial obligation. It can also refer to a breach or nonperformance of the terms of a debt instrument.
Defensive securities: Stock of companies whose earnings tend to grow despite the business cycle (e.g., food and drug firms), or of companies that pay relatively high dividends, like utilities
Deflation: A decline in the general price level of goods and services that results in increased purchasing power of money. The opposite of inflation.
Delta: A measure of the price change relationship between and option and its underlying asset.
Depreciation: A decline in value. In accounting, a reduction of earnings to write off the cost of an asset over its estimated useful life.
Depression: A severe downturn in an economy that is marked by falling prices, reduced purchasing power, and high unemployment.
Derivative: A financial product whose value is derived from an underlying financial asset, such as stocks, bonds, currencies, or mortgages. Derivatives may be listed on exchanges or traded privately over the counter. For example, derivatives may be futures, options, or mortgage backed securities.
Direct Purchase Plans (DPP): Direct Purchase Plans allow you to buy stock directly from the company that issues the stock.
Discount: In general, the amount by which one security price is less than another. In financing, it is the interest withheld when a note, draft, or bill is purchased
Discount brokers: Brokers who charge lower commissions than full-service brokers and usually limit their service to trade execution
Discount rate: The interest rate charged by the Federal Reserve on loans to banks.
Disinflation: A slowdown in the rate of price increases. Disinflation occurs during a recession, when sales drop and retailers are unable to pass higher prices along to consumers.
Diversification: Spreading investments among different types of securities to lessen risk.
Dividend Reinvestment Plans (DRIPs): A program offered by companies to allow the automatic reinvestment of stockholder dividends in additional shares.
Dividends: A portion of a company’s income paid to shareholders as a return on their investment
Dividend yields: A company’s annual dividend expressed as a percentage of its current stock price.
Dollar-cost averaging: A strategy to invest fixed amounts of money in securities at regular intervals, regardless of the market’s movements.
Dow Jones averages: There are four Dow Jones averages that track price changes in various sectors. The Dow Jones Industrial Average tracks the price changes of the stock of 30 industrial companies. The Dow Jones Transportation Average monitors the price changes of the stocks of 20 airlines, railroads and trucking companies. The Dow Jones Utility Average measures the performance of the stock of 15 gas, electric and power companies. The Dow Jones 65 Composite Average monitors the stock of all 65 companies that make up the other three averages.
Dow Jones Equity Market Index: Index that measures price changes in more than 100 U.S. industry groups. The stocks in the index represent about 80 percent of U.S. market capitalization and trade on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ Stock Market. The equity-market index is market-capitalization weighted, which means that a stock’s influence on the index is proportionate to its size in the market.
Dow Jones Global Indexes: Some 2,700 companies’ stocks in 29 countries worldwide are tracked by geographic region and by 120 industry groups. Collectively, they represent more than 80 percent of the equity capital on stock markets around the world. All of the indexes are weighted by market capitalization, which is the product of price times shares outstanding. Thus, each country carries a weight proportionate to the relative value of its equities the total value of world equities. The U.S. market is the world’s biggest, and the U.S. component of the global indexes has the most-more than 700.
Dow Jones Industrial Average (DJIA): Often referred to as the Dow, this is the best known and most widely reported indicator of the stock market’s performance. The Dow tracks the price changes of 30 mostly industrial stocks traded on the New York Stock Exchange. Their combined market value is roughly equal to 20 percent of the market value of all U.S. stocks and 25 percent of those listed on the New York Stock Exchange.
Dow Jones World Stock Index: An index that measures the performance of more than 2,000 companies worldwide that represent more than 80 percent of the equity capital on 25 stock markets.
Duration: A calculation measuring the expected life of a fixed income security. It estimates the time required to collect a fixed income security’s payments of the principal and interest.
E
Earnings: Income after a company’s taxes and all other expenses have been paid. Also called profit or net income.
Earnings per share: The amount of earnings allocated to each share of common stock. Calculated by dividing earnings by the number of shares outstanding.
Earnings yield: A company’s per-share earnings expressed as a percentage of its stock price. This provides a yardstick for comparing stocks with bonds, as well as with other stocks.
Economic indicators: Key statistics used to analyze business conditions and make forecasts
Education IRA: Education IRA’s are available to help finance a child’s education. Contributions of up to $2,000 may be made in any given year, depending on income. Now called the Coverdell Education Savings Account.
Emerging markets: Financial markets in nations that are developing market-based economies, such as in Latin American and China.
Employee Stock Ownership Plan (ESOP): A program encouraging employees to buy stock in their company and thereby have a greater stake in its financial performance.
Equity: In property, it is the difference between the property’s current market value and the claims against the property. In securities markets, it is the part of a company’s net worth that belongs to shareholders.
Estate taxes: Taxes levied by the federal and state governments on the transfer of your assets after you die. Uncle Sam levies estate taxes on the worldwide assets of both U.S. citizens and U.S. residents.
Euro: The currency of the 12 countries in the new European Union.
Eurobonds: Corporate or government bond denominated in a currency other than the currency of the issuer
Eurocurrency: Any currency held in a bank outside the country of origin.
Eurodollars: Dollar-denominated deposits in banks outside the U.S.
European-style option: An option that may be exercised only on its expiration date.
European Union: An intergovernmental organization of 15 Western European nations crated under the Maastricht treaty of December 1991 with its own institutional structures and decision-making framework. Before the Maastricht treaty went into effect in November 1993, the organization was known as the European Community or the Common Market. Its member’s are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Its council of ministers and the European Commission are based in Brussels, Belgium, and its parliament is based in Strasbourg, France. Also called the EU.
Exchange: A centralized place for trading securities and commodities, usually involving an auction process.
Exchange Traded Funds (ETFs): Similar to regular mutual funds, these track major indices. Unlike mutual finds which can only transact business at the end of the day, exchange traded funds can be bought or sold at any time. Also, unlike a mutual fund, an ETF can be sold short and bought on margin.
Ex-dividend: The time period between the announcement and the payment of a dividend. New investors in the stock in this period are not entitled to receive the dividend the stock trades lower than on the first day of this time. On this day the stock is said to go ex-dividend.
Executor: The person named in a will to handle the settlement of the estate.
Expense ratio: This figure tells you how much a mutual fund charges each year as a percentage of total fund assets. A fund with a 1.55 percent expense ratio, for instance, levies $1.55 for every $100 it has under management. Included in this figure are the fund’s management fee, shareholders servicing costs, and any annual 12b-1 fee. A 12b-1 fee, which is named after the applicable Securities and Exchange Commission regulation, is levied to pay for the cost of attracting new investors to the fund. The fee may be used to buy advertising or to compensate brokers who sell the fund.
Expiration Date: The date after which an option may no longer be exercised
F
Face value: The monetary value of a bond printed on its face. Face value and market value often differ.
Fair value: A mathematical relationship between the futures and the S&P 500 index.
Federal debt: The amount of debt sold by the federal government to fund past deficits
Federal deficit: Money owed by the federal government when spending exceeds tax revenues collected
Federal funds rate: The interest rate banks charge on overnight loans to bank that need more cash to meet bank reserve requirements. The Federal Reserve sets the interest rate.
Federal Reserve: The central bank of the U.S. that sets monetary policy. The Federal Reserve oversees money supply, interest rates, and credit with the goal of keeping the U.S. economy and currency stable. Governed by a seven-member board, the system includes 12 regional Federal Reserve Banks, 25 branches, and all national and state banks that are part of the system. Also called the Fed.
Financial planner: A type of financial adviser ideally one with broad knowledge of all areas of personal finance. But no particular training or credentials are required of investment and insurance products.
Fiscal year: The 12-month period that a corporation or government uses for bookkeeping purposes.
529 College Savings Plan: Managed by individual states, 529 plans let adults earmark large upfront contributions for college-up to $250,000, depending on the individual state plan.
Flexible spending account: An employee benefit offered by many companies that allows employees to have pretax dollars withheld from their salaries to pay for unreimbursed medical expenses and dependent-care expenses, such as babysitting or elder care.
Float: In securities, the number of outstanding shares in a corporation available for trading by the public. Also, the time between the deposit of a check in a bank and the check’s payment.
Floater: An insurance policy that covers specific items of personal property, such as jewelry.
Floating an issue: Offering stocks or bonds to the public for the first time. It can be an initial public offering or an offering of issues by companies that are already public.
Foreign exchange: Money instruments used to make payments between countries.
Foreign exchange markets: Market in which foreign currencies are bought and sold and exchange rates between currencies are determined.
Forward exchange rate: A currency exchange contract that traders have agreed upon for a future date. The forward rate is usually for one, two, three, or six months, and is referred to as 30-day forward, 60-day forward, etc.
Forward trading: Trade, usually at the current price, in which actual delivery and settlement is made at a future date. Forward trade occurs in the commodity, foreign exchange, stock, bond, and futures markets.
401k plan: An employer-sponsored retirement-savings plan funded by employees with contributions that are deducted from pretax pay. Employers frequently add matching contributions up to a set limit.
403b plan: A retirement savings plan for employees of colleges, hospitals, school districts, and nonprofit organizations. The plan, which is similar to the 401k plan offered to many corporate employees, is funded by employees with contributions that are deducted from pretax pay.
Friendly takeover: An acquisition of one company by another in which the boards of both companies agree to the terms of the transaction.
Full-service brokers: Brokers who execute buy and sell orders, research investments, help investors develop and meet investment goals, and give advice to investors. They charge commissions for their work.
Fundamental analysis: Analysis technique that looks at a company’s financial condition, management, and place in its industry to predict its stock price movement.
Funds of funds: Funds of funds take proceeds from investors and, in turn, invest that money into other mutual funds.
Futures: An agreement to purchase or sell a given quantity of a commodity, security, or currency at a specified date in the future. Also called a futures contract.
Futures option: An option on a futures contract.
G
General-obligation bond: A municipal government bond that is approved either by the voters or their legislature. The government’s promise to repay the principal and pay the interest is constitutionally guaranteed, based on its ability to tax the population.
Gift tax: Federal taxes owed on gifts if they exceed both the annual limit of $10,000 per recipient and the $600,000 lifetime unified credit.
Gross domestic product (GDP): The total value of goods and services produced by a nation. In the U.S. it is calculated by the Commerce Department, and it is the main measure of U.S. economic output.
Gross spread: The difference between the price that investors are charged for the security, and the amount of proceeds that are paid to the issuer.
Growth: This world label is applied both to a type of mutual fund and to a style of investing. Growth funds invest for capital gains-the profit that you make when you sell an investment for more than your cost.
Growth fund: A mutual fund that invests in the common stock of well-established companies. The aim of a growth fund is to buy stocks whose share price will increase over time.
Guaranteed investment contracts (GICs): Investments offered by insurance companies that promise preservation of principal and a fixed rate of return. Individuals invest in GICs through 401ks and other retirement plans.
H
Hard assets: Also known as tangible assets, these investments tend to perform well when the inflation rate is picking up. Gold and other pr
