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Financial Glossary >>
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(1) the deliberate, well-controlled assembling of blocks of stock without necessarily bidding up prices. (2) profits that are not distributed to stockholders as dividends but are instead transferred to a capital account. (3) in mutual funds, an investment of a fixed dollar amount on a regular basis, including the reinvestment of dividends and capital gains.

advance/decline (A/D) ratio:
the number of stocks that have risen versus those that have fallen over a stated time period for a specific exchange. It's a barometer of the market's condition; when advancers outnumber decliners, it indicates strength.

converting to an annual basis, e.g., a mutual fund returning 0.5% a month returns 6% on an annualized (yearly) basis.

arbitrage :
the simultaneous purchasing and selling of the identical item in different markets to yield profits with zero risk. It is a technique used to take advantage of differences in price.

The lowest price at which anyone is willing to sell a stock .

asset allocation:
determining the optimal distribution of funds among various types of assets, including stocks, bonds, and cash, to achieve investment objectives.

bid-asked spread:
the difference between the bid (the price a buyer is willing to pay) and the ask (the price a seller is offering); the fewer the shares outstanding, and the less the demand for shares, the bigger the spread, putting investors at a disadvantage.

block trade:
a large transaction, usually involving at least 10,000 or more shares of stock or US\$200,000 or more worth of bonds.

bond rating:
the quality of a bond, based on the issuer's financial condition, as determined by a recognized financial organization, such as Standard & Poor's or Moody's; it indicates the ability of the issuer to meet debt obligations. Ratings typically range from AAA (the highest quality) to D (in payment default). See bond, junk.

bond, convertible:
a bond that gives the holder the right to exchange it for other securities of the issuing corporation at a future date if certain conditions are met.

bond, junk:
a bond, issued by a company in poor financial condition, which possesses a higher-than-average possibility of default; typically offers interest rates three to four percentage points higher than safe government issues, as compensation to lenders for higher risk.

bond, treasury: a U.S. government long-term security, sold to the public and having a maturity longer than 10 years; considered the safest of all bond categories. See treasury bill, treasury note.

book value:
the result of adding all of a company's assets, then subtracting all debts and other liabilities, plus the liquidation price of any preferred issues.

after a short sale (in which shares are borrowed and then sold), the purchase of an identical amount in order to repay the loan. Also, the repurchase of stock by a corporation. See short sale.

call option:
the right to purchase stock at a stated "strike" price at any time prior to a predetermined deadline, at which point the option expires. Because the price of an options contract is low relative to that of the underlying security, an option gives investors the ability to control a large position without having to put up as much capital. Compare put option.

capital gain (or loss): the difference (gain or loss) between the value realized from the sale of a capital asset and its market value at purchase.

cash flow:
(1) the net cash generated by a firm from ongoing operations, or from financing, such as issuing stock or debt. (2) net income plus noncash charges, such as depreciation.

circuit breakers:
measures used by stock exchanges during large sell-offs; after market indices have fallen a certain percentage, the exchanges halt trading for a certain amount of time, with a goal of averting panic selling.

closed-end fund:
an actively managed fund of securities, such as stocks or bonds, with a fixed number of shares available for trading in secondary markets; management company does not stand ready to issue and redeem shares on an ongoing basis; the value of shares can trade at a premium or discount to the net asset value of the portfolio's securities. Compare open-end fund.

consolidated financial statement:
a financial accounting that combines all assets and liabilities, plus operating accounts of a company and its subsidiaries.

a price reaction, usually downward, leading to an adjustment of more than 10%.

one of a series of promissory notes of consecutive maturities attached to a bond or other debt certificate; they are intended to be presented on their respective due dates for payment of interest.

covered call:
(1) a call whose seller owns the security, or a security convertible. (2) a call whose holder sold the underlying security short. Used to reduce risk; if the security falls (rises) in value, the call option will rise (fall). See call option.

cyclical stocks:
securities of companies whose operations are tied to business cycles, doing well during economic recoveries and sliding during recessions.

debt/equity ratio:
long-term debt divided by shareholders' equity.

the effect of adding to the number of shares outstanding, which reduces the value to existing shareholders of earnings and assets.

when an investor, to reduce the risk of selection, spreads investment dollars over many securities.

that portion of the net profits officially declared by the board of directors for distribution to stockholders; paid at a fixed amount for each share of stock held at a specific time period. See yield.

dollar cost averaging:
a method of investing in which a security is purchased in fixed dollar amounts at regular intervals. As the stock price fluctuates, more shares are purchased when the price is low, and less when it is high, enabling an investor to reduce the average cost of the holding.

dow jones industrial average:
the average of the closing prices of 30 representative blue-chip stocks, which have been selected by Wall Street Journal editors. The Dow is often viewed as a proxy for the overall market.

dow theory:
purports that the market is in a basic upward trend if one of its averages (industrial or transportation) advances above a previous important high, accompanied or followed by a similar advance in the other. When both averages dip below previous important lows, it's regarded as confirmation of a basic downward trend.

earnings per share:
net income divided by shares outstanding.

when a dividend is declared by a corporation, it is payable on a designated date to stockholders of record as of a stated date. When stock is sold prior to that stated date, the dividend belongs to the buyer and not to the seller; when sold subsequent to the stated date and prior to the date of payment, the dividend belongs to the seller and not to the buyer. It is then said to sell ex-dividend.

the action by a stockholder in taking advantage of a privilege offered by the company, such as subscribing to additional stock or bonds, or converting securities into another form.

the number of shares available for trading by the public, as opposed to those held closely by corporate insiders and other large investors. Companies with small floats tend to have more volatile stocks than those with large floats.

fully valued:
a stock having attained a high enough price, one at which analysts believe the company's fundamental earnings power has been seen by the market.

futures :
contracts for the sale and delivery, usually of commodities, at a future time according to pre-established conditions; used by hedgers seeking to lock in prices and insulate themselves from price swings, and by speculators seeking capital gains.

growth stock:
the stock of a corporation whose revenue and earnings are growing at an above-average rate; usually marked by a relatively high price/earnings ratio.

hedge fund:
(1) a limited partnership of investors that invests in speculative stocks. (2) funds using calls, puts, margin, etc., to increase return.

holding company:
(1) any corporation, partnership, trust, association, or organized group of persons owning or controlling 10% or more of the outstanding voting shares of a company. (2) a corporation that exercises control over other companies through title to their securities, primarily voting issues.

in the money:
when an option's strike price is below the market price of the underlying stock for a call, or is above the market price of the underlying stock for a put. See call option, put option. Compare out of the money.

index fund:
a mutual fund whose objective is to match the performance of an index of publicly traded stocks, such as the Standard & Poor's 500. Since stocks are not actively selected, operating expenses, which generally are passed on to a fund's investors, are much lower than for the average mutual fund.

initial public offering (IPO):
a firm's first offering of stock to the public in order to raise money.

investment grade:
(1) an investment situation in which a firm has a strong balance sheet, considerable capitalization, and continuous dividends, and is recognized as a leader in its industry. (2) bond rating of BAA/BBB or higher; indicates investment-grade quality.

load funds :
mutual funds sold by sales representatives. For the shares they sell, there is a sales charge, or load.

margin call:
a broker's notice upon a client to put up money or securities; made when a purchase is carried out or when a customer's equity in a margin account declines below minimum standards set by an exchange or firm.

market capitalization:
the value of a firm, determined by multiplying its stock price by the number of its outstanding common shares.

market order:
an order to buy or sell a specific number of shares at the best available price once the order is received in the marketplace. See stop order.

market sentiment:
the feeling or tone of a market shown by the activity and price movement of the securities. A bullish market sentiment would be indicated by rising prices while a bearish sentiment would be indicated by falling prices.

market timing:
the attempt to predict future market movements, and basing buy and sell decisions on those forecasts.

maturity (maturity date):
the date on which the issuer of a debt security (bond) is required to repay the principal amount, or face value, of a security.

mutual fund:
the shorter and more popular term for an open-end investment company. See open-end fund, open-end investment company.

net asset value:
valuation based on the common practice for investment companies to compute assets daily, or even twice daily, by totaling the market value of all securities owned.

odd lot:
an amount of stock less than the established 100-share unit or 10-share unit of trading.

open-end fund:
mutual funds where new shares are sold when there is a request, with the expectation that the seller will request to buy back the shares at no extra charge. Compare closed-end fund.

out of the money:
when an option's strike price is higher than the market price of the underlying stock for a call, or is below the market price of the underlying stock for a put. See call option, put option. Compare in the money.

a security that has had a sharp rise, or a market as a whole after a period of vigorous buying, making prices too high. Opposite of oversold.

a single security (or a market) believed to have declined to an unreasonable level. Opposite of overbought.

a market made up of securities dealers who may or may not be members of a securities exchange. Securities are traded in the over-the-counter market between dealers who act either as principals or as brokers for customers; it is the principal market for U.S. government bonds, municipals, and bank and insurance stocks.

pink sheets:
a collection of price quotations of over-the-counter stocks published by the National Quotation Bureau; got its name because it is published on pink paper.

(1) dollar amount by which the market price of a bond exceeds its par value. (2) fee paid by a short seller to the lender of security that is sold short. (3) the amount at which a closed-end fund trades above its net asset value.

price/earnings ratio:
the price of a share of stock divided by earnings per share for a 12-month period; either the last fiscal year, the preceding four quarters (trailing earnings), or projections for future years (forward earnings); indicates the value investors place on a company's earnings.

private (financing) placement:
raising of capital for a business venture via private rather than public placement, resulting in the sale of securities to a relatively few number of investors. Such investments do not have to be registered with the SEC because no public offering is involved.

the printed summary of a registration statement filed with the SEC in conjunction with a public offering; contains details concerning the company issuing the shares and the price at which the shares are offered to the public. It must be provided to the original purchaser no later than the date of confirmation of their purchase. See proxy statement.

proxy statement:
information required by the SEC to be given stockholders as a prerequisite to solicitation of proxies for a listed security. See prospectus.

public offering:
See private (financing) placement, initial public offering.

put option:
a contract giving the right to sell a fixed number of shares at a fixed price in a stated time period. Compare call option.

real estate investment trust (REIT) :
an organization, usually corporate, established for the accumulation of funds for investing in real estate holdings. It pays out an established percentage of funds from operations in the form of a dividend to investors, in order to retain certain tax advantages.

relative strength:
measure of the market performance of a stock in comparison to its own industry and/or a market index for a stated time period.

secondary distribution (offering):
(1) the registered sale of securities, made by a selling holder of bonds or stocks. (2) the means of selling a large block of securities to investors by an earlier holder.

shares outstanding:
total number of shares issued by a corporation, excluding treasury stock.

short covering :
purchasing a stock to return stock that was previously borrowed to make delivery on a short sale.

short sale:
(1) any sale completed by the delivery of a borrowed certificate. (2) transaction made by an investor who believes a stock will decline and places a sell order, though he or she does not own any of those shares. See arbi-trage, buyback.

split :
the amendment of a firm's charter to increase (split up) or decrease (split down) the number of authorized shares; requires stockholder approval.

stock, common:
shares in a corporation representing ownership, with commensurate rights to share in dividends, capital appreciation, and risk.

stock, preferred:
company shares that pay a fixed annual dividend, can be called back at face value, and have priority over common stock in dividend payments, but usually lack voting rights. Compare stock, common.

stop order:
an instruction by a customer on an order to buy stock at a price above or sell stock at a price below the current market; cannot be made for an over-the-counter transaction. See market order.

strike (or striking) price:
(1) the fixed price of a put or call option (see definitions of those terms) (2) dollar value at which the holder of a share option can exercise it.

a company owned by another, which controls more than 50% of its voting stock.

support level :
the point where a market stops dropping because buyers start to outnumber sellers. Its reverse, the resistance level, is the point where the market peaks.

tax-exempt securities:
municipal securities, the interest of which is exempt from federal taxes, though not necessarily from state or local taxes.

trading range:
(1) the area in which a stock or a market has traded during a given period. (2) the trading limit established by a commodities futures exchange on a given commodity.

treasury bill (t-bill) :
short-term debt obligations of the U.S. government that mature within one year, often in 91 to 182 days; issued at a discount to face value. See bond, treasury. Compare treasury note.

treasury note:
U.S. government long-term security, sold to the public and having a maturity of one to 10 years. Compare treasury bill.

a way of saying that a stock is worth more than its current price, because of corporate earnings, market trends, or price/earnings ratios. Compare fully valued.

unissued stock:
that part of a corporation's authorized common and preferred shares never actually exchanged for money or services.

unit trust:
a fixed portfolio of stocks or bonds, held for a predetermined time, often one year.

venture capital:
funds invested in enterprises that normally do not have access to conventional sources of capital; usually for a new, risky business venture; providers usually demand a significant portion of the equity ownership.

a measure of a stock's tendency to move up/down in price, based on its daily price history for the last 12 months.

warrant :
certificate giving its holder the right to purchase securities at a stipulated price, either at any time or within a time limit.

wrap account:
a special brokerage arrangement, in which investors place their funds and pay a comprehensive annual fee in return for investment management, including the making and implementing of decisions, as well as the administering of them.

(1) the rate of return on an investment. (2) the percentage return on a security investment, such as a bond. Current yield is the rate of interest divided by the price; if the price falls, as happens when interest rates rise, then the yield increases. (3) a corporate dividend.

zero coupon:
bond bought at a discount to face value that pays face value on maturity. The longer the term, the deeper the discount, which is basically the discount that the seller pays, instead of the usual annual interest coupons attached to ordinary undiscounted bonds.


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