Investing Glossary

Here is an investing glossary for your reference. These investing terms are constantly referred to in investment books and articles…

Stock Exchange – A Marketplace the where securities are traded

Secondary Market – A marketplace is where investors purchase securities or assets from other investors, rather than buying it from the issuing company.

Income Statement – A financial document that show a company’s performance often on an annual and quarterly basis. The income statement summarizes sales and all associated operating coasts.

Balance sheet – A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a certain point of time.

Cash Flow Statement – A financial statement that show all cash inflows and outflows from operation and external investments.

Prospectus – A legal document that is filed with the Securities and Exchange Commission. It provides details about an investment that is sold to the public.

Price-Earnings Ratio (P/E Ratio) – A valuation of a company’s share price compared to its earnings per share. This ratio is commonly used by investors to determine the value of a company.

Earnings per share – Total earning divided by shares outstanding.

Dividend - A share of a company's net profits distributed by the company to its stockholders.

Dividend yield – A ratio that show what the divided is in relation to the company’s stock price (divided per share / price per share)

Dividend Payout Ratio – A percentage of earnings paid to shareholders in dividends (Annual dividends per share / earnings per share)

Dividend Policy – A policy dictating what percent of earnings should be paid to shareholders in the form of dividends.

Earnings – An amount of profit a company produces during a specific time period. It is typically measured per year or per quarter.

Common stock – Shares that represents ownership in a corporation. Owners of common stock have the right to elect a board of directors and voting on corporate policy.

Preferred Stock – Shares of a company whose dividend and liquidation value must be paid before common stocks.

Liquidity – The degree to which a security can be bought and sold in the market without affecting the securities price.

Stock - Ownership shares in a corporation.

Equities – Stocks, bonds, other securities

Securities – Stocks, bonds, futures contracts, derivatives contracts, mortgages, etc

Dow Jones industrial average (DJIA) – An index made up of some of the 30 largest companies in USA

S&P500 – An index made up of the 500 largest companies on the stock exchange

Index Fund – A fund that tracks an index such as DIJA, S&P500, etc.

IPO – Initial public offering. This is the first sale of stock from a private company that is going public.

Inflation – The definition of inflation in the Austrian school of economics refers that the increase of money supply. Not the increase in prices. The increase in prices comes after the increase of money.

Credit Rating – The credit worthiness of a company based on its history of borrowing and repayment, as well as its ability to payback based on its assets and liabilities.

Bear Market – A contracting market where prices of stocks are falling. Widespread pessimism is frequent during a bear market. The contractions vary but a 20% or larger decline typically indicate a bear market.

Bull Market – A situation where stocks are rising in value and they expect to continue rising. There is widespread optimism among investors and traders during a bull market.

Dilution – A company is issuing additional shares and reducing the earning of the existing shares outstanding.

Long Term Capital Gain – A capital gain realized 12 months or more after purchase. Long term capital gains have favorable tax incentives.

Capital Preservation – Protecting the initial investment from loss of principal, typically accomplished by investing in conservative or guaranteed vehicles.

Diversification – Spreading risk around multiple assets.

Dollar Cost Averaging – A strategy used to buy a fixed-dollar-amount of a security according to schedule. This strategy will average the unit cost over time.

Emerging Markets – Developing foreign markets like China, India, Russia, etc. These markets tend to have higher growth and less developed infrastructure.

Long Position – A purchase of a security and a bet that is will go up in price.

Market Timing – An attempt to predict the future of the market and buy at the right time to profit. Technical charts are typically used to time the market.

Junk Bonds – High risk bonds with low credit rating and a higher default risk.

Money-Market Account – A highly liquid financial instrument with short maturities. It is made up certificates of deposits (CDs), commercial paper, US treasury bills, municipal notes, federal funds and repurchase agreements (repos).

Net Asset Value (NAV) – The per share market value of a mutual fund or an exchange traded fund (ETF).

No-load Fund – A mutual fund in with shares sold without a commission.

Portfolio – A group of securities owned by a single owner (Individual or Institution).

Redemption – Liquidation of shareholder’s holdings.

Volatility – Uncertainty or risk about a security’s value. This causes the price do dramatically change in either direction over a short period of time. The higher the volatility the more change you are likely to see.

Yield – It refers to the income return on an investment. It is the interest or dividend received from a security and it is typically expressed on an annual basis.

52-Week High/Low – It is the highest or lowest point that stock has traded during the past 52 weeks.

Annual Report – It is an annual report that a corporation provide to shareholders to describe operations and financial conditions.

Blue Chip – A large well recognized and financially stable company.

Growth Stocks – Stocks whose earnings are expected to grow above the average rate relative to the market as whole. These stocks typically trade at a higher P/E ratio.

Income Stock – Companies that historically have paid out regular dividends.

Penny-Stock – Low priced stock. It includes most shares under $1.

Cyclical Stock – Stocks that rapidly goes up in price during economic growth and quickly falls in value during a recession.

Defensive Stocks – A company that has stable earnings in both economic upturns and downturns.

Bonus Issue – Distribution of free shares to existing shareholders. This is typically done as an alternative to dividend payout.

Capital Gain – Increase in an assets value since purchase.

Credit Risk – A risk that the issuer will default on his debt.

Delisting – A removal of a company form the stock exchange where it trades.

Insider – A person that has knowledge of valuable nonpublic information about a company.

Margin of Safety – A principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. The investor buys a company that he estimates is far below its fair market value.

Market Capitalization – It refers to the total dollar value of all of a company’s shares outstanding (Price per share x all outstanding shares)

Mergers and Acquisitions – A merger of two corporations into one. One company is buying another company without forming a new company.

Reverse Stock Split – A reduction of the number of shares and increase of value by the same amount.

Split – A transaction when the where the shareholder’s shares are increased and the value of the shares are decreased. The net value is not changed.

Small Cap Stocks – Stocks with a relatively small market capitalization

Margin calls – It occurs when investors is using leverage (or borrow money from the broker to buy a stock). If the price of the stock decreases in value the broker will ask the investor to add more equity to this position. If the investor is not able to increase his equity share in stock the broker will then liquidate or foreclose the on the stock.

Speculative Stock – Stocks with high risk but high reward possibility.

Selling Short – This is a practice when an investor bet that the price of the equity will be going down.

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