COOKING

Glossary of Investing Terms

A

After-Tax Profit Margin (%)
Net income divided by revenues.

Alpha
The return which results from bearing selection risk is called residual return or alpha. Alpha can be either positive, negative, or zero. An important objective of each investor or portfolio manager should be to strive for a positive alpha. This is the "value added" for departing from the overall market return and bearing the risk of selection.

Following is the formula used to calculate alpha:
Alpha = ( (Summation y) - b (Summation x) ) / n

where
b = beta, n = number of observations, x = rate of return of the S&P 500
y = rate of return for the security measured

Alternative Minimum Tax
A parallel tax system devised to ensure that at least a minimum amount of tax is paid by high-income individuals and corporations.

Annuity
An investment in which policy-holder makes a lump-sum or installment payments to an insurance company and receives income at retirement.

Ask price
The price a seller is willing to accept for the security; also called the offer price.

Asset
A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

Asset allocation
Dividing your investment portfolio among the major asset categories. Typically between stocks, bonds and cash equivalents.

Asset Allocation Funds
Mutual funds that feature a mix of stocks, bonds, and cash equivalents to meet the growth objectives of individual investors.

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B

Beta
A measure of a stock's risk relative to the market, usually the Standard & Poor's 500 index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.

A well diversified portfolio with a beta of 1.3, for example, would tend to be up or down 30% more in a given period than the market (S&P 500). Likewise, a well diversified portfolio with a beta of 0.8 would tend to be up or down 20% less than the market.

While beta has limited predictive reliability for any one security over short time periods, it has been found by experience to be highly useful as a forecasting tool over longer periods for well diversified portfolios, like most mutual funds.

Bid price
The price a buyer is willing to pay for a security.

Blue Chip
A common stock of an established company that has a long record of stable growth.

Bond
A security that obligates the issuer to repay the principal amount upon maturity and to make specified interest payments over specified time intervals to the bond holder. The issuer can be a corporation or a governmental entity. A bond is a debt obligation; the bondholder is a lender to the issuer and there is no ownership position.

Bond Maturity
The lifetime of a bond, concluding when the final payment of that obligation is due.

Book Value per Share ($)
Tangible common shareholders' equity on a per-share basis, calculated by dividing common shareholders' equity by the number of outstanding common shares at the end of the latest interim period. Intangibles, such as goodwill, debt, discount or preferred liquidating value, have been deducted.

Buy-and-hold
A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.

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C

Capital Gain
An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a "realized" capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year.)

Cash Investment
Very short-term (usually 90 days' maturity or less) obligation such as money market fund or very short-term CD that provides a return in the form of interest payments.

Certificate of Deposit
Short-term certificates of deposits offered by banks and savings and loan institutions. Fixed rate; FDIC insured.

Commission
Broker's fee for buying or selling securities.

Common Stock
Securities that represent an ownership interest in a corporation.

Common Stocks
Equity interest in a corporation.

Compound sum of an annuity
Constant payments are made at equally spaced time periods and grow to a future value.

Compounding
The computation of interest paid using the principal plus the previously earned interest.

Current Yield
Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.

Custodial Account
An account for the benefit of a minor with an adult as the custodian.

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D

Defined Benefit Plan
A company retirement plan in which you expect to receive a fixed amount on a regular basis from your employer, i.e. a pension. The employer is responsible for investing.

Defined Contribution Plan
A company retirement plan such as a 401 (k) or 403 (b), in which the employee elects to defer salary into the plan and directs the investments of that deferral.

Discount Bond
A bond that is valued at less than its face amount.

Discount Broker
A stockbroker who charges a reduced commission and provides no investment advice.

Discount Rate
The interest rate used in discounting future cash flows; also called the "capitalization rate."

Diversification
The allocation of assets among various types of investments. The process of accumulating securities in different investments, types of industries, risk categories, and companies in order to reduce the potential financial harm of loss from any one investment.

Dividends
The investor's share of the income earned by the company issuing the stock.

Dollar Cost Averaging
Buying securities at scheduled intervals at the same dollar amount. Usually used to lessen the risk of investing a large amount of money at a particularly inopportune time.

Dow Jones Industrial Average
Measure of the performance of the collection of 30 "blue-chip" stocks, considered the leaders of the market.

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E

Equity
Another word for stock (or similar securities representing an ownership interest).

Earnings per Share (EPS)
Actual net income before extraordinary items divided by the average number of common shares outstanding during the period.

Earnings per Share - Actual FY
The actual earnings per share as reported by the company on a "primary" basis.

Earnings per Share - Trailing 12 Months
Twelve months earnings per share through the latest interim period.

Ex-Dividend Date
The first day of trading when the stock trades without the dividend.

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F

Family of Funds
A group of mutual funds under the same management company.

Financial Planner
An investment professional that helps individuals delineate financial plans with specific objectives and coordinate various financial concerns.

Fiduciary
One who acts in the best interest and trust of a beneficiary or minor.

Fixed-Income Investment
Investments that produce steady income although principal may fluctuate in value.

Fixed-Income Security
An investment vehicle that provides a return in the form of fixed periodic payments and return of principal; examples are bonds and certificates of deposit.

Fundamental Analysis
This valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.

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G

GNMA (Ginnie Mae) Pass-through Certificate
Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association.

Going Public
Selling privately held shares to new investors on the over-the-counter market for the first time.

Government Bond
A debt obligation issued by the U.S. government.

Growth Stock
The shares of a company whose earnings are expected to grow at an above-average rate.

Guaranteed Investment (interest) Contract (GIC)
Debt instrument sold in large denominations often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk.

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H

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I

Income Stock
Those stocks having a history of regular dividend payments that contribute the largest proportion of the stock's overall return.

Index
A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the U.S.

Index Mutual Funds
Mutual funds that seek to replicate the performance of established securities indices.

Indexing
Investing for market returns by purchasing shares in an index fund.

Indicated Annual Dividend Rate ($)
Projects the annual shareholder dividend, based on recent cash payments.

Insider Trading
Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.

Investment Adviser
A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.

IRA
An Individual Retirement Account in which some or all the contribution may be deductible from current taxes, depending on the individual's adjusted gross income and coverage by an employer sponsored retirement plan.

Irrevocable Living Trust
An irreversible legal plan to transfer funds from the donor to the beneficiary, generally offering tax advantages.

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J

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K

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L

Liquid Reserve
Personal savings that can be accessed immediately.

liquidity
The degree of ease and certainty of value with which a security can be converted into cash.

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M

Marginal Rate
The tax rate you pay on your last dollar of income.

Market Capitalization
The total value of a company's stock. Number of common stock shares outstanding times share price. Provides a measure of firm size.

Market Risk
The volatility of a stock price relative to the overall market as indicated by beta.

Market Timing
Attempting to leave the market entirely during downturns and reinvesting when it heads back up. Requires a crystal ball to be effective.

Maturity
The length of time until the principal amount of a bond must be repaid.

Money Market Account
A vehicle in which accumulated funds are invested in various short-term securities.

Money Market Mutual Fund
A mutual fund that invests in very short-term financial securities, usually of less than 30 days maturity.

Mortgage-Backed Bonds
Bonds that derive their income from a pool of mortgages.

Municipal Bonds
The obligation of states, cities, towns, school districts, and public authorities. In general, interest paid on municipal bonds is exempt from federal taxes.

Mutual Fund
A managed collection of investments sold to the public in shares of the overall fund. The share price in a mutual fund is called net asset value.

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N

Net Asset Value
The market value of a mutual fund's total assets, after deduction of liabilities, divided by the number of outstanding shares; the per share price of no-load mutual funds.

Net Income
Income for the period indicated from all sources including discontinued operations, after deduction of expenses, taxes and interest - but before deducting dividends or extraordinary items.

New York Stock Exchange index
A market value-weighted measure of stock market changes for all stocks listed on the NYSE.

No-load Mutual Fund
A mutual fund that does not charge a fee to buy the fund at the time of purchase or at time of sale.

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O

Operating Margin (%)
Operating income divided by revenues.

Over-The-Counter Market
A communications network through which trades of bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).

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P

Price-Earnings Ratio (PE Ratio)
Price of the company's common stock as of the close of the previous trading day divided by the actual or estimated (as indicated) earnings per share for the period indicated.

Price-Earnings Ratio - Current (Current PE)
The closing stock price from the previous trading day divided by earnings per share for the last 12 months.

Price-Earnings Ratio - 5 Year High/Low
PE ratio range calculated by dividing annual earnings into high and low common stock price for the calendar year.

Preferred Stocks
A security representing prior claim to common stock on the firm's earnings and assets. Preferred stockholders normally forgo voting rights and receive a fixed dividend that takes precedence over payment of dividends to common stockholders.

Present Value
The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.

Principal
The amount of money that is financed, borrowed, or invested.

Prospectus
The written statement that discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus.

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Q

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R

Return
Consists of income plus capital gains relative to investment.

Return on Assets (%)
Net income divided by total assets for the period indicated.

Return on Equity (%)
Net income divided by common stockholders' equity.

Revenue
Sales net of excise taxes, plus operating revenues for the period indicated.

Revenue Bond
A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.

Risk
Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.

Risk/Return Factor
The relationship between your investment's growth potential and its exposure to loss.

Rollover IRA
A tax-free transfer of assets from one qualified plan to another.

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S

Security Analyst
One who studies various industries and companies and provides research reports and valuation reports.

Shareholders' Equity
Owners' interest in the assets of the company as measured by the total amount invested by shareholders, adding profits and/or subtracting losses.

Shares Outstanding
The most recent common stock issued and in public hands. Excludes those shares repurchased by issuer as treasury stock. All historical shares outstanding are adjusted for stock splits.

Standard & Poor's 500 Index
An index of 500 major U.S. corporations. There are 400 industrial firms, 20 transportation firms, 40 utilities, and 40 financial firms. This index is value-weighted.

Stock Dividends
A dividend paid in securities rather than cash.

Stock Split
The division of a company's existing stock into more shares. In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held.

Stockbroker
An agent who for a commission handles the public's orders to buy and sell securities.

STRIPS
Zero-coupon Treasuries issued by the U.S. at a discount from face value. Interest is paid as a lump sum at maturity.

Surrender Charges
Fees for terminating your annuity contract before it matures.

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T

Technical Analysis
An analysis of price and volume data as well as other related market indicators to determine past trends that are believed to be predictable into the future. Charts and graphs are often utilized.

Time Horizon
The length of time an investment is held.

Treasury Bill
Short-term debt security issued by the federal government for periods of one year or less.

Treasury Bond
Longer-term debt security issued by the federal government for a period of seven years or longer.

Treasury Note
Longer-term debt security issued by the federal government for a period of one to seven years.

Trust Account
A legal plan by which the trustor places assets in trust for a beneficiary.

Turnover Ratio
The Turnover Ratio indicates the percentage of the mutual fund's stock holdings that are bought and sold in a given year.

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U

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V

Value Line Index
The index represents 1,700 companies from the New York and American Stock Exchanges and the over-the-counter market. It is an equal-weighted index, which means each of the 1,700 stocks, regardless of market price or total market value, are weighted equally.

Variability
The possible different outcomes of an event. As an example, an investment with many different levels of return would have great variability.

Vested
The percentage of ownership in your retirement plan assets.

Volume
The number of shares traded during a period, usually scaled in thousands.

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WXYZ

Yield
The amount of interest paid on a bond divided by the price. A measure of the income generated by a bond. A yield is not a total return measure because it does not include capital gains or losses.

Yield Curve
A curve that shows interest rates at a specific point for all securities having equal risk but different maturity dates. Usually, government securities are used to construct such curves.

Yield to Maturity
The rate of return anticipated on a bond if it is held until the maturity date.

Zero-coupon Bond
A bond that generates no periodic interest payments and is issued at a discount from face value. All return is realized at maturity.

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0-9

40 Day Average Volume
Average number of shares traded per day over the last 40 trading days as reported by the security's primary exchange.

401 (k)
A type of salary deferral plan that allows employees to make pre-tax contributions, which reduce their taxable income. Employers can match some or all funds.

403 (b)
A qualified retirement plan designed for non-profit organizations.

5 Year Divided Growth Rate
Based on payment date. Shows dividend growth rate for last five calendar (Jan to Dec) years using the sixth year as a base year for the next five. Growth is measured using the least squares method.

5 Year Earnings Growth
Show the compounded annual rate of per share earnings growth for the latest five years. Includes the last 12 months interim earnings per share (EPS) when available.

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