Glossary of Terms
Ask: This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted offer at which an investor can buy shares of stock.
Basis Point: In the bond market, the smallest measure used for quoting yields is a basis point. One basis point is 0.01 percent of a bond's yield. Basis points are also used for interest rates. An interest rate of 5.0 percent is 50 basis points greater than an interest rate of 4.50 percent.
Beta: A measure of the fund's sensitivity to stock market movements. The beta of the market is always 1.00 by definition. A beta greater than 1.00 implies that the fund's return is expected to be greater than the market's return. A beta less than 1.00 implies that the fund's return is expected to be less than the market's return.
Bid: This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically speaking, this is the available price at which an investor can sell shares of stock.
Book Value: A company's book value defined as: total assets minus intangible assets and liabilities. A company's book value might be more or less than the market value of a company.
Closed-end Fund: A closed-end fund is a type of mutual fund that issues a limited number of shares. After that, shares can only be purchased or sold among investors or an established exchange. A fund's shares, for example, can trade below their net asset value or above their net asset value depending on investor's demand for the shares.
Consumer Price Index: The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S. Department of Labor publishes the CPI every month.
Consumer Stock: The stock of a company that produces consumer-oriented products like food, beverages, tobacco, pharmaceuticals.
Current Yield: The yield is a measure of income on a security. It is computed by dividing the amount of annualized income by the current price of the security. A $10 stock that pays a 50 cent dividend for the year has a 5% yield.
Cyclical Stock: The stock of a company whose fortunes are closely tied to the cyclical ups and downs of the economy in general. For example, General Motors is a cyclical stock since business of selling autos is highly dependent on a robust economy - high levels of employment, rising personal incomes, etc.
Deferred Fees: Also known as back-end sales charges, are imposed when investors remove money from a mutual fund. The percentage charged generally declines the longer the shares are held.
Discount Rate: The interest rate charged by the U.S. Federal Reserve, the nation's central bank, for loans to member banks. The Fed, as it is called, alters rates to increase or decrease the growth of the nation's economic output.
Dividend: A dividend is a portion of a company's profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5 percent.
Dow Jones Industrial Average: The best known U.S. stock index, it contains 30 stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.
Duration: A measure of a bond price's sensitivity to a change in interest rates. The duration (measured in years) multiplied by the percentage change in interest rates. Predicts the effect on the bond or bond funds price. For example if your interest rate changes by 1% and you own a bond fund with a 6 year duration you can expect to see a 6% drop in the price of your bond fund.
Earnings Per Share: EPS, as it is called, is a company's profit divided by its number of shares. If a company earned $2 million in one year and had 2 million shares of stock outstanding, its EPS would be $1 per share.
Ex-dividend: This literally means "without dividend." The buyer of shares quoted ex-dividend is not entitled to receive a declared dividend.
EDGAR: The Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit company documents to investors. Those documents include 10-Q's (quarterly reports), 8-K's (significant developments such as the sale of a company unit) and 13-D's (disclosure by parties who own 5% or more of a company's shares).
Exchange: There are three main U.S. stock exchanges on which securities are traded. AMEX is the American Stock Exchange. NASDAQ is the National Association of Securities Dealers. NYSE is the New York Stock Exchange.
Expense Ratio: A figure taken from a mutual fund's prospectus that represents the percentage of fund assets paid for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund's NAV (Net Asset Value). Sales charges are not included in the expense ratio. The expense ratio is useful because it shows the actual amount that a fund takes out of its assets each year to cover its expenses. Investors should note not only the expense figure, but also the trend in these expenses. It could prove useful to know whether a fund is becoming cheaper or more costly.
Federal Funds Rate: This is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction of U.S. interest rates. The Federal Reserve raises or lowers the Fed Funds rate to control the growth of the U.S. economy.
Float: The number of shares of a security that are outstanding and available for trading by the public.
Front-end Load: The initial, or front-end, sales charge is a one-time deduction from an investment made into a mutual fund. The amount is generally relative to the amount of the investment, so that larger investments incur smaller rates of charge. The sales charge serves as a commission for the broker who sold the fund.
Growth Stock: The stock of a company which possesses an above-average growth rate.
Initial Public Offering: An IPO is stock in a company that is being traded on an exchange for the first time. Investors should first read a prospectus that describes the potential of the company and the risks of investing in it.
Junk Bond: (Also called "High Yield Bonds") Bonds with a speculative credit rating of BB or lower. Such bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poors and Moody's Investor Services, provide the rating systems for companies credit.
Limit Order: Investors can place an order to buy or sell securities at a set price. The trade can take place only at that price or a lower one.
NAV: Net Asset Value, which is the fund's share price. Funds compute this value by dividing the total net assets by the total number of shares.
Open-end Mutual Fund: A fund that sells its shares continually at net asset value. It creates shares as investors demand them. Investors buy the shares at market price. Most mutual funds are open-end funds. Those that are not are closed-end funds that sell a fixed number of shares to investors.
PEG Ratio: The Projected Earnings Growth of a company as it compares with its P/E ratio. It is calculated by dividing a company's P/E ratio by its earnings growth rate. Investors use this ratio in an attempt to find a fast growing stock at a cheap price. Investor look for a stock with a PEG ratio of less than 1. This suggests that the price should rise sharply in future months.
Preferred Shares: Preferred shares give investors a fixed dividend from the company's earnings. And more importantly, preferred shareholders get paid before common shareholders. Preferred stocks generally appreciate less than common stocks.
Price/Book Ratio: The Price/Book ratio of a company is calculated by dividing the market price of its stock by the company's per-share book value. In theory, a high P/B ratio indicates that the price of the stock exceeds the actual worth of the company's assets, while a low P/B ratio indicates that the stock is a bargain.
Price/Cash-Flow Ratio: The ratio between the fiscal year-end market price and the cash earnings per share. Price/cash-flow represents the amount an investor is willing to pay for a dollar generated from a particular company's operations. Price/cash-flow shows the ability of a business to generate cash and acts as a gauge of liquidity and solvency.
Price/Earnings Ratio: The P/E ratio of a stock is calculated by dividing the current price of the stock by its earnings per share for the company's most recent four quarters. A projected P/E divides the share price by estimated earnings per share for the coming four quarters.
Prime Rate: The interest rate banks charge, their best customers. It is determined by market forces affecting a bank's cost of funds and the rates the borrowers will accept. This rate tends to become standard for the banking industry when a major bank raises or lowers its rate.
12b-1 Fees: The maximum annual charge deducted from a mutual fund's assets to pay for distribution and marketing costs.
Record Date: The date on which a shareholder must officially own shares in order to be entitled to a dividend. After the date of record, the stock is said to be ex-dividend.
Redemption Fees: An annual amount charged when assets are withdrawn from some mutual funds and annuities.
R-Squared: Reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An mutual of 100 indicates that all movements of a fund are completely explained by the movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100 (some fall short of the 100 mark because expense ratios are figured in). Example: Vanguard Index 500 has an R-squared of 100.
Return On Equity: Return on equity measures the return, expressed as a percentage, earned on a company's common stock investment for a specific period of time. It is calculated by dividing the firms income by its total equity. The calculation is performed after preferred stock dividends and before common stock dividends. The figure shows investors how well, or how effectively, their money is being used by managers.
Shareholders' Equity: This is a company's total assets minus total liabilities. Also referred to as net worth.
Sharpe-Ratio: A risk-adjusted measure that uses standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe-Ratio, the better the fund's historical risk-adjusted performance.
Standard Deviation: A statistical measurement of dispersion about an average that depicts how widely the returns varied over a certain period of time. Investors use the standard deviation to try to predict the range of returns that are most likely for a given fund. When a fund has a high standard deviation, the predicted range of performance is wide, implying greater volatility.
Turnover Ratio: This is a measure of a mutual fund's trading activity. The percentage represents the percentage of the portfolio's holdings that have changed over the past year.
Value Stock: A stock perceived by the marketplace to be undervalued based on criteria such as its price-to-earnings ratio, price-to-book ratio, dividend yield, etc.
Zero Coupon Bond: A debt security that pays an investor no interest. It is sold at a discount to its face price and matures in one year or longer.
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