Investment Terms Glossary

By David S. Chang

Investment Terms Glossary

A 401(k) plan is an employer sponsored retirement savings plan. 401(k)s are largely self-directed: You decide how much you would like to contribute, and which investments from among those offered by the plan you would like to invest in. Traditional 401(k)s are funded with money deducted from your pre-tax salary. Your earnings are tax deferred until you withdraw your money from your account. Roth 401(k)s are funded with after-tax income, but withdrawals are tax free if you follow the rules.

A 403(b) plan, sometimes known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA), is an employer sponsored retirement savings plan for employees of not-for-profit organizations, such as colleges, hospitals, foundations and cultural institutions. Some employers offer 403(b) plans as a supplement to—rather than a replacement for—defined benefit pensions.

These tax-deferred retirement savings plans are available to state and municipal employees. Like traditional 401(k) and 403(b) plans, the money you contribute and any earnings that accumulate in your name are not taxed until you withdraw.

Accounts Payable
Money a company owes to its to suppliers. Accounts payable are a liability of the company.

Accounts Receivable
Money a company is owed by its customers. Accounts receivable are an asset of the company.

Accounts Receivable Turnover (also known as Receivables Turnover)
A figure used to measure how quickly customers pay their bills. It is calculated by dividing credit sales for a specific period by the average accounts receivable.

Accrual Basis Accounting
A method of accounting that reports income when it is earned (although not necessarily yet received) and expenses when incurred (even if bills are paid later). This is in contrast to cash-basis accounting, which reports income when it is actually received and expenses when they are actually paid.

Accumulated Earnings
See Retained Earnings.

Acid-Test Ratio
See Quick Ratio.

Agency security
Debt security issued or guaranteed by an agency of the federal government or by a government-sponsored enterprise (GSE). These securities include bonds and other debt instruments. Agency securities are only backed by the “full faith and credit” of the U.S. government if they are issued or guaranteed by an agency of the federal government, such as Ginnie Mae. Although GSEs such as Fannie Mae and Freddie Mac are government-sponsored, they are not government agencies.

Allowance for Bad Debt
Money a company sets aside to cover the possibility that some customers may not pay their debts.

Altman Z-Score
A credit scoring methodology that attempts to gauge the likelihood that a company will file for bankruptcy based on several metrics. 

Allocation and charge to expenses of the cost of intangible assets over their useful life. It also refers to the process of accounting for the reduction of debt through regular payments over a set time period and/or in accordance with a pre-determined schedule.

Annual Report
A colorful, glossy brochure that a company sends out to shareholders, which includes audited financial statements and a report from management. The Form 10-K that the company must file with SEC contains more detailed information.

Annual report for Retirement Plans
Your plan administrator must file an annual report with the IRS using Form 5500. The report, which you may request from your plan administrator, includes information on plan participation, funding and administration.

Anything that a company owns that has monetary value. Examples of assets include buildings and equipment, cash, accounts receivable, short- and long-term investments, inventories, or prepaid expenses. Assets are listed on the company’s balance sheet.

Asset allocation
Asset allocation means dividing your assets on a percentage basis among different broad categories of investments, including stocks, bonds and cash. Asset allocation is a strategy for reducing the risk associated with investing. Since your portfolio is spread among different asset classes, it’s less likely that they will all perform badly at the same time. Finding the right mix of assets depends on your age, your assets, your financial objectives and your risk tolerance.

Asset class
Different categories of investments that provide returns in different ways are sometimes described as asset classes. Stocks, bonds, cash and cash equivalents, real estate, collectibles and precious metals are among the primary asset classes.

Average maturity
The average time that a mutual fund’s bond holdings will take to be fully payable. Interest rate fluctuations have a greater impact on the price per share of funds holding bonds with longer average lives.

Balance Sheet
A summary of a company’s assets, liabilities, and shareholder’s equity.

Balanced fund
Balanced funds are mutual funds that invest in a combination of common stock, preferred stock and bonds or other fixed-income investments to meet their dual investment goal of seeking a strong return while minimizing risk.

Bear market
A bear market is one in which stock and/or bond prices decline over an extended period of time, at times accompanied by an economic recession, rising inflation or rising interest rates.

A stock market benchmark is an index or average whose movement is considered a general indicator of the direction of the overall market and against which investors and financial professionals may measure the performance of individual stocks or market sectors. There are also benchmarks for other types of investments, such as bonds, mutual funds and commodities.

A measure of the volatility of a stock relative to an overall market index during a given time period. The market has a beta of one; therefore, a security with a beta of one is exactly as volatile as the market. A beta of less than one indicates lower volatility than the market; a beta of more than one indicates higher volatility than the market. Sometimes, beta values can be negative, indicating that the stock moved in the opposite direction of the market index during the given time period. In most cases, negative betas are short-lived and not indicative of the underlying volatility of the stock.

A debt instrument, also considered a loan, that an investor makes to a corporation, government, federal agency or other organization (known as an issuer) in which the issuer typically agrees to pay the owner the amount of the face value of the bond on a future date, and to pay interest at a specified rate at regular intervals.

Owner of a bond; may be an individual or institution such as a corporation, bank, insurance company or mutual fund. A bondholder is typically entitled to regular interest payments as due and return of principal when the bond matures.

Bond rating
A method of evaluating the quality and safety of a bond. This rating is based on an examination of the issuer’s financial strength and the likelihood that it will be able to meet scheduled repayments. Ratings range from AAA (best) to D (worst). Bonds receiving a rating of BB or below are not considered investment grade because of the relative potential for issuer default.

Book Value              
A company’s assets, minus liabilities and intangible assets

See FINRA BrokerCheck

Brokerage window
Some 401(k) plans allow participants to invest in stocks and funds offered by a brokerage firm selected by your plan administrator. This is often referred to as a brokerage window, or a self-directed account. 

Bull market
A bull market is one in which prices rise during a prolonged period of time.

The issuer’s right to redeem outstanding bonds before the stated maturity.

Call Protection
A feature of some callable bonds that protects the investor from calls for some initial period of time.

Call Risk
The risk that a bond will be called prior to its maturity date, causing the bond’s principal to be returned sooner than expected. If the bondholder wishes to reinvest the principal, it usually must be done at a lower rate than when the bond was originally purchased.

Capital Appreciation                     
An increase in the market price of an asset, such as stock

Capital Expenditures (capex)
Investments in physical assets that are needed to support the operations of a company, including factories, office buildings and capital equipment.  

Capital Gains Tax (CGT)
A capital gains tax is due on profits you realize on the sale of a capital asset, such as stock, bonds or real estate. Long-term gains, on assets you own more than a year, are taxed at a lower rate than ordinary income while short-term gains are taxed at your regular rate. Assets held for over five years may be taxed at an even lower capital gains rate.

The sum of a company’s long-term debt, stock, and retained earnings.

Cash Balance Plan
A cash balance retirement plan is a defined benefit plan that has some characteristics of a defined contribution plan, such as portability. The pension benefit accrues over time from contributions, based on a percentage of your current pay, which are credited to a hypothetical account in your name.

Cash Basis Accounting                  
A method of accounting that reports income when it is actually received and expenses when they are actually paid. This is in contrast to accrual basis accounting, which reports income when it is earned (although not necessarily yet received) and expenses when incurred (even if bills are paid later).

Cash Flow                          
A measure of the inflows and outflows of cash experienced by a company. You can find this information in the company’s Statement of Cash Flows. 

Cash Flow Statement                    
See Statement of Cash Flows.

Collateralized Mortgage Obligation (CMO)
A bond backed by multiple pools (also called tranches) of mortgage securities or loans.

The fee paid to a broker for executing a securities trade. If your 401(k) plan has a brokerage window, you should be aware of how high the commissions will be when you trade and what impact those costs may have on your return.

Common Stock                
Securities representing ownership in a corporation, which provide voting rights and entitle the holder to a share of the company’s success through dividends or capital appreciation.

Comparables (“comps”)
A group of companies that are in the same line of business as the target company. Often used to compare profitability, efficiency and valuation metrics between companies to determine which is the most profitable, efficient or attractively priced. 

Consensus Ratings/Consensus Estimates                            
The average of several analysts’ recommendations concerning the securities of a particular issuer.

A contrarian is an investor who buys things other investors are shunning. If most investors are buying stocks, a contrarian is concentrating on building a bond portfolio or putting more money into cash investments. Contrarians may also invest in unpopular market sectors and/or styles. Contrarian mutual funds use this approach as their investment strategy, concentrating on building a portfolio of out-of-favor (and therefore often undervalued) investments.

Contribution Level
A measure of a company’s non-variable costs. Defined as Sales minus Variable Costs.  

Contribution Margin
Contribution Level divided by Sales. This ratio shows the percentage of a company’s Sales that are available to pay non-variable costs (e.g. Depreciation).  

Convertible bond
A bond with the option to convert into shares of common stock of the same issuer at a pre-established price.

Corporate bond
A bond issued by a corporation to raise money for capital expenditures, operations and acquisitions.

The interest payment made on a bond, usually paid twice a year. A $1,000 bond paying $65 per year has a $65 coupon, or a coupon rate of 6.5 percent. Bonds that pay no interest are said to have a “zero coupon.” Also called the coupon rate.

Coupon yield
The annual interest rate established when the bond is issued. The same as the coupon rate, it is the amount of income you collect on a bond, expressed as a percentage of your original investment.

Credit risk
The possibility that the bond’s issuer may default on interest payments or not be able to repay the bond’s face value at maturity.

A person or company who provides credit to another person or company functions as a creditor. For example, if you take out a mortgage or car loan at your bank, then the bank is your creditor. But if you buy a bond issued by a corporation or other institution, you are the creditor because the money you pay to buy the bond is actually a loan to the issuer.

Current Assets                 
Assets that are easily convertible to cash. Cash, short-term investments, and accounts receivable are examples of current assets, as they should result in cash within the next year.

Current Liabilities                          
Debt or other obligations that are payable within the next year. 

Current Liabilities to Inventory Ratio                    
A ratio calculated by dividing current liabilities by inventory. This ratio yields an indication of the extent to which a company relies on funds from disposal of unsold inventories to meet its debts. 

Current Ratio                    
A ratio calculated by dividing a company’s current assets by its current liabilities. The higher the ratio, the more easily a company can meet its short-term debts.

Current yield
The yearly coupon payment divided by the bond’s price, stated as a percent. A newly issued $1,000 bond paying $65 has a current yield of .065, or 6.5 percent. Current yield can fluctuate: If the price of the bond dropped to $950, the current yield would rise to 6.84 percent.

An unsecured bond backed solely by the general credit of the borrower.

Money the company borrowed and must repay.

Debt-to-Equity Ratio                     
A ratio calculated by dividing a company’s long-term debt by its stockholders’ equity. Because long-term debt reflects obligations that a company must eventually repay, a high ratio may indicate high risk.

Debt Security
Any security that represents loaned money that must be repaid to the lender.

Deferred annuity
A deferred annuity contract allows you to accumulate tax-deferred earnings during the term of the contract and sometimes add assets to your contract over time. Your deferred annuity earnings may be either fixed or variable, depending on the way your money is invested. Deferred annuities are subject to withdrawal rules so you may owe a 10 percent penalty if you withdraw earnings before you reach age 59½. Surrender charges also may apply.

Defined benefit plan
A defined benefit plan provides a specific income for retired employees, either as a lump sum or as a pension, or lifetime annuity. The pension amount usually depends on the employee’s age at retirement, final salary and the number of years on the job.

Defined contribution plan
A defined contribution plan is an employer sponsored retirement plan. The income the plan provides is not predetermined or guaranteed, as it is with a defined benefit pension. Rather, it varies according to how much is contributed to the plan, how the contributions are invested and what the return on that investment is. 401(k), 403(b), 457 and profit-sharing plans are examples of defined contribution plans.

For accounting and tax purposes, the allowance made to reflect a tangible asset’s loss in value over time.

The amount by which a bond’s market price is lower than its issuing price (par value). A $1,000 bond selling at $970 carries a $30 discount.

Discount Rate                   
The interest rate that the Federal Reserve charges on its loans to banks.

Discounted Cash Flow (DCF)                      
The present value of future cash flows.

Diversification is an investment strategy for spreading your principal among different markets, sectors, industries and securities. The goal is to protect the value of your overall portfolio in case a single security or market sector takes a serious downturn and drops in price.

Portion of a company’s earnings paid to shareholders. Dividends are usually paid on a quarterly basis.

Dividend Payout Ratio
The percentage of a company’s current earnings that are being paid out as a dividend. Defined as Dividends per Share divided by Earnings per Share. Companies with dividend payout ratios nearing or exceeding 100% may be at risk of reducing their future dividends if the business experiences any decline in profits.  

Dividend Yield                 
The annual percentage rate of return a stock earns from its dividends. You get the dividend yield by dividing the annual dividend by the stock’s current market price.

Dow Jones Industrial Average (DJIA or “the Dow”)                         
A price-weighted average of 30 actively traded blue chip stocks. It is the oldest and most traditionally quoted indicator of changes in the market.

The amount of money remaining after a company pays its bills, taxes, and other expenses. It is also known as net income or net profit. Publicly traded companies usually report their earnings on a quarterly basis.

Earnings Per Share (EPS)                             
A company’s earnings, divided by the number of total shares outstanding. EPS tells you how much of a company’s profit is attributed to each outstanding share of its common stock.

Earnings before interest and taxes.

Earnings before interest, taxes, depreciation, and amortization.

EDGAR (Electronic Data Gathering, Analysis, and Retrieval)                       
The SEC’s electronic system that provides online access to many of the documents publicly traded companies file with the SEC. (

Employer sponsored retirement plan
Employers may offer their employees either defined benefit or defined contribution retirement plans, or they may make both types of plans available. Any employer may offer a defined benefit plan, but certain types of defined contribution plans are available only through specific categories of employers. However, employers are not required to offer plans.

Enterprise Value:
An estimate of the actual price that a buyer would need to pay in order to become the sole owner of a company by purchasing all of the outstanding debt and equity of the company. Enterprise Value is equal to the company’s current market capitalization plus the book value of all outstanding debt minus the value of all cash & cash equivalents owned by the company. The value assumes that the buyer repays all outstanding debt at par and purchases all outstanding shares at the current market price. Enterprise value gives a more accurate picture of the total amount of capital (debt plus equity) that is used by a company.        

Event risk
The risk that an event will have a negative impact on a bond issuer’s ability to pay its creditors.

Equity fund
Equity mutual funds invest primarily in stocks. The particular stocks a fund buys depends on the fund’s investment objectives and management style.

The Employee Retirement Income Security Act of 1974 (ERISA) sets certain standards for 401(k) plan administrators and requires uniform rights for plan participants.

A company’s incurring of liabilities, or outflow or depletion of assets, through carrying out the activities that constitute their central operation.

Expense ratio
An expense ratio is the amount you pay annually to a mutual fund for operating expenses and management fees, expressed as a percentage of the net asset value of your investment in the fund.

Face value
The amount the issuer must pay to the bondholder at maturity, also known as par.

Financial Statements                    
Reports of a company’s past financial performance and current financial position. The four primary financial statements are the balance sheet, income statement, statement of shareholder’s equity, and the statement of cash flows.

FINRA BrokerCheck
FINRA BrokerCheck is a resource for learning about the professional background, registration/license status and conduct of brokerage firms, individual brokers, investment advisers and firms. If your 401(k) plan has a brokerage window, or if you roll your 401(k) into an IRA at a brokerage firm, you’ll want to use FINRA BrokerCheck to check out the firm and its brokers.

Fiscal Year (FY)                
A 12-month period over which a company accounts for its financial operations. Many companies calculate their financial data over a 12-month period that does not start on January 1. For example, a company’s fiscal year may start in April and end the following March. Not all companies use the same fiscal year.

Fixed Assets                     
Long-term assets, such as manufacturing equipment, furniture, and real estate, held for business use and not expected to be converted to cash in the current or upcoming fiscal year.

Fixed-rate bond
A bond with an interest rate that remains constant or fixed during the life of the bond.

That portion of a company’s total shares outstanding that can be bought and sold by the public. It is often expressed as a percentage of the total shares outstanding.

Floating-rate bond
A bond with an interest rate that fluctuates (floats), usually in tandem with a benchmark interest rate during the life of the bond.

Form 10-K                          
The Securities and Exchange Commission (SEC) requires most publicly traded companies to file an annual report each year on Form 10-K. This report gives the preceding year’s audited financial results and management’s plans for the upcoming year. 10-K are public and you may obtain them online by accessing EDGAR, a service offered by the SEC. (

Form 10-Q                          
The SEC requires most publicly traded companies to file certain pro forma financial information each quarter on Form 10-Q. 10-Q are public and you may obtain them online by accessing EDGAR, a service offered by the SEC. (

Free Cash Flow
A measure of the cash that a company has at its disposal after making the necessary capital expenditures to maintain the existing asset base of the company. Defined as Cash Flow from Operations minus Capital Expenditures.    

Free Cash Flow Return
Free Cash Flow divided by the current Enterprise Value of the company 

Free Cash Flow Yield (%)
Free Cash Flow divided by the current Market Cap of the company

Full faith and credit of the U.S. government
A promise by the U.S. government to pay all interest when due and redeem bonds at maturity. Treasuries, savings bonds and debt securities issued by federal agencies are backed by the “full faith and credit” of the U.S. government.

Fundamental Analysis                  
A form of investment analysis that focuses on a company’s financial statements, earnings, sales, and quality of management. Compare to Technical Analysis.

FY1, FY2                              
Specific fiscal periods for which a company’s future earnings are forecasted. “FY” stands for “fiscal year.” FY1 is the first upcoming year, FY2 the year following FY1.

General Obligation bond (GO)
A municipal bond secured by a governmental issuer’s “full faith and credit,” usually based on taxing power.

An intangible asset, representing the value of a business’s good name, ongoing relations with its customers, and similar factors that may affect its earning power. In an acquisition, the excess of the purchase price above the net tangible assets of the acquired company may be recorded as goodwill on the balance sheet of the acquirer.

Government-Sponsored Enterprises (GSE)
Federally chartered government-sponsored enterprises (GSEs) are shareholder-owned corporations, not federal agencies. Although GSEs, such as Fannie Mae and Freddie Mac, were created to fulfill a public purpose, the mortgage-backed bonds they issue are not insured by the government or backed by its full faith and credit.

Gross Margin                    
A ratio calculated by subtracting the company’s cost to manufacture the goods sold from the total sales, and dividing the result by the total sales. This ratio provides a measure of the efficiency of a manufacturing company.

Growth and Income fund
These mutual funds invest in securities that provide a combination of growth and income. They generally funnel most of their assets into common stocks of well-established companies that pay regular dividends. They may also invest in high-rated bonds.

Growth Fund
Growth fund managers invest in stocks of companies that have recently exhibited faster than average earnings gains. Such stocks generally have higher price/earning ratios and often do not pay dividends. Growth stock funds are often characterized by high levels of price volatility.

Growth Stocks                 
Stocks of companies that have exhibited faster than average earnings gains and are expected to continue its record of high performance. Such stocks generally have higher price/earnings ratios and do not pay dividends.

Guaranteed investment contract (GIC)
A GIC (pronounced gick) is an insurance company product designed to preserve your principal and to provide a fixed rate of return. You may invest in a GIC through an employer sponsored salary reduction plan, such as a 401(k) or 403(b), if it is one of the investment options offered.

Hardship withdrawal
A hardship withdrawal occurs when you take money out of your 401(k) or other qualified retirement savings plan to cover a pressing financial need. You must qualify to withdraw by meeting the conditions your plan imposes in keeping with Internal Revenue Service (IRS) guidelines. If you’re younger than 59½, you may have to pay a 10 percent penalty, plus income tax, on the amount you withdraw, and you may not be permitted to contribute to the plan again for a period of time.

High-yield bond
A bond issued by an issuer that is considered a credit risk by a Nationally Recognized Statistical Rating Organization, as indicated by a low bond rating (e.g., “Ba” or lower by Moody’s Investors Services, or “BB” or below by Standard & Poor’s Corporation). Because of this risk, a high-yield bond generally pays a higher return (yield) than a bond with an issuer that carries lower default risk. Also known as a “junk” bond.

Highly compensated employees
Highly compensated employees are people who earned more from their employer, or own a larger stake in the company, than the floor the government has established for this category of worker. The drawback of being highly compensated is that you may be restricted on what you can contribute to a 401(k).

Holding period risk
The risk, while you are waiting for your bond to mature (holding it), that a better opportunity will come around that you may be unable to act upon. The longer the term of your bond, the greater the chance a more attractive investment opportunity will become available, or that any number of other factors may occur that negatively impact your investment.

Income Statement (Statement of Operations)                  
A financial statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a company over some period of time.

A legal document between a bond issuer and a trustee appointed on behalf of all bondholders that describes all of the features of the bond, the rights of bondholders, and the duties of the issuer and the trustee. Much of this information is also disclosed in the prospectus or offering statement.

An unmanaged selection of securities whose performance as a group is used to measure investment results. Examples include the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500.

Index fund
An index mutual fund is designed to mirror the performance of a stock or bond index, such as Standard & Poor’s 500 Index (S&P 500) or the Russell 2000 Index. To do that, the fund purchases all of the securities included in the index, or a representative sample of them, and adds or sells investments only when the securities in the index are changed.

Individual retirement account (IRA)
Individual retirement accounts (IRAs) are self-directed investment accounts that provide the incentive of tax-deferred (in the case of traditional IRAs) or tax-free (in the case of Roth IRAs) earnings on assets in the account. If you earn income, or are married to someone who does, you are limited in how much money you can contribute to your IRA. You can see the current limits in the Annual Contribution Limits table.

A continuous increase over time in the overall costs of goods and services.

Inflation risk
The risk that a bond’s returns may not keep pace with inflation, eroding purchasing power.

Initial Public Offering (IPO)                       
A company’s first sale of stock to the public.

Intangible Assets                            
A non-physical asset that represents a competitive advantage to a company, such as brand name, a trademark, patents or other intellectual property, and goodwill.

Interest rate risk
The risk that a bond’s price will fall when interest rates rise.

Goods that a company has produced or purchased, but not yet sold. Inventory is considered an asset. If inventory is growing faster than sales, this can be a warning sign that business growth is slowing.

Investment-grade bond
A bond whose issuer’s prompt payment of interest and principal (at maturity) is considered relatively safe by a nationally recognized statistical rating agency as indicated by a high bond rating (e.g., “Baa” or better by Moody’s Investors Service, or “BBB” or better by Standard & Poor’s Corporation).

Junk bond
Another name for a high-yield bond.

Large-Capitalization ( or “Large-Cap”) Stocks                    
Large caps are stocks of companies whose market value is above a designated minimum, such as $10 billion.

Outstanding debts.

Lifecycle fund
A lifecycle fund is a package of individual mutual funds that a fund company puts together to help investors meet their investment objectives without having to select portfolios of funds on their own. The allocation of funds within the fund is altered as the investor moves closer to retirement to help reduce potential volatility and preserve capital.

Liquid investment
A liquid investment is one that can be bought or sold quickly in large volume without dramatically affecting its market price. However, the term is sometimes used more generally to describe investments you can buy or sell easily, including mutual funds and most publicly traded stocks and bonds. It may also be used to describe those investments you can sell or cash in easily without loss of principal, such as a money market fund.

Liquidity risk
The risk of not being able to execute a trade at the time you desire, or being forced to accept a significantly discounted price of a bond at the time you desire to sell.

Long-Term Assets
Assets that will be expended or consumed over multiple years. Examples include land, buildings, equipment, and intangible assets, such as goodwill, and accrued organizational expenses. Long-term assets appear on a company’s balance sheet.

Long-Term Debt                              
Loans and other debt obligations with maturities of longer than one year. Long-term debt appears on a company’s balance sheet.

Lump-sum distribution
A lump-sum distribution is a one-time payout of assets in an account, typically a retirement savings account. When you retire or change jobs, you can take a lump-sum distribution as cash, or you can roll over the distribution into an individual retirement account (IRA). If you take the cash, you owe income tax on the full amount of the distribution, and you may owe an additional 10 percent penalty if you’re younger than 59½. If you roll over the lump sum into an IRA, the full amount continues to be tax deferred, and you can postpone paying income tax until you withdraw from the account.

Managed account
A managed account is a portfolio of stocks or bonds owned by an individual investor. The account has a professional investment manager who makes buy and sell decisions, sometimes in response to the account owner’s instructions. Each managed account has an investment objective, and each manager oversees multiple individual accounts invested to meet the same objective.

Managed Funds
Unlike index funds that are designed to track a market index, managed funds rely on the expertise of the mutual fund manager to research and select the stocks or bonds that make up the fund’s portfolio.

Market capitalization
Market capitalization is a measure of the value of a company, calculated by multiplying the number of existing shares, or shares the company has issued, by the current price per share. For example, a company with 100 million shares of stock with a current market value of $25 a share would have a market capitalization of $2.5 billion. Market capitalization is sometimes used interchangeably with market value. Mutual funds often will note if their focus is on large-, mid- or small-cap stocks.

Market Index
A market index measures changes in the value of a specific group of stocks, bonds or other investments that it tracks from a specific starting point, which may be as recent as the previous day or some date in the past. An index may be broad, encompassing a large number of stocks or bonds, or quite narrow, including only a limited number.

Market Value or Market Price                  
Most recent recorded price at which a stock traded.

Maturity Date
A maturity date is the date when the principal amount of a bond, note or other debt instrument is typically repaid to the investor along with the final interest payment.

Uniting of two or more companies to become one.

Minority Interest
The portion of a company’s earnings that it must pay to the outside owners of one of its subsidiaries.  

Monte Carlo simulation
A Monte Carlo simulation generates thousands of probable performance outcomes, called scenarios, which might occur in the future. An investment simulation incorporates economic data such as a range of potential interest rates, inflation rates, tax rates, and so on, combined in random order. As a result, it’s designed to account for the uncertainty and performance variation that’s always present in financial markets.

Mortgage-backed security
A security that is secured by home and other real estate loans.

Moving Average
An average of a stock’s closing price over the past 50, 100 or 200 trading days. Moving averages often serve as a “floor” or a support level below which a stock is unlikely to fall. Conversely, moving averages can also serve as a “ceiling” or a resistance level above which a stock is unlikely to rise.  

Municipal bond
A bond issued by states, cities, counties and towns to fund public capital projects like roads and schools, as well as operating budgets. These bonds are typically exempt from federal taxation and, for investors who reside in the state where the bond is issued, from state and local taxes, too.

Nasdaq Composite Index (or “the Nasdaq”)                      
The Nasdaq Composite Index is a widely cited indicator of changes in The Nasdaq Stock Market. It is a market-value weighted measure of all Nasdaq domestic and foreign common stocks.

Net asset value (NAV)
The NAV is the dollar value of one share of a mutual fund at the close of the trading day. It is calculated by totaling the value of all the fund’s holdings and dividing by the number of outstanding shares. That means the NAV changes regularly, though day-to-day changes are usually small.

Net Income/Net Profit                 
Income after taxes, interest, depreciation, and other expenses have been deducted.

Net Profit Margin                           
Net profit divided by net sales and expressed as a percentage.

Non-Callable bond
A feature of some bonds that stipulates the bond cannot be redeemed (called) before its maturity date. Also called a “bullet.”

Non Investment-grade bond
A bond whose issuer’s prompt payment of interest and principal (at maturity) is considered risky by a nationally recognized statistical rating agency, as indicated by a lower bond rating (e.g., “Ba” or lower by Moody’s Investors Service, or “BB” or lower by Standard & Poor’s Corporation).

Non-operating Expense (or Income)
Unusual expenses or incomes that are not part of the company’s normal business operations. Although these unusual expenses or incomes impact the company’s Net Income, analysts often remove these unusual items to get a better sense of the company’s ongoing Net Income.   

A short- to medium-term loan that represents a promise to pay a specific amount of money. A note may be secured by future revenues, such as taxes. Treasury notes are issued in maturities of two, three, five and 10 years.

Next Twelve Months

Making an offer to sell a new issuance of stock to the public through an underwriting. Often refers to an initial public offering (IPO).

Operating Income                          
Earnings before deduction of interest and taxes. This is a measure of the company’s earning power from ongoing operations.

Operating Profits
The profits that a company earnings after deducting the cost of goods sold, SG&A, R&D and other operating expenses from its sales. 

Opportunity risk
The risk that a better investment opportunity will come around that you may be unable to act upon because of a current investment. Generally, the longer the holding period of a bond, the greater the opportunity risk.

Over-the-counter (OTC) securities
Securities that are not traded on a national exchange. For such securities, broker-dealers negotiate directly with one another over computer networks and by phone.

Overvalued Stock                           
Stock that trades at a higher price than the issuing company’s reputation, earnings outlook, or financial situation would seem to merit. For example, one sign of potential overvaluation is a price/earnings ratio (P/E Ratio) significantly higher than average for the market as a whole and for the industry to which the corporation belongs.

Par value
An amount equal to the nominal or face value of a security. A bond selling at par, for instance, is worth the same dollar amount at which it was issued, or at which it will be redeemed at maturity—typically $1,000 per bond.

PBT = Profit Before Taxes
Operating Profits before the payment of income taxes.

Phantom income
Interest reportable to the IRS that does not generate income, such as interest from a zero-coupon bond.

Plan administrator
Your 401(k) plan administrator is the person or more typically the company your employer chooses to manage the organization’s retirement savings plan. The administrator works with the plan provider to ensure that the plan meets government regulations and that you and other employees have the information you need to enroll, select and change investments in the plan, apply for a loan if the plan allows loans and request distributions.

Plan provider
A 401(k) plan provider is the mutual fund company, insurance company, brokerage firm or other financial services company that creates and sells the plan your employer selects.

Plan sponsor
A 401(k) plan sponsor is an employer who offers the plan to employees. The sponsor is responsible for choosing the plan, the plan provider and the plan administrator, and for deciding which investments will be offered through the plan.

A portable retirement plan is one where you can take your contributions plus any earnings with you when you change jobs. 401(k) plans are portable and you can usually leave the money with your former employer, roll over the money into your new employer’s plan, roll over the money into an IRA or take the cash value of your contributions and any earnings.

Preferred Stock
Capital stock with a claim on company earnings and assets that takes precedence over the claims of common stock in the event of the company’s liquidation. Preferred stock often pays a regular dividend, which is also paid prior to any dividend payments to common stockholders. Preferred stock usually does not carry voting rights.

Prepayment risk
The possibility that the issuer will call a bond and repay the principal investment to the bondholder prior to the bond’s maturity date.

The amount by which a bond’s market value exceeds its issuing price (par value). A $1,000 bond selling at $1,063 carries a $63 premium.

Pretax Income                 
Earnings before income tax is subtracted.

Price to Earnings to Growth Ratio (PEG Ratio)
Defined as the Price to Earnings Ratio divided by the Annual Earnings Per Share Growth rate. This ratio is used to value a company in light of the expected growth in its earnings. A PEG Ratio of 1.0 or less is interpreted to mean that a company is undervalued relative to its future earnings, which are expected to be significantly higher than in the past.  

Price to Earnings Ratio (P/E Ratio)                               
A common measure for identifying undervalued and overvalued stock. It uses the relationship between a company’s earnings and share price to value a company’s stock. The P/E ratio is calculated by dividing the current market price per share by the earnings per share. A stock’s P/E ratio gives you a sense of what you are paying for a stock in relation to its earning power (e.g., a stock with a P/E of 20 is trading at 20 times its earnings). If a company’s market price is $40 and the earnings per share is $4, the P/E ratio for the company is 10.

Price to Book Ratio                        
A ratio calculated by dividing a company’s total market capitalization by its book value.

Pricing Pressure                              
Condition resulting when, in response to the competitive nature of the market, companies must reduce the prices of their products or services. This can reduce earnings.

Prime Rate                        
In theory, the interest rate banks charge their best and biggest customers for short-term loans. In practice, banks sometimes vary the rate they offer, depending on other factors such as the customer’s creditworthiness.

Primary market
The market in which new issues of stock or bonds are priced and sold, with proceeds going to the entity issuing the security. From there, the security begins trading publicly in the secondary market.

Principal can refer to an amount of money you invest, the face amount of a bond or the balance you owe on a debt, aside from the interest.

  1. For investments, principal is the original amount of money invested, separate from any associated interest, dividends or capital gains. For example, the price you paid for a bond with a $1,000 face value the time of purchase is your principal. Once purchased, the value of your bond holdings can fluctuate, meaning you can see an increase or decrease to your principal.
  2. A brokerage firm that executes trades for its own accounts at net prices (prices that include either a mark-up or mark-down).

Profit sharing 
A profit-sharing plan is a type of defined contribution retirement plan that employers may establish for their workers. The employer may add up to the annual limit set by Congress to each employee’s profit-sharing account in any year the company has a profit to share, though there is no obligation to make a contribution in any year.

Pro Forma (PF) Financial Statements                     
Hypothetical financial statements based on a projected or recently completed transaction, such as a merger.

A formal written offer to sell securities that sets forth the plan for a proposed business enterprise, or the facts concerning an existing business enterprise that an investor needs to make an informed decision.

Publicly Traded Company                           
A company whose securities can be bought and sold by the general public.

Quarterly Report                            
An unaudited document that most publicly traded companies in the U.S. are required to file on Form 10-Q with the SEC, reporting their financial results for, and noting any significant changes or events in the quarter.

Quick Ratio                        
A ratio calculated by dividing cash plus accounts receivable by current liabilities. It measures a company’s ability to quickly convert assets to cash to meet operating needs.

Rate of Return                 
Annual return on an investment. Rate of return may refer to the dividend yield or it may refer to the total return rate.

Ratio Analysis                  
The examination of the relationships between a firm’s accounting numbers and trends over time.

Real rate of return
The real rate of return on an investment is the rate of return minus the rate of inflation. For example, if you are earning 6 percent interest on a bond in a period when inflation is running at 2 percent, your real rate of return is 4 percent. But if inflation were at 4 percent, your real rate of return would be only 2 percent.

Relative Strength Index (RSI)
A measure of the degree to which a stock is “overbought” or “oversold” based on the stock price performance over the past 14 trading days. The RSI value can range from 0 to 100. A value of less than 30 means the stock is “oversold” and likely to increase in price. A value greater than 70 means the stock is “overbought” and likely to decrease in price.  

Retained Earnings                          
Earnings a company reinvests in its core business or to retire debt, after it pays dividends.

Retention Ratio
Defined as 100% – the Dividend Payout Ratio. This ratio indicates the percentage of a company’s earnings that are being retained by the company and reinvested in the business.   

Return on Assets (ROA)                               
A ratio calculated by dividing the company’s EBIT (net income) by total assets. The ROA is one of the most commonly used profitability ratios.

Return on Equity (ROE)                
A ratio calculated by dividing the company’s net income before common stock dividends are paid by the company’s shareholder’s equity. This ratio measures how much a company earns in relation to the amount invested in its common stock.

Return on Sales                               
A ratio calculated by dividing pre-tax profit by total sales. This relationship measures the efficiency of operations by showing the profits earned per dollar of sales.

Required minimum distribution (RMD)
A required minimum distribution is the smallest amount you can take each year from your 401(k), 403(b), traditional IRA or other retirement savings plan once you’ve reached the mandatory age for making withdrawals, usually 70½. If you take less than the required minimum, you owe a 50 percent penalty on the amount you should have taken. You calculate your RMD by dividing your account balance at the end of your plan’s fiscal year—usually, but not always, December 31—using a divisor determined by your age.

Money collected for providing a product or service. Companies that provide services, such as telecommunications, generally use the term revenue; whereas companies that manufacture products, such as automobiles, often use the term sales.

Revenue bond
A type of municipal security backed solely by fees or other revenue generated or collected by a facility, such as tolls from a bridge or road, or leasing fees. The creditworthiness of revenue bonds tends to rest on the bond’s debt service coverage ratio—the relationship between revenue coming in and the cost of paying interest on the debt.

The possibility that an investment will lose, or not gain, value.

Risk tolerance
A person’s capacity to endure market price swings in an investment.

If you move your assets from one tax-deferred or tax-free investment to another, it’s called a rollover. For example, if you move money from one individual retirement account (IRA) to another IRA, or from a qualified retirement plan into an IRA, the transaction is a rollover.

Roth IRA
A Roth IRA is an individual retirement account from which you can withdraw your earnings completely tax free any time after you reach age 59½, provided your account has been open at least five years. To qualify to contribute to a Roth IRA, your income must be less than the level set by Congress. However, even if you are not eligible to contribute to a Roth IRA, you may convert a traditional IRA to a Roth IRA and pay the tax that’s due on contributions and accumulated earnings.

Salary reduction plan
A salary reduction plan, such as a traditional 401(k) or 403(b), is a type of employer sponsored retirement savings plan that allows you to contribute pretax income to a retirement account in your name and to accumulate tax-deferred earnings. In contrast, with a Roth 401(k) and 403(b) you contribute after-tax income to a retirement account in your name and may make tax-free withdrawals after you retire if you’re at least 59½ and your account has been open at least five years. All of these plans, which may be described as salary deferral plans because part of your current salary goes into your retirement account rather than being included in your take-home pay, have the same annual contribution cap, which is set by Congress, and allow annual catch-up contributions for participants 50 and older.

The total dollar amount collected for goods and services provided. See Revenue.

Sales to Inventory Ratio                              
A ratio calculated by dividing annual net sales by inventory. The sales to inventory ratio is a gauge of how rapidly merchandise is being moved and the effect on the flow of funds into the business.

Sales to Net Working Capital Ratio                         
A ratio calculated by dividing net sales by net working capital. This relationship may indicate whether a company is carrying more assets than necessary.

Savings bond
U.S. government bond issued in face denominations ranging from $25 to $10,000.

Secondary market
Markets where securities are bought and sold subsequent to their original issuance.

Sector fund
Sector mutual funds, also called specialty or specialized funds, concentrate their investments in a single segment of an industry, such as biotechnology, natural resources, utilities or regional banks, for example. Sector funds tend to be more volatile than more broadly diversified funds, and often dominate both the top and bottom of annual mutual fund performance charts.

Securities and Exchange Commission (SEC)                        
The agency of the U.S. government that regulates the U.S. securities markets.

Self-directed retirement plan
A self-directed retirement plan is one in which you select the investments. When the plan is employer sponsored, you usually select from a menu of choices your plan offers. When it’s an individual retirement account (IRA), you typically may choose from the full range of investments other than collectibles and non-US coins. In contrast, if you’re part of a defined benefit pension plan, your employer is responsible for making the investment decisions.

Self-Regulatory Organization (SRO)
An entity that regulates its industry through the adoption and enforcement of rules governing the conduct of its members. FINRA is the largest SRO in the securities industry. Its mission is to bring integrity to the markets and confidence to investors.

Selling, General and Administrative Expenses (SG&A)
SG&A includes expenses that are not directly related to the production of a company’s products (e.g. marketing expenses and corporate overhead). 

Share buybacks
A reduction in the number of shares of a company that trade on public exchanges. A company will decide to use some of its excess cash to repurchase shares from investors if the company feels that the current stock price does not reflect the true value of the company.

Shares Outstanding vs. Floating Shares
Shares Outstanding are the total shares that have been issued by the company since its creation. Floating Shares are the shares that are freely traded on public markets and not restricted, or “locked up”, in any way.   

Shareholders’ Equity                    
Calculated by subtracting the company’s total assets from total liabilities.

Short Interest Ratio (Days to Cover)
A measure of the degree to which people have bet against a stock by selling it short. Defined as the number of shares sold short for a particular stock divided by the average daily trading volume. The ratio is expressed in “days” and interpreted to mean the number of days it would take for everyone who has sold short to close out their positions by repurchasing the stock in the open market.  

Standard & Poor’s 500 Index (or “the S&P 500”)                              
A market-value weighted index that tracks the performance of 500 widely held large-cap stocks in the industrial, transportation, utility, and financial sectors. It is often looked to by experienced investors as a measure of changes in the broad market.

Statement of Cash Flows                            
A financial statement showing the inflow and outflow of cash during a specified period.

Statement of Shareholders’ Equity                        
A financial statement showing changes in shareholders’ equity. This statement is useful for identifying reasons for changes in shareholders’ claims on the assets of the company.

An instrument that signifies equity ownership in a corporation, and represents a proportionate claim on a company’s assets and profits.

Stock Dividend                
The payment of a dividend in the form of stock. This is sometimes done to conserve a company’s cash position.

Short for “Separate Trading of Registered Interest and Principal of Securities.” STRIPS are Treasury Department-sanctioned bonds in which a broker-dealer is allowed to strip out the coupon, leaving a zero-coupon security.

Summary plan description (SPD)
A summary plan description is a document describing the features of an employer sponsored plan. The Employee Retirement Income Security Act (ERISA) requires that SPDs address several different aspects of the plan, such as participant rights.

Sustainable Growth Rate
An estimate of the maximum rate of growth that a company can achieve through the reinvestment of its earnings. Any growth above this rate will require the company to borrow money from a 3rd party to fund the expansion. Sustainable Growth Rate is defined as the Return on Equity * (1 – Dividend Payout Ratio).  

Tax deferral
Tax deferral means that income taxes that would otherwise be due on employment or investment earnings are postponed until some point the future, often when you retire. Then tax is due on the amounts you withdraw, at the same rate you pay on your regular income. For example, if you contribute pretax income to a retirement savings plan, such as a 401(k) or 403(b), you owe no tax on the contributions or any earnings in the plan until you withdraw those funds. In other plans, such as individual retirement accounts (IRA), the contribution may be taxable but the earnings are tax deferred.

Technical Analysis                          
A method of evaluating securities that focuses on the assumption that detailed market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, it gives little weight to the intrinsic value of a company’s business.

U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond’s principal is adjusted upward to keep pace with inflation.

Total Assets                      
All assets, current and fixed.

Total Liabilities                
All liabilities, current and long-term.

Total return
Total return is your annual gain or loss on an equity or debt investment. It includes reinvested dividends or interest, plus any change in the market value of the investment. When total return is expressed as a percentage, it’s figured by dividing the increase in value, plus dividends or interest, by the original purchase price. On bonds you hold to maturity, however, your total return is the same as your yield to maturity (YTM).

Total Return Rate/Total Return                
The rate of return that reflects the annual dividend paid on a stock (if any) plus any capital appreciation that has occurred during the time you have held it

Total Shares Outstanding                            
Shares of stock issued and in the hands of shareholders. Total shares outstanding can usually be found listed on company balance sheets as “Capital Stock Issued and Outstanding.”

Negotiable debt obligations that include notes, bonds and bills issued by the U.S. government at various schedules and maturities. Treasuries are backed by the “full faith and credit” of the U.S. government.

Treasury bill
Non-interest bearing (zero-coupon) debt security issued by the U.S. government with a maturity of four, 13 or 26 weeks. Also called a T-bill.

Treasury bond
Long-term debt security issued by the U.S. government with a maturity of 10 to 30 years, paying a fixed interest rate semiannually.

Treasury note
Medium-term debt security issued by the U.S. government that has a maturity of two to 10 years.

Trailing Twelve Months. Synonymous with Last Twelve Months. 

Undervalued Stock                        
A stock that trades at a lower price than the issuing company’s reputation, earnings outlook, or financial situation would seem to merit.

An intermediary between the company offering the securities and the investing public, usually a brokerage firm.

Process of estimating the future worth of a company’s stock. One standard method of estimating the value of a company’s stock is the P/E ratio.

Valuation metrics (multiples)
A ratio that relates the current stock price to a company’s annual sales (i.e. Price to Sales Ratio), earnings (i.e. Price to Earnings), book value (i.e. Price to Book Ratio) or cash flow (i.e. Price to Cash Flow). Analysts often compare a company’s current valuation metric to its historical values as well as the current valuation metrics of its competitors to determine if a stock is undervalued or overvalued. 

Value fund
When a mutual fund manager buys primarily undervalued stocks for the fund’s portfolio with the expectation that these stocks will increase in value, that fund is described as a value fund. A value fund may be limited to stocks of a certain size, such as those included in a small-cap value fund, or it may include undervalued stocks with different levels of capitalization.

Variable annuity
A variable annuity is a contract offered by an insurance company that can be used to accumulate savings tax deferred. You allocate your premium among a number of subaccounts or investment portfolios offered through the contract. Your contract value, which fluctuates over time, reflects the performance of the underlying investments held by the funds you have selected, minus the contract expenses. Withdrawals are taxed as ordinary income, rather than at the lower capital gains rate. If you make withdrawals before you reach age 59½, you may also be subject to a 10 percent early withdrawal penalty. Unlike fixed annuities, variable annuities are securities registered with the Securities and Exchange Commission (SEC).

Variable Costs
Costs that do not increase with increasing levels of production. The opposite of fixed costs. 

If you are part of an employer pension plan or participate in an employer sponsored retirement plan, such as a 401(k), you become fully vested—or entitled to the contributions your employer has made to the plan, including matching and discretionary contributions—after a certain period of service with the employer. Qualified plans must determine the period using standards set by the federal government. If you leave your job before becoming fully vested, you forfeit all or part of those benefits.

A measure of how quickly and to what degree the value of a security, market, or market sector fluctuates. The volatility of a stock relative to its overall market index is known as its beta.

An instrument giving the holder the right to purchase shares of a company’s stock at a stipulated price, usually within a specified time frame.

Weighted Average Cost of Capital (WACC)
An estimate of the theoretical “interest rate” for the combined debt and equity used by a company, weighted by the relative proportion of each type of capital. Higher WACCs indicate higher risk investments.      

Weighted Stock Index
In a market value or price weighted index, changes in some stocks have a greater impact than changes in others in computing the direction of the overall index. By contrast, in an equally weighted index, changes in all the stocks have an equal impact. In a price weighted index, such as the Dow Jones Industrial Average (DJIA), changes in the prices of its higher-priced securities have more impact on the index than changes in the prices of lower-priced securities. Similarly, a market capitalization weighted index, such as the NASDAQ Composite Index, gives more weight to price changes in its securities with the highest market values, calculated by multiplying the current price per share by the number of existing shares.

Working Capital                              
The money that a company must invest in short term assets (e.g. Accounts Receivable and Inventory) to make and sell its products minus the company’s short term liabilities (e.g. Accounts Payable). Working Capital usually increases as a company’s Sales increase.  Also known as the difference between current assets and current liabilities.

Yield (Bond)
The return earned on a bond, expressed as an annual percentage rate.

Yield (Stock)                     
For stock, that portion of return that is paid in the form of dividends. See dividend yield. For fixed-income securities, such as bonds or notes, yield is the effective rate of interest paid.

Yield Curve
A yield curve is a graph showing the relationship between yield (on the y- or vertical axis) and maturity (on the x- or horizontal axis) among bonds of different maturities and of the same credit quality.

Yield to call (YTC)
The rate of return you receive if you hold the bond to its call date and the security is redeemed at its call price. YTC assumes interest payments are reinvested at the yield-to-call date.

Yield to maturity (YTM)
The overall interest rate earned by an investor who buys a bond at the market price and holds it until maturity. Mathematically, it is the discount rate at which the sum of all future cash flows (from coupons and principal repayment) equals the price of the bond.

Yield to worst (YTW)
The lower yield of yield-to-call and yield-to-maturity. Investors of callable bonds should always do the comparison to determine a bond’s most conservative potential return.

Yield reflecting broker compensation
Yield adjusted for the amount of the mark-up or commission (when you purchase) or mark-down or commission (when you sell) and other fees or charges that you are charged by your broker for its services.

Short for zero-coupon bond.

Zero-coupon bond
A type of bond that does not pay a coupon. Zero-coupon bonds are purchased by the investor at a discount to the bond’s face value (e.g., less than $1,000), and redeemed for the face value when the bond matures.

David S. Chang

Award-Winning Entrepreneur, Wealth Manager and CEO | Chief Editor, Author, Keynote Speaker, Consultant | Political Consultant | Army Officer National Guard | Living To Fulfill Needs, Solve Problems, and Live Passionately!

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