Fundamentals of Investing Flashcards
Key Terms (286 cards)
1
Q
bonds
A
Long-term debt instruments (IOUs), issued by corporations and governments, that offer a known interest return plus return of the bond’s face value at maturity. (Chapters 1 and 10)
2
Q
capital gains
A
The amount by which the sale price of an asset exceeds its original purchase price. (Chapter 1)
3
Q
capital loss
A
The amount by which the proceeds from the sale of a capital asset are less than its original purchase price. (Chapter 1)
4
Q
common stock
A
Equity investment that represents ownership in a corporation; each share represents a fractional ownership interest in the firm. (Chapter 1)
5
Q
convertible security
A
A fixed-income obligation with a feature permitting the investor to convert it into a specified number of shares of common stock. (Chapter 1)
6
Q
debt
A
Funds lent in exchange for interest income and the promised repayment of the loan at a given future date. (Chapter 1)
7
Q
derivative securities
A
Securities that are structured to exhibit characteristics similar to those of an underlying security or asset and that derive their value from the underlying security or asset. (Chapters 1 and 14)
8
Q
direct investment
A
An investment in which an investor directly acquires a claim on a security or property. (Chapter 1)
9
Q
discount basis
A
A method of earning interest on a security by purchasing it at a price below its redemption value; the difference is the interest earned. (Chapter 1)
10
Q
diversification
A
The inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risk. (Chapters 1 and 2)
11
Q
dividends
A
Periodic payments made by firms to their shareholders. (Chapter 1)
12
Q
domestic investments
A
Debt, equity, and derivative securities of U.S.-based companies and governments. (Chapter 1)
13
Q
equity
A
Ongoing ownership in a business or property. (Chapter 1)
14
Q
exchange-traded fund (ETF)
A
An open-end fund that trades as a listed security on a stock exchange. (Chapter 1)
15
Q
financial institutions
A
Organizations that channel the savings of governments, businesses, and individuals into loans or investments. (Chapter 1)
16
Q
financial markets
A
Forums in which suppliers and demanders of funds trade financial assets. (Chapter 1)
17
Q
fixed-income securities
A
Investments that offer fixed periodic cash payments. (Chapter 1)
18
Q
foreign investments
A
Debt, equity, and derivative securities of foreign-based companies. (Chapter 1)
19
Q
futures
A
Legally binding obligations stipulating that the seller of the contract will make delivery and the buyer of the contract will take delivery of an asset at some specific date and at a price agreed on at the time the contract is sold. (Chapter 1)
20
Q
hedge funds
A
Lightly regulated investment funds that pool resources from wealthy investors. (Chapters 1 and 12)
21
Q
indirect investment
A
Investment made in a collection of securities or properties. (Chapter 1)
22
Q
individual investors
A
Investment professionals who are paid to manage other people’s money. (Chapter 1)
23
Q
institutional investors
A
Investment professionals who are paid to manage other people’s money. (Chapter 1)
24
Q
investment
A
Any asset into which funds can be placed with the expectation that it will generate positive income and/or preserve or increase its value. (Chapter 1)
25
investment goals
The financial objectives that one wishes to achieve by investing. (Chapter 1)
26
liquidity
The ability of an investment to be converted into cash quickly and with little or no loss in value. (Chapter 1)
27
long-term investments
Investments with maturities of longer than a year or with no maturity at all. (Chapter 1)
28
money market mutual funds (money funds)
Mutual funds that invest solely in short-term investment vehicles. (Chapters 1 and 12)
29
mutual fund
A company that raises money from sale of its shares and invests in and professionally manages a diversified portfolio of securities. (Chapters 1 and 12)
30
net losses
The amount by which capital losses exceed capital gains; up to $3,000 of net losses can be applied against ordinary income in any year. (Chapter 1)
31
option
Security that gives the holder the right to buy or sell a certain amount of an underlying financial asset at a specified price for a specified period of time. (Chapters 1 and 14)
32
portfolio
Collection of securities or other investments, typically constructed to meet one or more investment goals. (Chapter 1)
33
preferred stock
Ownership interest in a corporation; has a stated dividend rate, payment of which is given preference over common stock dividends of the same firm. (Chapters 1 and 16)
34
property
Investments in real property or tangible personal property. (Chapter 1)
35
real estate
Entities such as residential homes, raw land, and income property. (Chapters 1 and 18)
36
returns
The rewards from investing, received as current income and/or increased value. (Chapter 1)
37
risk
Reflects the uncertainty surrounding the return that an investment will generate. (Chapter 1)
38
securities
Investments issued by firms, governments, or other organizations that represent a financial claim on the issuer’s resources. (Chapter 1)
39
short-term investments
Investments that typically mature within one year. (Chapter 1)
40
tangibles
Investment assets, other than real estate, that can be seen or touched. (Chapter 1)
41
tax planning
The development of strategies that will defer and minimize an individual’s level of taxes over the long run. (Chapters 1 and 17)
42
tax-advantaged investments
Investment vehicles and strategies designed to produce higher after-tax returns by reducing the amount of taxes that investors must pay. (Chapters 1 and 17)
43
American depositary receipts (ADRs)
U.S. dollar–denominated receipts for the stocks of foreign companies that are held in the vaults of banks in the companies’ home countries. Serve as backing for American depositary shares (ADSs). (Chapter 2)
44
American depositary shares (ADSs)
Securities created to permit U.S. investors to hold shares of non-U.S. companies and trade them on U.S. stock exchanges. They are backed by American depositary receipts (ADRs). (Chapter 2)
45
ask price
The lowest price offered to sell a security. (Chapter 2)
46
bear markets
Markets normally associated with falling prices, investor pessimism, economic slowdown, and government restraint. (Chapter 2)
47
bid/ask spread
The difference between the bid price and the ask price, which is a kind of transactions cost that investors may pay when they trade through a market maker or securities dealer. (Chapter 2)
48
bid price
The highest price offered to purchase a security. (Chapter 2)
49
bull markets
Markets normally associated with rising prices, investor optimism, economic recovery, and government stimulus. (Chapter 2)
50
capital market
Market in which long-term securities (with maturities greater than one year) such as stocks and bonds are bought and sold. (Chapter 2)
51
crossing markets
After-hours trading in stocks that involves filling buy and sell orders by matching identical sell and buy orders at the desired price. (Chapter 2)
52
currency exchange rate
The relationship between two currencies on a specified date. (Chapter 2)
53
currency exchange risk
The risk caused by the varying exchange rates between the currencies of two countries. (Chapter 2)
54
debit balance
The amount of money being borrowed in a margin loan. (Chapter 2)
55
decimalization
The practice of quoting and transacting security prices in decimals rather than in fractions that was fully implemented in 2001. (Chapter 2)
56
designated market maker (DMM)
NYSE member who specializes in making transactions in one or more stocks and manages the auction process. (Chapter 2)
57
direct listing
A type of IPO in which the company does not issue any new shares or raise any additional capital, but rather tranfers some of its existing shares directly to a stock exchange where they begin trading. (Chapter 2)
58
diversification
The inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risk. (Chapters 1 and 2)
59
dual listing
Listing of a firm’s shares on more than one exchange. (Chapter 2)
60
electronic communications networks (ECNs)
Electronic trading networks that automatically match buy and sell orders that customers place electronically. (Chapter 2)
61
ethics
Standards of conduct or moral judgment. (Chapter 2)
62
excess margin
More equity than is required in a margin account. (Chapter 2)
63
financial leverage
The use of debt financing to magnify investment returns. (Chapter 2)
64
front running
A high-frequency trading strategy based on information about upcoming trades and their likely impact on a security’s price. (Chapter 2)
65
gross proceeds
The total proceeds raised in the sale of a new security. In an IPO, the gross proceeds equal the number of shares sold in the offering times the offer price. (Chapter 2)
66
high-frequency trading (HFT)
Ultra-fast algorithmic trading that relies and computers and electronic order execution. (Chapter 2)
67
initial margin
The minimum amount of equity that must be provided by a margin investor at the time of purchase. (Chapters 2 and 15)
68
initial public offering (IPO)
The first public sale of a company’s stock. (Chapter 2)
69
investment bank
Financial intermediary that specializes in assisting companies issue new securities and advising companies with regard to major financial transactions. (Chapter 2)
70
IPO underpricing
The percentage difference between the secondary-market closing price on the first day that an IPO stock trades and the IPO offer price. (Chapter 2)
71
latency
The time it takes for a trade to be accepted, executed, and reported. (Chapter 2)
72
long purchase
A transaction in which investors buy securities in the hope that they will increase in value and can be sold at a later date for profit. (Chapter 2)
73
maintenance margin
The absolute minimum amount of margin (equity) that an investor must maintain in the margin account at all times. (Chapters 2 and 15)
74
margin account
A brokerage account for which margin trading is authorized. (Chapters 2 and 3)
75
margin call
Notification of the need to bring the equity of an account whose margin is below the maintenance level up above the maintenance margin level or to have enough margined holdings sold to reach this standard. (Chapter 2)
76
margin loan
Vehicle through which borrowed funds are made available, at a stated interest rate, in a margin transaction. (Chapter 2)
77
margin requirement
The minimum amount of equity that must be a margin investor’s own funds; set by the Federal Reserve Board (the “Fed”). (Chapter 2)
78
margin trading
The use of borrowed funds to purchase securities; magnifies returns by reducing the amount of equity that the investor must put up. (Chapter 2)
79
market makers
Securities dealers that “make markets” by offering to buy or sell certain quantities of securities at stated prices. (Chapter 2)
80
market order
An order to buy or sell stock at the best price available when the order is placed. (Chapters 2 and 3)
81
money market
Market where short-term debt securities (with maturities less than one year) are bought and sold. (Chapter 2)
82
over-the-counter (OTC) market
Trading in smaller, unlisted securities. (Chapter 2)
83
pinging
An action by a high-frequency trader designed to detect the small, incremental trades that are part of a larger order by placing a series of competitive bids or offers for small amounts of stock and waiting for the small orders to be taken. (Chapter 2)
84
primary market
The market in which new issues of securities are sold by the issuers to investors. (Chapter 2)
85
prime rate
The lowest interest rate charged to the best business borrowers. (Chapter 2)
86
private placement
The sale of new securities directly, without SEC registration, to private investors. (Chapter 2)
87
prospectus
A portion of a security registration statement that describes the key aspects of the issue and issuer. (Chapter 2)
88
public offering
The sale of a firm’s securities to public investors. (Chapters 2 and 6)
89
pyramiding
The technique of using paper profits in margin accounts to partly or fully finance the acquisition of additional securities. (Chapter 2)
90
restricted account
A margin account whose equity is less than the initial margin requirement; the investor may not make further margin purchases and must bring the margin back to the initial level when securities are sold. (Chapter 2)
91
rights offering
An offer of new shares of stock to existing stockholders on a pro rata basis. (Chapters 2 and 6)
92
secondary distributions
The public sales of large blocks of previously issued securities held by large investors. (Chapter 2)
93
secondary market
The market in which securities are traded after they have been issued; an aftermarket. (Chapter 2)
94
Securities and Exchange Commission (SEC)
Federal agency that regulates securities offerings and markets. (Chapter 2)
95
securities markets
Forums that allow suppliers and demanders of securities to make financial transactions. (Chapter 2)
96
self-regulatory organization (SRO)
A nongovernmental organization that is responsible for its own regulation or the regulation of an industry or other group. (Chapter 2)
97
selling group
A group of dealers and brokerage firms that join the investment banker(s); each member is responsible for selling a certain portion of a new security issue. (Chapter 2)
98
short selling
The sale of borrowed securities, their eventual repurchase by the short seller, and their return to the lender. (Chapter 2)
99
underwriting
The role of the investment banker in bearing the risk of reselling the securities purchased from an issuing corporation at an agreed-on price. (Chapter 2)
100
underwriting syndicate
A group of investment banks formed by the originating investment banker to share the financial risk associated with underwriting new securities. (Chapter 2)
101
Yankee bonds
U.S. dollar-denominated debt securities issued by foreign governments or corporations and traded in U.S. securities markets. (Chapters 2 and 10)
102
analytical information
Projections and recommendations about potential investments based on available current data. (Chapter 3)
103
arbitration
A formal dispute-resolution process in which a client and a broker present their arguments before a panel, which then decides the case. (Chapter 3)
104
back-office research reports
A brokerage firm’s analyses of and recommendations on investment prospects; available on request at no cost to existing and potential clients or for purchase at some websites. (Chapter 3)
105
basic discount broker
Typically, a deep-discount broker through which investors can execute trades electronically online via a commercial service, on the Internet, or by phone. (Also called online brokers or electronic brokers.) (Chapter 3)
106
bond yield
The return an investor would receive on a bond if it were purchased and held to maturity; reported as an annual rate of return. (Chapter 3)
107
cash account
A brokerage account in which a customer can make only cash transactions. (Chapter 3)
108
churning
An illegal and unethical practice engaged in by a broker to increase commissions by causing excessive trading of clients’ accounts. (Chapter 3)
109
custodial account
The brokerage account of a minor; requires a parent or guardian to be part of all transactions. (Chapter 3)
110
descriptive information
Factual data on the past behavior of the economy, the market, the industry, the company, or a given investment. (Chapter 3)
111
Dow Jones Corporate Bond Index
Mathematical averages of the closing prices for 96 bonds—48 industrial, 36 financial, and 12 utility/telecom. (Chapter 3)
112
Dow Jones Industrial Average (DJIA)
A stock market average made up of 30 high-quality stocks selected for total market value and broad public ownership and believed to reflect overall market activity. (Chapter 3)
113
fair disclosure rule (Regulation FD)
Rule requiring senior executives to disclose critical information simultaneously to investment professionals and the public via press releases or SEC filings. (Chapter 3)
114
financial portals
Supersites on the web that bring together a wide range of investing features, such as real-time quotes, stock and mutual fund screens, portfolio trackers, news, research, and transaction capabilities, along with other personal finance features. (Chapter 3)
115
fixed commissions
Fixed brokerage commissions that typically apply to the small transactions usually made by individual investors. (Chapter 3)
116
Form 10-K
A statement that must be filed annually with the SEC by all firms having securities listed on a securities exchange or traded in the OTC market. (Chapter 3)
117
full-service broker
Broker who, in addition to executing clients’ transactions, provides them with a full array of brokerage services. (Chapter 3)
118
indexes
Numbers used to measure the general behavior of stock prices by measuring the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time. (Chapter 3)
119
limit order
An order to buy at or below a specified price or to sell at or above a specified price. (Chapter 3)
120
margin account
A brokerage account for which margin trading is authorized. (Chapters 2 and 3)
121
market order
An order to buy or sell stock at the best price available when the order is placed. (Chapters 2 and 3)
122
mediation
An informal, voluntary dispute-resolution process in which a client and a broker agree to a mediator, who facilitates negotiations between them to resolve the case. (Chapter 3)
123
Mergent
Publisher of a variety of financial material, including Mergent’s Manuals. (Chapter 3)
124
Nasdaq Stock Market indexes
Indexes that measure the current price behavior of securities traded in the Nasdaq stock market, relative to a base of 100 set at specified dates. (Chapter 3)
125
negotiated commissions
Brokerage commissions agreed to by the client and the broker as a result of their negotiations; typically available to large institutional transactions and to individual investors who maintain large accounts. (Chapter 3)
126
NYSE Composite Index
An index that measures the current price behavior of stocks listed on the NYSE, relative to a base of 5,000 set at December 31, 2002. (Chapter 3)
127
odd lot
Less than 100 shares of stock. (Chapter 3)
128
premium discount broker
Broker who charges low commissions to make transactions for customers but provides limited free research information and investment advice. (Chapter 3)
129
quotations
Price information about various types of securities, including current price data and statistics on recent price behavior. (Chapter 3)
130
round lot
A 100-share unit of stock. (Chapter 3)
131
Securities Investor Protection Corporation (SIPC)
A nonprofit membership corporation, authorized by the federal government, that insures each brokerage customer’s account for up to $500,000, with claims for cash limited to $100,000 per customer. (Chapter 3)
132
Standard & Poor’s Corporation (S&P)
Publisher of a large number of financial reports and services, including corporation records and stock reports. (Chapter 3)
133
Standard & Poor’s 500 Stock Index
An index that measures the current price of a group of large-cap stocks relative to a base index value (set according to the specific index). (Chapter 3)
134
stockbrokers
Professionals who assist investors in deciding which stocks and other investments to buy and in executing trades. (Chapter 3)
135
stop-loss (stop) order
An order to sell a stock when its market price reaches or drops below a specified level; can also be used to buy stock when its market price reaches or rises above a specified level. (Chapter 3)
136
street name
Security certificates issued in the brokerage firm’s name but held in trust for its client, who actually owns them. (Chapter 3)
137
Value Line Composite Index
One of the most popular subscription services used by individual investors; subscribers receive three basic reports weekly. (Chapter 3)
138
wrap account
A brokerage account in which customers with large portfolios pay a flat annual fee that covers the cost of a money manager’s services and the commissions on all trades. (Also called a managed account.) (Chapter 3)
139
business risk
The degree of uncertainty associated with an investment’s earnings and the investment’s ability to pay the returns owed to investors. (Chapter 4)
140
deflation
A period of generally declining prices. (Chapter 4)
141
discount rate
The annual rate of return that could be earned currently on a similar investment; used when finding present value; also called opportunity cost. (Chapters 4 and 4A)
142
event risk
Risk that comes from an unexpected event that has a significant and usually immediate effect on the underlying value of an investment. (Chapter 4)
143
expected inflation premium
The average rate of inflation expected in the future. (Chapter 4)
144
expected return
The return an investor thinks an investment will earn in the future. (Chapters 4 and 11)
145
financial risk
The degree of uncertainty of payment resulting from a firm’s mix of debt and equity; the larger the proportion of debt financing, the greater this risk. (Chapter 4)
146
holding period
The period of time over which one wishes to measure the return on an investment vehicle. (Chapter 4)
147
holding period return (HPR)
The total return earned from holding an investment for a specified holding period (usually one year or less). (Chapter 4)
148
income
Usually cash or near-cash that is periodically received as a result of owning an investment. (Chapter 4)
149
inflation
A period of generally rising prices. (Chapter 4)
150
interest rate risk
The chance that changes in interest rates will adversely affect a security’s value. (Chapter 4)
151
internal rate of return
The discount rate that equates an investment’s cost to the present value of benefits that it provides the investors. (Chapter 4)
152
liquidity risk
The risk of not being able to liquidate an investment quickly and at a reasonable price. (Chapter 4)
153
market risk
Risk of decline in investment returns because of market factors independent of the given investment. (Chapters 4 and 5)
154
nominal rate of return
The actual return earned on an investment expressed in current dollars. (Chapter 4)
155
paper return
A return that has been achieved but not yet realized by an investor during a given period. (Chapter 4)
156
present value
The value today of a sum to be received at some future date; the inverse of future value. (Chapters 4 and 4A)
157
purchasing power risk
The chance that unanticipated changes in price levels (inflation or deflation) will adversely affect investment returns. (Chapter 4)
158
rate of growth
The compound annual rate of change in the value of a stream of income. (Chapter 4)
159
real rate of return
The nominal return minus the inflation rate; a measure of the increase in purchasing power that an investment provides. (Chapter 4)
160
realized return
Current income actually received by an investor during a given period. (Chapter 4)
161
required return
The rate of return an investor must earn on an investment to be fully compensated for its risk. (Chapter 4)
162
return
The profit from an investment. (Chapter 4)
163
risk premium
A return premium that reflects the issue and issuer characteristics associated with a given investment vehicle. (Chapter 4)
164
risk-averse
Describes an investor who requires greater return in exchange for greater risk. (Chapter 4)
165
risk-free rate
The rate of return that can be earned on a risk-free investment; the sum of the real rate of return and the expected inflation premium. (Chapter 4)
166
risk-indifferent
Describes an investor who does not require a change in return as compensation for greater risk. (Chapter 4)
167
risk-return tradeoff
The relationship between risk and return, in which investments with more risk should provide higher returns, and vice versa. (Chapter 4)
168
risk-seeking
Describes an investor who will accept a lower return in exchange for greater risk. (Chapter 4)
169
satisfactory investment
An investment whose present value of benefits (discounted at the appropriate rate) equals or exceeds the present value of its costs. (Chapter 4)
170
standard deviation
A statistic used to measure the dispersion (variation) of returns around an asset’s average or expected return. (Chapter 4)
171
tax risk
The chance that Congress will make unfavorable changes in tax laws, driving down the after-tax returns and market values of certain investments. (Chapter 4)
172
total return
The sum of the current income and the capital gain (or loss) earned on an investment over a specified period of time. (Chapter 4)
173
annuity
A stream of equal cash flows that occur at equal intervals over time. (Chapters 4A and 17)
174
compound interest
Interest paid not only on the initial deposit but also on any interest accumulated from one period to the next. (Chapter 4A)
175
176
continuous compounding
Interest calculation in which interest is compounded over the smallest possible interval of time. (Chapter 4A)
177
discount rate
The annual rate of return that could be earned currently on a similar investment; used when finding present value; also called opportunity cost. (Chapters 4 and 4A)
178
future value
The amount to which a current deposit will grow over a period of time when it is placed in an account paying compound interest. (Chapter 4A)
179
interest
The “rent” paid by a borrower for use of the lender’s money. (Chapter 4A)
180
mixed stream
A stream of returns that, unlike an annuity, exhibits no special pattern. (Chapter 4A)
181
ordinary annuity
An annuity for which the cash flows occur at the end of each period. (Chapter 4A)
182
present value
The value today of a sum to be received at some future date; the inverse of future value. (Chapters 4 and 4A)
183
simple interest
Interest paid only on the initial deposit for the amount of time it is held. (Chapter 4A)
184
time value of money
The fact that as long as an opportunity exists to earn interest, the value of money is affected by the point in time when the money is received. (Chapter 4A)
185
true rate of interest
The actual rate of interest earned. (Chapter 4A)
186
beta
A measure of undiversifiable, or market, risk that indicates how the price of a security responds to market forces. (Chapter 5)
187
capital asset pricing model (CAPM)
Model that formally links the notions of risk and return; it uses beta, the risk-free rate, and the market return to help investors define the required return on an investment. (Chapter 5)
188
correlation
A statistical measure of the relationship, if any, between series of numbers representing data of any kind. (Chapter 5)
189
correlation coefficient
A measure of the degree of correlation between two series. (Chapter 5)
190
diversifiable (unsystematic) risk
The portion of an investment’s risk that results from uncontrollable or random events that are firm-specific; can be eliminated through diversification. (Chapter 5)
191
efficient frontier
The leftmost boundary of the feasible (attainable) set of portfolios that includes all efficient portfolios—those providing the best attainable tradeoff between risk (measured by the standard deviation) and return. (Chapter 5)
192
efficient portfolio
A portfolio that provides the highest return for a given level of risk. (Chapter 5)
193
firm-specific risk, also called unique risk or idiosyncratic risk
The part of an investment’s risk that disappears when the investment is held as part of a diversified portfolio; risk that is unique to the specific investment rather than risk that affects the broader market. (Chapter 5)
194
growth-oriented portfolio
A portfolio whose primary objective is long-term price appreciation. (Chapter 5)
195
income-oriented portfolio
A portfolio that is designed to produce regular dividends and interest payments. (Chapter 5)
196
market risk
Risk of decline in investment returns because of market factors independent of the given investment. (Chapters 4 and 5)
197
modern portfolio theory (MPT)
An approach to portfolio management that uses several basic statistical measures to develop a portfolio plan. (Chapter 5)
198
negatively correlated
Describes two series that move in opposite directions. (Chapter 5)
199
perfectly negatively correlated
Describes two negatively correlated series that have a correlation coefficient of –1. (Chapter 5)
200
perfectly positively correlated
Describes two positively correlated series that have a correlation coefficient of 1. (Chapter 5)
201
portfolio beta, bp
The beta of a portfolio; calculated as the weighted average of the betas of the individual assets it includes. (Chapter 5)
202
positively correlated
Describes two series that move in the same direction. (Chapter 5)
203
security market line (SML)
The graphical depiction of the capital asset pricing model; reflects the investor’s required return for each level of undiversifiable risk, measured by beta. (Chapter 5)
204
total risk
The sum of an investment’s undiversifiable risk and diversifiable risk. (Chapter 5)
205
traditional portfolio management
An approach to portfolio management that emphasizes “balancing” the portfolio by assembling a wide variety of stocks and/or bonds of companies from a broad range of industries. (Chapter 5)
206
uncorrelated
Describes two series that lack any relationship or interaction and, therefore, have a correlation coefficient close to zero. (Chapter 5)
207
undiversifiable (systematic) risk
The risk that remains even in a well-diversified portfolio. Risk that tends to affect all (or nearly all) securities. (Chapter 5)
208
Risk Reduction
Investor can achieve the grwatest risk reduction if they combine assets that have a low correlation
209
Treasury Stock
When a firm buys shares of its own stock, the repurchased shares become treasury stock. Firms often buy their own stock if management believes the stock is undervalued or engage in a buyback in lieu of paying a dividend. Treasury stock can be used to pay for mergers and acquisitions, stock dividends, executive stock options, or kept indefinitely.
210
Residual owners of the firm
common stockholders
211
Quality long-term growth
A strategy that seeks captial gains as the primary goal
212
blue-chip stocks
Financially strong, high-quality stocks with long and stable records of earnings and dividends. (Chapter 6)
213
book value
The amount of stockholders’ equity in a firm; equals the amount of the firm’s assets minus the firm’s liabilities, or sometimes assets minus liabilities and preferred stock. (Chapters 6 and 16)
214
cash dividend
Payment of a dividend in the form of cash. (Chapter 6)
215
classified common stock
Common stock issued by a company in different classes, each of which offers different privileges and benefits to its holders. (Chapter 6)
216
cyclical stocks
Stocks whose earnings and overall market performance are closely linked to the general state of the economy. (Chapter 6)
217
date of record
The date on which an investor must be a registered shareholder to be entitled to receive a dividend. (Chapter 6)
218
declaration date
The date on which a firm’s board of directors declares the amount and timing of the firm’s dividend payment. (Chapter 6)
219
defensive stocks
Stocks that tend to hold their own, and even do well, when the economy starts to falter. (Chapter 6)
220
dividend payout ratio
The portion of earnings per share (EPS) that a firm pays out as dividends. (Chapter 6)
221
dividend reinvestment plan (DRIP)
Plan in which shareholders have cash dividends automatically reinvested into additional shares of the firm’s common stock. (Chapter 6)
222
dividend yield
A measure that relates dividends to share price and puts common stock dividends on a relative (percentage) rather than absolute (dollar) basis. (Chapters 6 and 16)
223
earnings per share (EPS)
The amount of annual earnings available to common stockholders, as stated on a per-share basis. (Chapter 6)
224
equity capital
Evidence of ownership position in a firm in the form of shares of common stock. (Chapter 6)
225
226
ex-dividend date
Three business days up to the date of record; determines whether one is an official shareholder and thus eligible to receive a declared dividend. (Chapter 6)
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growth stocks
Stocks that experience high rates of growth in operations and earnings. (Chapter 6)
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income stocks
Stocks with long and sustained records of paying higher-than-average dividends. (Chapter 6)
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investment value
The amount that investors believe a security should be trading for or what they think it’s worth. (Chapter 6)
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large-cap stocks
Stocks with very high market capitalizations. (Chapter 6)
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market value
The prevailing market price of a security. (Chapters 6 and 18)
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mid-cap stocks
Medium-sized stocks, generally with market values of less than $4 or $5 billion but more than $1 billion. (Chapter 6)
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dividend yield
A measure that relates dividends to share price and puts common stock dividends on a relative (percentage) rather than absolute (dollar) basis. (Chapters 6 and 16)
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earnings per share (EPS)
The amount of annual earnings available to common stockholders, as stated on a per-share basis. (Chapter 6)
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equity capital
Evidence of ownership position in a firm in the form of shares of common stock. (Chapter 6)
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ex-dividend date
Three business days up to the date of record; determines whether one is an official shareholder and thus eligible to receive a declared dividend. (Chapter 6)
238
income stocks
Stocks with long and sustained records of paying higher-than-average dividends. (Chapter 6)
239
growth stocks
Stocks that experience high rates of growth in operations and earnings. (Chapter 6)
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investment value
The amount that investors believe a security should be trading for or what they think it’s worth. (Chapter 6)
241
large-cap stocks
Stocks with very high market capitalizations. (Chapter 6)
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market value
The prevailing market price of a security. (Chapters 6 and 18)
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mid-cap stocks
Medium-sized stocks, generally with market values of less than $4 or $5 billion but more than $1 billion. (Chapter 6)
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dividend yield
A measure that relates dividends to share price and puts common stock dividends on a relative (percentage) rather than absolute (dollar) basis. (Chapters 6 and 16)
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par value
The stated, or face, value of a stock. (Chapter 6) Also, the value that a bond issuer must pay to the investor when the bond matures. (Chapter 10)
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payment date
The actual date on which the company will mail dividend checks to shareholders (also known as the payable date). (Chapter 6)
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public offering
The sale of a firm’s securities to public investors. (Chapters 2 and 6)
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publicly traded issues
Shares of stock that are readily available to the general public and are bought and sold in the open market. (Chapter 6)
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residual owners
Owners/stockholders of a firm, who are entitled to dividend income and a prorated share of the firm’s earnings only after all other obligations have been met. (Chapter 6)
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rights offering
An offer of new shares of stock to existing stockholders on a pro rata basis. (Chapters 2 and 6)
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small-cap stocks
Stocks that generally have market values of less than $1 billion but can offer above-average returns. (Chapter 6)
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speculative stocks
Stocks that offer the potential for substantial price appreciation, usually because of some special situation, such as new management or the introduction of a promising new product. (Chapter 6)
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stock dividend
Payment of a dividend in the form of additional shares of stock. (Chapter 6)
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stock spin-off
Conversion of one of a firm’s subsidiaries to a stand-alone company by distribution of stock in that new company to existing shareholders. (Chapter 6)
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stock split
A maneuver in which a company increases the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share. (Chapter 6)
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tech stocks
Stocks that represent the technology sector of the market. (Chapter 6)
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treasury stock
Shares of stock that have been sold and subsequently repurchased by the issuing firm. (Chapter 6)
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activity ratios
Financial ratios that are used to measure how well a firm is managing its assets. (Chapter 7)
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balance sheet
A financial summary of a firm’s assets, liabilities, and shareholders’ equity at a single point in time. (Chapter 7)
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business cycle
An indication of the current state of the economy, reflecting changes in total economic activity over time. (Chapter 7)
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common-stock (market) ratios
Financial ratios that convert key information about a firm to a per-share basis. (Chapter 7)
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economic analysis
A study of general economic conditions that is used in the valuation of common stock. (Chapter 7)
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fundamental analysis
The in-depth study of the financial condition and operating results of a firm. (Chapter 7)
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growth cycle
A reflection of the amount of business vitality that occurs within an industry (or company) over time. (Chapter 7)
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income statement
A financial summary of the operating results of a firm covering a specified period of time, usually a year. (Chapter 7)
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industry analysis
Study of industry groupings that looks at the competitive position of a particular industry in relation to others and identifies companies that show particular promise within an industry. (Chapter 7)
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intrinsic value
The underlying or inherent value of a stock, as determined through fundamental analysis. (Chapter 7) Also, the gross amount of money that an investor would receive if he or she chose to exercise an option. (Chapter 14)
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leverage ratios
Financial ratios that measure the amount of debt being used to support operations and the ability of the firm to service its debt. (Chapter 7)
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liquidity ratios
Financial ratios concerned with a firm’s ability to meet its day-to-day operating expenses and satisfy its short-term obligations as they come due. (Chapter 7)
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PEG ratio
A financial ratio that relates a stock’s price/earnings multiple to the company’s rate of growth in earnings. (Chapter 7)
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profitability
Financial ratios that measure a firm’s returns by relating profits to sales, assets, or equity. (Chapter 7)
272
ratio analysis
The study of the relationships between financial statement accounts. (Chapter 7)
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security analysis
The process of gathering and organizing information and then using it to determine the intrinsic value of a share of common stock. (Chapter 7)
273
statement of cash flows
A financial summary of a firm’s cash flow and other events that caused changes in the company’s cash position. (Chapter 7)
274
common-size income statement
A type of financial report that uses a common denominator (net sales) to convert all entries on a normal income statement from dollars to percentages. (Chapter 8)
275
dividend valuation model (DVM)
A model that values a share of stock on the basis of the future dividend stream it is expected to produce; its three versions are zero-growth, constant-growth, and variable-growth. (Chapter 8)
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free cash flow
The cash flow remaining after a firm has paid all of its expenses and makes necessary investments in working capital and fixed assets. (Chapter 8)
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free cash flow to equity method
A stock valuation approach that estimates the free cash flow that a company will produce over time and discounts that to the present to estimate the firm’s total equity value. (Chapter 8)
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price-to-earnings (P/E) approach
Stock valuation approach that tries to find the P/E ratio that’s most appropriate for the stock; this ratio, along with estimated EPS, is then used to determine a reasonable stock price. (Chapter 8)
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relative P/E multiple
A stock’s P/E divided by a market multiple. (Chapter 8)
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stock valuation
Obtaining an estimate of a stock’s intrinsic value that investors can act on. (Chapter 8)
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target price
The price an analyst expects the stock to reach within a certain period of time, usually a year. (Chapter 8)
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valuation
A process by which an investor determines an investment’s worth. (Chapter 8)
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