FINANCE and INVESTMENT

TERMS for BEGINNERS

Learn the language of investing. These investment terms are good to know so you can engage in a water cooler conversation about the stock market or an intelligent conversation about your favorite company. Finance and investment terms will be updated upon request, allowing you to understand the most important beginning terms and investing concepts used in investment circles. I know this page is long, forgive/ sue me.

Terms are derived from definitions found in one or more Barron's book publications.
Review Barron's Finance and Investment books on-line at Amazon.com:

Barron's Dictionary of Finance and Investment Terms: (about $12.00 from amazon)

Barron's Finance and Investment Handbook:   Massive book of investing concepts, terms and data; 1998 Edition.

 

Other Barron's Professional Hand books:

• Dictionary of Business Terms (Barron's Business Guides); Jack P., Ph.D. Friedman, et al
• Dictionary of Accounting Terms (Barron's Business Guides); Joel G. Siegel, Jae K. Shim
• Dictionary of Banking Terms (Barron's Business Library); Thomas P. Fitch

Jump To: MUTUAL FUNDS Jump To: EXCHANGES, INDEXES and AVERAGES Jump To: DIVIDENDS, SPLITS and ADJUSTMENTS

UNDERSTANDING THE TERMS:

• STOCK: Ownership of a company or corporation, represented by "shares" of stock that claim ownership on the company's earnings and assets.
  
• EARNINGS: A company's net profit, after expenses, investing and taxes. Most commonly referred to as earnings per share, or EPS, the company's earnings are divided by the number of the company's (stock) shares to arrive at earnings per share. EXAMPLE: 1,000,000 shares of common stock; $1,000,000 profit: EPS = $1.00
  In real estate, the three most important things are: location, location, location. In finance they are earnings, earnings, earnings.
  EXAMPLE: 1,000,000 shares of common stock; $1,000,000 profit: EPS = $1.00
  
• ASSET: Anything owned by a company or corporation that has monetary value. This could include desks, chairs, light fixtures, product inventory, checking account balance, or even the company name.
  
• IPO: Initial Public Offering. This is the initial, or first, offering of common stock to the public. As the stock market has heated up in the last 5-7 years, the number of companies initiating IPOs has exploded.
  
• BULL MARKET: A period of rising stock market prices accompanied by increased trading volumes. A person who thinks stock prices will go up is "bullish".
  
• BEAR MARKET: A period of falling or depressed stock market prices. One who thinks that the market will fall, or not rise, is considered a Bear, and is "Bearish".
  
• DJIA: Also known as "THE DOW", is actually the Dow Jones Industrial Average, composed of 30 solid and stable corporations whose stocks are traded on the New York Stock Exchange. The "DOW" is derived from a complex equation adjusting for stock splits, dividends paid and several other factors. Quoted in points, not dollars, the DJIA is used by many investors as a "windsock" of how the market is doing, and which way it is headed, up or down. It is by far the most widely quoted stock market indicator.
• P/E: Price to earnings ratio. Also known as the "multiple". Found by dividing the current stock price by the latest year's earnings per share (called trailing P/E). P/E is used as a guide, or yardstick, to compare the "value" in predicted earnings growth of one stock to another. High P/Es mean the stock is highly valued among due to its expected increase in earning per share.. Utility companies, automobile manufacturers and clothing retailers "trade at" lower P/Es than say technology stocks. Note that each time a stock's share price changes, so does its P/E.

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EXCHANGES, INDEXES and AVERAGES

• EXCHANGE: An exchange, or Stock Exchange, is a physical place where members trade stocks and other "listed" investments (options, bonds, etc.). Each exchange has it's own set of rules that must be met before a company's stock can be listed there for trading. Rules for membership differ from exchange to exchange. The New York Stock Exchange (NYSE) has the most stringent rules. EXAMPLE:The NYSE requires a corporation to have a minimum total market value of $16,000,000, minimum shares of 1,000,000, and an annual income exceeding $2,500,000.
  
• NYSE: NEW YORK STOCK EXCHANGE. The NYSE is the oldest, largest, and the most highly regarded exchange in the United States. Located at 11 Wall Street in New York, it is also know as the Big Board. The NYSE is a very large organization with many operating divisions composed of marketers, legal experts, planners, developers and economists. Thousands of larger companies are listed on the Big Board. Performance of companies on the NYSE usually takes the pole position in the news, as it is considered to be one of the more important economic "indicators".
  
• AMEX: AMEX is the abbreviation for the American Stock Exchange located in Manhattan. Stocks and bonds of smaller to mid-sized companies are listed through the AMEX. Many oil and gas company's stocks, foreign stocks, and ADRs are traded through the AMEX.
  
• NASDAQ: National Association of Security Dealers Automated Quotations. The NASDAQ is a computer operated system owned by the NASD that provides dealers with price quotations for stocks and securities traded through the NASDAQ. Also used interchangeably with National Market System. Stocks traded on the NASDAQ are usually the smaller, more volatile corporations and include many start up companies. Although stocks trading here must meet certain minimum requirements, those requirements for size, profitability etc. and less rigid than the NYSE.
  
• INDEX: An index is a statistical number, derived by summing many parts, and used to determine (or indicate) the movement, up or down, of the economy or a financial market. The Consumer Price Index is one such index used to measure the movement of inflation (usually up!). Other well known indexes are NYSE Index, the Standard &Poor's 500 Index, and the Value Line Index. A popular small company stock index is the Russell 5000.
  
• S & P 500 : Standard &Poor's 500 Index, The "S & P 500" or just the "S & P". The S & P 500 is a broad stock market index (indicator) derived from the value (price) of common stocks of 500 publicly traded companies. The S & P 500 is composed of 400 industrial, 60 transportation and utility , and 40 financial company stocks. While the DJIA is the most popular indicator, the S & P 500 is believed to be more representative of the entire market.
  
• AVERAGE: The word is a little misleading, but "average" is a weighted, adjusted, arithmetic mean value of a selected group of stocks, selected to indicate movement up or down of that particular market sector. These averages within the various sectors are important economic indicators.
  
• DOW JONES AVERAGES: Like the DJIA, there are several other averages from Dow Jones & Company; Dow Jones Transportation Average (DJTA)- 20 airline, railroad and airline stocks, and the Dow Jones Utility Average (DJUA)- 15 gas and electric utility companies. The DJIA, DJTA and DJUA are sometimes referred to as simply- "industrials", "transportation" or "utilities", respectively. A typical news report might state: "industrials were up 44 points, while transportation down 3- utilities unchanged".
  
  These averages can easily be confused with Indexes of the same type- DJII, DJUI, DJTI. Indexes are quoted as numbers, with no money value, while averages are quoted in dollars and cents. Both indexes and averages are simply tools, most often used to gauge changes in market direction or sector performance..

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DIVIDENDS, SPLITS and ADJUSTMENTS

• DIVIDEND: A dividend is a payment of net profit to the shareholders. Net profit is profit after expenses (overhead, payroll, materials, equipment, taxes etc.). Not all companies pay a dividend, even though they earned a profit. Some companies choose to reinvest part or all the net profits back into the business. Other companies, utility companies for example, tend to pay most or all the profits in dividends.
  
• STOCK SPLIT: A stock split is like cell division (biology) in that as a company grows, and it's stock price rises, the stock will divide, or "split". Most stock splits are the result of the stock price becoming so high, it discourages new investors. Stocks can split "2 for 1", "3 for 1", "3 for 2" etc. In a 2 for one split, each share is exchanged for 2 new shares and it's value is divided in half. The two new shares have the same value as the one share and the stock price has been effectively reduced. In a 3 for 1 split, three new shares are exchanged for each old share, and so on. Note also that the number of authorized shares will double, triple etc. and the dividend per share will decrease accordingly. Dividends are usually paid in cash, are occasionally paid in stock, and in rare cases, are paid in merchandise or products.
  
• REVERSE SPLIT:The reverse split is a little different, although it follows the same lines. In a reverse 1 for 3 split, three old shares would be exchanged for one new share and the price would increase accordingly. The most common reason for a reverse split is that the company's stock has decreased in value such, that by price alone, it is unattractive to investors. The number of shares and the dividend will change accordingly.
  
• ADJUSTMENTS: As mentioned above, when a stock splits, its price and dividend per share, if any, is adjusted. Also, the number of shares outstanding increases. On stock price history charts, the prices listed are adjusted for splits. This can be a difficult concept. The historical price shown for a given stock, will be adjusted for splits that happened in the "future".
  
  For example; the 1988 low price for COMPAQ COMPUTER, as listed in the Value Line® is listed as $2.80. Since then, the stock has split 2 for 1 in 1990, 3 for 1 in 1994 and 5 for 2 in 1997. The current price for COMPAQ is $34 1/6. The actual price of COMPAQ was never $2.80 in 1988, but the 1988 price, as listed, has been adjusted to reflect these splits.
  
  Note of interest: If One share of compaq was purchased in 1988, the number of shares owned today would be 15, at a price of $34.06 per share, for a total value of $511.20! One can see that without the splits that the price would be quite high for a single share, and with splits, the number of share increased without further purchases.
  
• EX-DIVIDEND: Ex-dividend is the time interval between the announcement of a dividend payment and the date it is paid. An investor that buys shares after the "ex" date is not entitled to receive a dividend. Usually, a stock that has an ex-dividend date will fall in price by the amount of the dividend on the ex date. A stock or security that has "gone ex-dividend" will be noted by an "x" in the newspaper and sometimes with "adjusted", as the price has been adjusted by the amount of the dividend.

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MUTUAL FUNDS

• PORTFOLIO: The portfolio is simply the stocks and other investments one owns.
• DIVERSIFICATION: Diversification means to put your eggs in different investment baskets- to have a diverse portfolio. Investments in different "sectors", different business areas, will accomplish this. Examples of different sectors include: bank stock, retail outlet stock, medical technology stock, Health Maintenance Organization stock, Internet provider stock, high tech stock etc. One might diversify within a sector and own differing stock from the same sector. Investing in several different sectors, say, pharmaceuticals, aircraft manufacturing and software design yields more diversification.
• MUTUAL FUND: Ah the Mutual Fund- a near perfect way to diversify. A mutual fund is a collection of stocks, from different companies, combined (or co-mingled) together to provide one single investment. An example might be a mutual fund that invests 10% in bank stock, 25% in retail outlet stock, 25% in medical technology stock, 25% in high tech stock and the remaining % in government securities. The mutual fund attracts money from many investors and manages the "mix" of stocks, often for a fee.
• MUTUAL FUND ADVANTAGES: The main advantage to mutual funds is that the funds are managed by professional investment managers. The second advantage is, mutual funds offer a (somewhat) diversified portfolio because of the many different stocks a fund holds. Some funds, "sector" funds, offer a diversified portfolio of companies within the same industry.
• SECTOR FUNDS: A sector fund provides a concentration in a particular industry, such as, computers or tobacco. A sector fund might be chosen because of the bright future of a particular industry. Fidelity offers many such sector funds.
• LOADED FUNDS: Loaded funds are ones that charge a fee to the fund (share) holders, usually a "management " fee or a sales commission. These fees can be relatively large or small, depending on the fund. The stated advantage of a loaded fund is; the sales person explains the fund to the buyer and provides advise as to when it is appropriate to sell or buy more of the fund. It is felt by some that a self reliant investor could make better use of the fees by investing them rather than to pay for additional "management". These fees can be either front end loaded or back end loaded.
• FRONT END LOAD: Front load is when the sales fee is charged at the time of purchase of a fund. Three percent is average but some funds charge more, some less. From the fund's point of view, the earnings of the fund should more than make up for the upfront sales fee (? hummm).
• BACK END LOAD: Also called a redemption charge, the back-end load is charged at redemption (part or all) of the fund. This fee is also called a deferred sales charge or exit fee, and in most cases includes any and capital gains of the fund. The back-end load, or end-load, was designed to discourage investors from withdrawal of the fund. Also note that the back end charge may be waived after a certain time period, say five years.
• NO-LOAD FUND: The no load fund is just that- a fund which charges no sales, management or commission fees. No-loads are increasingly popular and provide a more affordable investment vehicle, and a better value, to many investors. No-load mutual funds listed in the financial pages are designated by the symbol "NL".

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