AAA bond rating is the highest possible rating assigned to an issuer’s bonds by credit rating agencies. The AAA rating is assigned to bonds whose issuers can easily meet their financial commitments.
Absolute Performance is a measure of the appreciation or depreciation (expressed as a percentage) that a stock or a mutual fund achieves over a given period of time.
Alpha is a calculation that measures the value a portfolio manager adds to or subtracts from a mutual fund's return in comparison with the market as a whole. The S&P 500 Index is most commonly used as the proxy for the market. If the alpha is greater than 1, it would indicate the fund has outperformed the market by 1 percent. If the alpha is less than 1, it would indicate an under-performance of 1 percent.
American Depositary Receipts (ADRs) are shares that trade in U.S. markets, but represent shares of a foreign company. A bank (the depository) purchases a number of the foreign shares and holds them in a trust or similar account; in turn, the bank issues shares tradable in the U.S. that represent an interest in the foreign company. The ratio of ADRs to foreign shares is set by the bank. ADRs do not mitigate currency risk, but can reduce transaction costs and simplify trading compared to buying the local shares in the foreign markets.
Annuity is a contract with an insurance company; i.e. you make a lump-sum payment or series of payments and, in return, the insurer agrees to make periodic payments or a lump-sum payment to you. There are generally two types: fixed and variable. Note that annuities typically offer tax-deferred growth of earnings; penalties apply, however, if redeemed before the surrender date.
Asset is any item of economic value owned by an individual, institution, or corporation. Examples: cash, securities, accounts receivable, inventory, office equipment, real estate, automobiles, jewelry, etc. The IRS for tax purposes defines any increase in assets as income or capital gains.
Balance Sheet is a financial statement that summarizes the assets and liabilities of a company or individual.
Base 10 Log Scale is used to reflect growth compounding at a constant rate. Based on multiplication rather than addition, a log scale allows you to examine values that span orders of magnitude without losing information.
Basis Point or Basis Point System (BPS) is a unit of measurement equal to 1/100th of 1 percent. It is often used to measure very small changes in interest rates, equity indexes, and the yields of fixed-income securities.
Beta is a calculation that attempts to measure the price volatility of a security or a mutual fund in comparison with the market as a whole. The S&P 500 Index is most commonly used as the proxy for the market. If the beta is greater than 1, the price of the security has been more volatile than the market. If the beta is less than 1, the price of the security has been less volatile than the market. Note that the value of beta for a security can change with sampling frequency.
Bonds are a way for the government or a company to borrow money. Bonds have two parts: the principal and the coupon. The coupon is a fixed amount that is to be paid to the bondholder periodically over the life of the bond (thus providing “income”). The principal is repaid when the bond matures. Bonds are traded in an open market, just like stocks. Bond prices reflect many things, including changes in interest rates. The price of a bond changes as follows:
- If the current market interest rate is higher than the bond coupon, the bond will sell for less than the face (par) value of the bond.
- If the current market interest rate is less than the bond coupon, the bond will sell for more than face (par) value.
- If the current market interest rate equals the coupon value, the bond will trade at face (par) value.
Book Value (BV) or “Book” equals total assets minus total liabilities. It is the owner’s equity in the business, often quoted as Book Value/Share.
CAGR (Compound Annual Growth Rate) is the year-over-year growth rate of an investment over a specified period of time.
Capital Gains is the amount by which the selling price of an asset exceeds the purchase price; the gain is unrealized until the asset is sold, at which time the gain is realized (and taxed).
Capitalization often referred to as “Market Cap,” is the total dollar market value of all of a company's outstanding shares. Example: if a company has 25 million shares outstanding, each with a share price of $100, the company's market capitalization is $2.5 billion (25,000,000 x $100 per share). This figure is often used to rank a company's size, as opposed to sales or total asset figures. Note: “Small Cap” is often $250 million to $1 billion capitalization; “Mid Cap” is often $1 billion to $5 billion capitalization; “Large Cap” is often over $5 billion capitalization.
Carry trade can be characterized by borrowing in one currency (e.g. U.S dollars at .25% or the Japanese yen at .30%) and investing that money in other assets, including the sovereign debt of another currency regime, (e.g. Australian bonds at 4%-6%).
Cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately (as in the case of money market accounts).
Cash Flow represents the cash a company is able to generate after paying out the money required to maintain or expand its business.
Central Bank is the entity responsible for overseeing the monetary system for a nation (or group of nations). The central banking system in the U.S. is known as the Federal Reserve (commonly referred to "the Fed"), composed of twelve regional Federal Reserve Banks located in major cities throughout the country. The main tasks of the Fed are to supervise and regulate banks, implement monetary policy by buying and selling U.S. Treasury bonds, and steer interest rates.
Certificate of Deposit (CD) is an interest-bearing savings instrument with a specified interest rate and maturity date. CDs are generally issued by commercial banks, thereby insured by the FDIC.
Coincident Composite Coincident Composite, published by the Conference Board, is a broad-based measurement of current economic conditions, assisting economists and investors to determine the business cycle of the economy.
Coincident Indicators tend to move in step with general economic trends. Examples: Consumer Price Index (CPI), retail sales, and trade balances.
Collateralized Debt Obligation (CDO) is an investment security backed by a pool of bonds or loans, representing different types of debt and credit risk.
Commodity s a basic good with little differentiation, (e.g. grains, metals, oil), whose price is subject to supply and demand.
Common Stock represents equity ownership in a company, providing voting rights and entitling the holder to a share of the company's success through dividends and/or capital appreciation. The Stock Market is a financial auction where participants buy and sell equities. Stock Prices are set by the market; i.e. what someone is willing to pay to own a piece of the company. Over the long term, the price will reflect the true value of the company, but over the short term, the perceived value of the company may not always reflect the company's true value.
Conference Board publishes a variety of economic indicators, including the Consumer Confidence Index, along with Coincident, Lagging, and Leading Indicators.
Consumer Confidence Index Consumer Confidence Index is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
Consumer Price Index (CPI) measures the prices of consumer goods and services purchased by households. CPI is used as a measure of price inflation.
Correction is a short-term drop in stock prices, usually viewed as contrary to the underlying trend.
Correlation s a statistical measure of how two securities move in relation to each other. A perfect positive correlation (a coefficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a coefficient of -1) means that if one security moves in either direction, the security will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random. (In real life, perfectly correlated securities are rare.)
Cost Basis (also referred to as Basis) is the cost of shares and is used to calculate the gain or loss on a redemption or exchange of an asset. The original cost basis of the shares depends upon whether the shares were acquired through purchase, reinvestment of dividends and/or capital gains, inheritance, or as a gift. Typically for purchased shares, the cost basis it equal to the purchase price, including commissions, and may be adjusted by various tax items including return of capital and wash sale rules.
Cost Basis Method is an accounting method used to determine how shares in an account are depleted upon redemption or exchange and for purposes of calculating the basis and therefore the gain or loss on those shares. The cost basis method selected will determine both the depletion order of the shares which are redeemed or exchanged and how the cost basis information is calculated and subsequently reported to the shareholder and to the Internal Revenue Service (IRS).
Covered Call A Covered Call is an options strategy where the investor owns the underlying stock and writes (sells) a “call contract.” By selling a call, an investor collects a premium for selling someone the right to buy the underlying stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time. The premium collected by selling a call helps an investor reduce the risk of owning a position by either increasing income or offsetting some of the loss if the stock declines.
Credit Default Swap A Credit Default Swap (CDS) is a contract that involves the transfer of credit risk between two parties. It is similar to insurance because it provides the buyer of the contract, who often owns the underlying credit, with protection against default, a credit rating downgrade, or another negative “credit event.” The seller of the contract assumes the credit risk that the buyer does not wish to shoulder in exchange for a periodic protection fee similar to an insurance premium.
Credit Markets are a financial auction where participants buy and sell debt securities, usually in the form of bonds. By contrast, the equity markets deal in stocks.
Credit Spreads refer to the difference in the number of percentage points or basis points in yield. The level of risk correlates with the potential for returns.
Currency is any form of money in public circulation. In some cultures currency can refer to any object that has a perceived value and can be exchanged for other objects.
Currency hedging is the act of entering into a financial contract in order to protect against changes in currency exchange rates.
Currency Peg is when a country or government's exchange-rate policy “pegs” its central bank’s rate of exchange to another country’s currency. (Currency has sometimes also been pegged to the price of gold.) Also known as a “fixed exchange rate” or “pegged exchange rate,” currency pegs allow importers and exporters to know exactly what kind of exchange rate they can expect for their transactions, simplifying trade. In turn, this helps to curb inflation and temper interest rates, allowing for increased trade.
Defined-benefit plan the employer guarantees employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investments.
Defined-contribution plan the employer makes predefined contributions for the employee, but the final amount of benefit received depends on the performance of the underlying investments.
Deflation s a generalized decline in prices. When businesses are able to produce goods at lower prices, due to cost-cutting initiatives and efficiency gains, the effect can be positive. When money grows slower than the supply of goods, a downward spiral in price can take effect as witnessed during the Great Depression.
Depression is a severe economic downturn that lasts several years. It’s been said that during a depression, you don’t care about the return on your money; you care about the return of your money.
Derivative is a security whose price is dependent upon or derived from one or more underlying assets, such as stocks, bonds, commodities, currencies, interest rates, etc.
Devalue is to lower the exchange value of a currency.
Discounted Cash Flow is a method of valuing a project, company, or asset, whereby all future cash flows are estimated and discounted to give their present values.
Disruptive technologies are innovations that change the status quo. Examples in the transportation industry include trains, automobiles, and planes. Recent examples in the field of technology include video streaming, social media, and online trading.
Diversification is used to spread risk, or reduce volatility of investment prices. Diversification does not assure a profit or prevent against a loss in a declining market.
Dividend is a distribution of a company's earnings to its shareholders, as decided by the board of directors.
Dividend Discount Model suggests that a share of stock is worth the present value of all its future dividends, rather than its earnings. This model was popularized by John Burr Williams in the 1930s; he concluded reported earnings could not be trusted -- the only return you could trust was an actual check in the mail.
Dividend Yield (%) is a company's annual dividend payments divided by its market capitalization, or the dividend per share divided by the price per share.
DJIA The Dow Jones Industrial Average (DJIA) is one of several stock market indices, created by 19th century Wall Street Journal editor Charles Dow to gauge the performance of the industrial sector of the American stock market. The DJIA consists of 30 of the largest and most widely held public companies in the United States. Note the "industrial" portion of the name is largely historical; many of the 30 modern companies have little to do with traditional heavy industry.
Dollar Cost Averaging is a strategy of buying securities in fixed-dollar amounts at scheduled intervals, with the aim to lower the average cost per share over time. Dollar cost averaging does not assure a profit, nor does it guarantee against loss.
DOW (DJIA) is one of several stock market indices, created by 19th century Wall Street Journal editor Charles Dow to gauge the performance of the industrial sector of the American stock market. The DJIA consists of 30 of the largest and most widely held public companies in the United States. Note the "industrial" portion of the name is largely historical; many of the 30 modern companies have little to do with traditional heavy industry.
Dow Jones Industrial Average (DJIA) is one of several stock market indices, created by 19th century Wall Street Journal editor Charles Dow to gauge the performance of the industrial sector of the American stock market. The DJIA consists of 30 of the largest and most widely held public companies in the United States. Note the "industrial" portion of the name is largely historical; many of the 30 modern companies have little to do with traditional heavy industry.
Earnings are revenues minus the cost of sales, operating expenses, and taxes, over a given period of time.
Earnings Per Share (EPS) is the portion of a company's total profit that may be allocated to each share, computed by dividing net income (or earnings) by the total number of shares outstanding.
Economic Value Added (EVA) is a way to determine the value created, above the required return. By taking all capital costs into account, including the opportunity cost, EVA can show the financial amount of wealth a business has created or destroyed in a reporting period.
Equities are the result of a company selling shares of a stock in order to raise money. The stockholder is then an owner of the company and shares in both the success of the company (through dividends and capital gains) and its failures (through capital loss). There are no guarantees.
Equity equals assets minus liabilities. Equity investments represent ownership. Normally long term, equity ownership can be in stocks, real estate, tangible assets, or business enterprise. “Equities” are the result of a company selling shares of a stock in order to raise money. The stockholder is then an owner of the company and shares in both the success of the company (through dividends and capital gains) and its failures (through capital loss). There are no guarantees.
Estimated P/E Is an estimate of the price-to-earnings (P/E) ration where the earnings (E) are forecasted or estimated earnings for the company.
Euro Stoxx 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within Eurozone nations.
Exchange Traded Notes (ETN) is a type of unsecured, unsubordinated debt security. The value of an ETN can be affected by the credit rating of the issuer and not just changes in the underlying index.
Exchange Traded Products (ETP) is a type of security that is derivatively priced and trades intra-day on a national securities exchange. Generally, ETPs are benchmarked to stocks, commodities, or indices; they can also be actively managed. The most popular ETP is an Exchange Traded Fund (ETF) that tracks an index, commodity, or basket of assets. Different tax treatment applies to the various types of ETPs.
Exchange-Traded Fund (ETF) is an investment fund that tracks a commodity, a basket of securities, or an index (e.g. S&P 500, MSCI EAFE), but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Fannie Mae Federal National Mortgage Association) was originally created in 1938 as part of FDR’s “New Deal” to provide banks with federal money for financing mortgages. In 1968, Congress privatized Fannie Mae and it began operating as a GSE (government sponsored enterprise), buying mortgages from primary lenders and then packaging them into investor securities. To avoid being a monopoly, a second GSE, Freddie Mac, was created in 1970. Currently, Fannie Mae and Freddie Mac control about 90% of the nation’s secondary mortgage market
FASB (Federal Accounting Standards Board) 157, also known as Mark-to-Market Accounting, took effect in November 2007 and required companies to “mark” their asset values to similar values of recently sold assets. In March 2009, FASB allowed more leeway in valuations, a move that eased balance-sheet pressures amongst banks and insurance companies.
Federal Deposit Insurance Corporation (FDIC) is a U.S. government corporation created by the Glass-Steagall Act of 1933, providing deposit insurance which guarantees the principal of checking and savings deposits in member banks.
Federal Funds Rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. It is the interest rate banks charge each other for loans.
Federal Reserve Board (informally referred to as “the Fed”), is the central banking system of the United States, created in 1913 by the Federal Reserve Act. The main tasks of the Fed are to supervise and regulate banks, implement monetary policy by buying and selling U.S. Treasury bonds, and steer interest rates.
Fixed-Income Securities refer to any type of investment that yields a regular (or fixed) return.
Flat Yield Curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition.
Forward P/E or Estimated P/E is an estimate of the price-to-earnings (P/E) ratio where the earnings (E) are forecasted or estimated future earnings for a company.
Freddie Mac is the Federal Home Loan Mortgage Corporation, charted by Congress in 1970. A publicly owned corporation, it buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities in the open market. Currently, Fannie Mae and Freddie Mac control about 90% of the nation’s secondary mortgage market.
Free Cash Flow represents the cash a company is able to generate after paying out the money required to maintain or expand its business.
Free Cash Flow Yield is a ratio calculated by dividing the Free Cash Flow per Share by the Current Market Price per Share.
Fundamental Analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets.
Futures Contract is used to buy or sell a particular commodity, currency, or financial instrument at a pre-determined price in the future.
Gross Domestic Product (GDP) is the total market value of all goods and services produced within a country in a given period of time (usually a calendar year).
Growth Investing generally involves investing in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of price-to-earnings (P/E) or price-to-book (P/B) ratios.
Hedge is an investment to reduce the risk of adverse price movements in a security.
Historical Earnings Growth shows the rate of increase in a company's earnings per share (EPS).
HUD is the U.S. Department of Housing and Urban Development, established in 1965 to increase home ownership.
ICSC Chain Store Sales Index s a weekly compilation of chain store sales based on a sample of major retailers' weekly sales patterns. The weekly Index provides a timely window on the monthly store sales performance of the major retailers.
Income is money derived from either labor (salary, wages, and tips) or investment. The IRS defines investment income as “interest dividends, capital gains, and other types of distributions.”
Income Statement is a financial statement that shows how much revenue and profit a company has generated over a period of time.
Index Fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index (e.g. S&P 500).
Industrial Production is an economic indicator released monthly by the Federal Reserve Board, representing the total output of U.S. factories and mines
Inflation is generated by increases in the money supply, as directed by the Federal Reserve Bank. Note if the money supply grows faster than the pool of goods and services on which to spend it, general prices are bid higher as a result. Such “price inflation” generates a loss of purchasing power. In the United States, price inflation is most commonly measured by the percentage rise in the Consumer Price Index (CPI).
Insider Trading typically refers to when a person buys or sells a security based on their knowledge of material nonpublic information. This conduct is illegal in the United States because it creates an unfair advantage for those who have insider information compared to the general public. Insider trading may also refer to legal activity when corporate insiders (such as officers, employees, and directors) buy and sell shares in their company’s stock; they must report their trades to the SEC.
Interest Rate %) is the price a borrower pays for the use of money, and the return a lender receives for lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year.
Inverted Yield Curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of a possible upcoming recession.
Investment Climate is largely determined by inflation and interest rates, critical for understanding many of the successes and pitfalls of investing.
ISM Activity Indices are published by the Institute for Supply Management (ISM), based on a national survey of roughly 370 purchasing executives in industries including finance, insurance and real-estate, communications and utilities.
ISM Non-Manufacturing Index is based on a national survey of roughly 370 purchasing executives in industries including finance, insurance and real-estate, communications and utilities. The Index is published monthly by the Institute for Supply Management (ISM).
Johnson Redbook Same Store Sales Index is a sample of large U.S. general merchandise retailers representing about 9,000 stores. Same-store sales are sales in stores continuously open for 12 months or longer. By dollar value, the Index represents over 80% of the equivalent 'official' retail sales series collected and published by the U.S. Department of Commerce.
Junk Bonds or low grade bonds, are issued by parties with questionable ability to meet their debt obligations (and, therefore are subject to default). Note: When you buy a bond you are lending money to someone (government or company) who promises to pay you back when the bond matures, plus interest. A bond's credit rating expresses the issuers' ability to meet its obligations; bonds that have high credit ratings are referred to as investment grade bonds; bonds that have low credit ratings are referred to as "junk."
Keynesian Economics named for John Maynard Keynes and developed during the Great Depression, asserts that the aggregate demand created by households, businesses, and the government -- and not the dynamics of free markets -- is the most important driving force in an economy. His theory further asserts that free markets (despite the assertion of 18th century Scottish economist Adam Smith and other classical economists) has no self-balancing mechanisms that lead to full employment.
Lagging Indicators tend to change only after the economy has already changed. Examples: unemployment rate, outstanding consumer loans, outstanding business loans, and business spending.
Leading Indicators tend to change before the economy has changed. Examples: building permits, money supply, stock prices, interest rate spread, and weekly manufacturing hours.
Liability is money owed. Examples: accounts payable, taxes, employee wages, accrued expenses, and deferred revenues
LIBOR (London Interbank Offered Rate) is the interest rate at which banks can borrow funds from other banks in the London interbank market. LIBOR is fixed on a daily basis by the British Bankers' Association.
Load Fund Is a mutual fund that may charge a front-end fee (sales commission) on the purchase of shares, a back-end fee (deferred sales charge) on the redemption of shares, and/or an annual 12b-1 fee (marketing fee) on the shares being held.
Long-term Debt includes investments such as Treasury bonds, corporate bonds, municipal bonds and mortgage-backed securities that are guaranteed by the borrower. Interest rates on long-term debt are driven by the market.
Long-Term Interest Rate (%) is the interest rate earned by a note or bond having a maturity of ten or more years.
Mark-to-Market Accounting FASB 157, took effect in November 2007 and required companies to “mark” their asset values to similar values of recently sold assets. In March 2009, FASB allowed more leeway in valuations, a move that eased balance-sheet pressures amongst banks and insurance companies.
Market Index is a portfolio of securities representing a particular market or a portion of it. Stock and bond market indexes are designed to mirror their underlying components.
Markit (Markit ABX) A series of indices developed by Markit, designed to reflect changes in price of a variety of collateral-backed securities.
Markit ABX is an index designed to reflect changes in price of a variety of collateral-backed securities.
Master Limited Partnership (MLP) A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
Modern Portfolio Theory (MPT) is a mathematical approach to portfolio diversification that attempts to collectively lower risk and maximize expected returns. Pioneered in the 1950s, MPT assumes that markets are efficient and investors are rational. Recent studies in behavioral economics have presented significant challenges to MPT.
Money Market is a market for short-term debt securities, such as banker's acceptances, commercial paper, negotiable CDs (certificates of deposit), and Treasury Bills with a maturity of one year or less.
Money Supply is the total amount of money available in an economy at a particular point in time. The Federal Reserve is able to influence an increase or decrease in the money supply.
Moodys Corporate Bond Baa Index is considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Moody’s bond ratings reflect the credit quality of companies. The highest rating is AAA and the lowest rating is D.
MSCI EAFE Index is a stock market index that represents the equity market performance of large and mid-cap securities outside the U.S. and Canada. The EAFE acronym indicates that the location of the 21 developed markets are within Europe, Australasia, and the Far East.
MSCI Indices were created by Morgan Stanley Capital International. Each MSCI Index measures a different aspect of global stock market performance. The MSCI indices are now managed by MSCI Barra.
NASDAQ is a market capitalization-weighted index designed to represent the performance of the National Market System which includes over 5,000 stocks traded only over-the-counter and not on an exchange. You cannot invest directly in an index.
NASDAQ Biotechnology Index (NBI) is an index of companies classified as either Biotechnology or Pharmaceuticals. The NBI is calculated under a modified capitalization-weighted methodology. You cannot invest directly in an index.
Net Cash Flow is the balance of the amounts of cash being received and paid by a business during a defined period of time.
Nikkei is short for Japan’s Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index comprising Japan’s top 225 blue-chip companies traded on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average (DJIA) Index in the United States.
No-load A no-load mutual fund is a fund that doesn't charge a front-end fee (sales commission) on the purchase of shares, a back-end fee (deferred sales charge) on the redemption of shares, and/or an annual 12b-1 fee (marketing fee) on shares being held.
Nominal Rate refers to the rate of stated interest before adjustment for inflation.
Normal Yield Curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds.
Note is a debt security that promises to pay interest during the term that the issuer has use of the money, and to repay the principal on or before the maturity date.
Option Contract is the right, but not the obligation, to buy (a call option) or sell (a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time.
Ordinary Income is composed mainly of wages, salaries, commissions, and interest income; it is taxed at the highest rate.
P/E to Growth Ratio Also referred to as PEG, is calculated by dividing the price-to-earnings (P/E) ratio by the Annual Earnings per Share Growth Rate.
Pension Plan is a type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee's future benefit. The pool of funds is then invested on the employee's behalf, allowing the employee to receive benefits upon retirement. There are two main types: Defined-benefit plan: the employer guarantees employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investments. Defined-contribution plan: the employer makes predefined contributions for the employee, but the final amount of benefit received depends on the performance of the underlying investments
Preferred Stock pays dividends at a specified rate and has preference over Common Stock in the payment of dividends and the liquidation of assets. Preferred stockholders may have different voting rights. Not all companies have preferred stocks
Price-to-Book (P/B) is the market capitalization divided by the owner’s equity in the business. Note that P/B equals the price-to-earnings ratio (P/E) x (times) return on equity (ROE).
Price-to-Cash-Flow is the current price of a stock divided by cash flow per share. The price-to-cash-flow ratio is used to evaluate the value of a company in much the same way as price-to-earnings and price-to-sales ratios are used.
Price-to-Earnings (P/E) is the current price of a stock divided by the (trailing) 12 months earnings per share.
Price-to-Sales Ratio equals the stock’s current price, divided by the stock’s revenue per share. It can be used for measuring a stock relative to its own past performance, other companies, or the market itself.
Price-to-Value Ratio (PVA) compares the current price of a company’s stock to the “fair value” calculated by the Ford Equity Research Company’s proprietary Dividend Discount Model (DDM). A PVA greater than 1 suggests a company’s stock is overpriced. A PVA less than 1 suggests a company’s stock is underpriced. The usefulness of the model depends upon how “fair value” is determined.
Principal (sum) is the original amount of a debt or investment on which interest is calculated.
Purchasing Power is the value of assets after adjusting for inflation; in other words, the money you have available to spend, if you choose. In order to increase the purchasing power of an investment, the value of the investment must grow at a rate greater than inflation. One way of doing this is to minimize the tax bite by providing long-term capital gains, which are currently taxed at a lower rate than ordinary income.
Quantitative Easing is a government monetary policy used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that although more money is floating around, there is still a fixed amount of goods for sale. This may eventually lead to higher prices or inflation.
Real Rate of Return (or real interest rate) is the nominal rate minus the rate of inflation.
Recession is a downturn in economic activity, generally defined by economists as two consecutive quarters of negative GDP growth
REITs is an investment vehicle for real estate that allows investors to acquire ownership in real estate ventures. REITs are required by law to maintain dividend payout ratios of at least 90%.
Relative Performance is the performance of a mutual fund compared against a benchmark.
Return on Assets (ROA) is equal to a fiscal year’s earnings divided by its total assets, expressed as a percentage. It can be used as a measure of a company’s profitability.
Return on Equity (ROE) is a company’s net income (earnings) divided by the owner’s equity in the business (Book Value); ROE = Earnings/Book Value. This percentage indicates company profitability or how efficiently a company is using its equity capital.
Revenue is the amount of money that is brought into a company by its business activities.
Risk is defined at Muhlenkamp & Company as the probability of losing purchasing power, (i.e. the money you can spend). Both inflation and taxes determine purchasing power, thereby influencing risk. Wall Street’s definition of risk is volatility. Beware when you are being told stocks are risky. You need to know what definition is being used.
Risk-Adjusted Returns strive to lower volatility. The trouble with striving for risk-adjusted returns is that it encourages the investor to move out of (and into) the market on a frequent basis, thereby increasing one’s tax rate, along with other trading costs and commissions.
Royalty trusts is a a ‘pass through’ vehicle available to get income from the corporation to the individual with only one level of taxation (the individual income tax). As a result, royalty trusts do not own the properties that are producing, they simply collect royalties and distribute them. Royalty trusts trade on the basis of income; therefore, it is important to check not only today’s yield, but, more importantly, what the yield will be or is projected to be in the future. The price of oil and gas drive the payouts, so as oil and gas prices fall and rise, the payouts change from month to month. In general:
- Royalty trusts have no employees;
- Royalty trusts generally own no land or any other asset except for the right to receive a percentage of either revenues or profits from a production asset that someone else owns; and
- Royalty trusts generally have a finite life, either measured in time (years), or volumes (i.e. a certain amount of oil or gas), or, in some cases, they terminate upon deaths of certain named individuals.
Russell 2000 refers to the Russell 2000 Index, a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Russell 2000 is by far the most common benchmark for mutual funds that identify themselves as "small-cap.”
S&P 400 Index provides investors with a benchmark for mid-sized companies, covering over 7% of the domestic equities market. You cannot invest directly in an index.
S&P 500 Bank Index A capitalization-weighted index created and supported by Bloomberg to measure the performance of the U.S. banking industry
S&P 500 Index is a widely recognized, unmanaged index of common stock prices. The S&P 500 Index is weighted by market value and its performance is thought to be representative of the stock market as a whole. You cannot invest directly in an index.
S&P 600 Index covers approximately 3% of the domestic equities market. You cannot invest directly in an index.
S&P BRIC 40 USA Index is designed to offer exposure to four emerging markets: Brazil, Russia, India, and China. Known as the BRIC countries, they are actively watched by investors in recognition of their potential to move from emerging market status to developed market
S&P/Case-Shiller Home Price Index is calculated from data on repeat sales of single-family homes, an approach developed by economists Karl Case, Robert Shiller, and Allan Weiss.
Sales Growth shows the rate of increase in a company's sales.
SEC is the U.S. Securities and Exchange Commission, established by Congress in 1934 as an independent, non-partisan regulatory agency following the Great Depression. Its purpose is to protect investors against fraudulent and manipulative practices in the securities markets. The SEC does not endorse, approve or disapprove of any security.
Securities are investment instruments that can be easily traded at financial auctions, including stocks, bonds, as well as option contracts and mutual funds.
Securitization is a process which pools and repackages financial assets (like mortgages) into securities that are then sold to investors.
Shanghai Stock Exchange or SSE is the largest stock exchange in mainland China, run by the China Securities Regulatory Commission (CSRC). Stocks, funds, and bonds are all traded on the Exchange, which has listing requirements including that a company must be in business and earning a profit for at least three years before joining the exchange.
Share is a unit of ownership for various financial instruments including stocks and mutual funds. The income received from shares is called a dividend, and a person owning shares is called a shareholder.
Short-term Debt matures in less than one year, and includes securities such as passbook savings accounts, certificates of deposit (CDs), and Treasury bills. The principal is often guaranteed by the federal government (i.e. the American tax payer) through the Federal Deposit Insurance Corporation (FDIC). The interest rates on short-term debt are set by the market, but are heavily influenced by the Federal Reserve Board.
Short-Term Interest Rate (%) is the interest rate earned by a note or bond having a maturity of less than one year.
Shorting Stock is when an investor generally borrows shares from a brokerage house and sells them to another buyer. Proceeds from the sale go into the short seller’s account. He must buy those shares back (cover) at some point in time and return them to the lender.
Soft Landing is the process of an economy shifting from growth to slow-growth to potentially flat, as it approaches but avoids a recession. It is often caused by government attempts to slow down inflation.
Solvency II is due to be implemented on November 1, 2012 and will set out new, strengthened EU-wide requirements on capital adequacy and risk management for insurance companies, with the aim of increasing policyholder protection by reducing the possibility of consumer loss. The proposed Solvency II framework has three main areas (“pillars”):
- Pillar 1 establishes capital requirements for insurance companies.
- Pillar 2 establishes requirements for the effective supervision of insurance companies.
- Pillar 3 focuses on disclosure and transparency requirements.
SPDR 500 ETF tracks the S&P 500 Index. Its objective is to duplicate as closely as possible, before expenses, the total return of the S&P 500 Index.
Spreads refer to the difference in the number of percentage points or basis points in yield. The level of risk correlates with the potential for returns.
Stagflation is a combination of low growth (stagnation) and high inflation, as seen in the American economy during the 1970s.
Stock Market Stock Market is a financial auction where participants buy and sell equities.
Stock Prices are set by the market; i.e. what someone is willing to pay to own a piece of the company. Over the long term, the price will reflect the value of the company, but over the short term, the prices or perceived value of the company may not always reflect the company’s true value.
Stop-Loss Order is an order to sell a security at market price if the price of that security falls below a specified value. This is to help protect the stockholder from excessive losses in declining markets. However in highly volatile markets, stop-loss orders may not limit losses because once the stock falls below the set price, it triggers a sell order at the next available market price without regard to how much the price may have dropped.
Style Box was designed by Morningstar, Inc., an investment research company, to plot mutual funds on a three-by-three matrix. One axis attempts to characterize the investment strategy (value, blend, growth); the other axis lists the size of typical investments (small-, mid- or large-cap companies).
Sub-prime mortgage may be granted to borrowers whose credit history is not sufficient to get a conventional mortgage.
Tariff is a tax imposed on a product when it is imported into a country
TARP The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008. It was a component of the government's measures in 2008 to address the subprime mortgage crisis.
Tax-Adjusted Returns Tax-Adjusted Returns are adjusted for taxes and sales charges, following SEC guidelines for calculating returns before sale of the shares.
Tax-Loss Selling or Harvesting involves selling securities at a loss to offset a capital gains tax liability. Tax loss selling or harvesting is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains.
Technical Analysis relies upon market data such as charts of price and volume to assist in assigning a probability of a particular price trend in the future.
Total Return is the change in value of a mutual fund plus any distribution (i.e. capital gain, interest, and dividends) divided by the value of the mutual fund at the beginning of the period.
Tranche is French for “slice,” and represents a class of bonds. For example, collateralized mortgage obligations (CMOs), which are made up of a number of classes, (“tranches”), differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, etc
Treasury Bills (T-Bills) are short-term debt securities, backed by the federal government with a maturity of less than one year. T-bills are sold in denominations of $1,000, up to a maximum purchase of $5 million. Maturities are generally one-, three-, or six-month periods.
Treasury Inflation Protected Securities (TIPS) are inflation-adjusted bonds issued by the U.S. Treasury. The principal value rises or falls with inflation as measured by the Consumer Price Index (CPI).
Treasury Notes are sold by the U.S. Treasury Department to pay for the U.S. debt and earn a fixed-rate of interest every six months until maturity. Notes are issued in terms of two-, five-, and 10-years.
Value Investing generally involves buying securities shares that appear underpriced by some form(s) of fundamental analysis. Muhlenkamp & Company characterizes value investing as “buying Buicks at Chevy prices.” In typical usage, "value investing" contrasts with growth investing. At Muhlenkamp & Company, we think growth is part of the value calculation, but we consider profitability (ROE) more important than growth. We try to get profitability at a value price. Growth stocks typically are more volatile than value stocks; however, value stocks have a lower expected growth rate in earnings and sales.
Value Line is a research company that collects data and analyzes performance of approximately 8,000 stocks, 15,000 mutual funds, 80,000 options and other securities.
Velocity of Money is the rate of turnover of money in the economy. Irving Fisher, an American economist, developed the equation ?MV=?PQ.
Let M = money; V = the velocity of circulation of money; P = price; Q = quantity of real output (goods).
This equation says the “change in money x (times) velocity = change in price x (times) quantity.”
Historically, if money grows faster than the quantity of goods, the price of goods goes up to reflect the change. That’s called inflation. The assumption has always been that velocity is stable; mostly, because it’s difficult to predict. In fact, for most of the past thirty to forty years, velocity has been relatively stable. During 2004-07, it grew rapidly; in 2008-09, it collapsed.
VIX (CBOE Volatility Index) is an index created by the Chicago Board Options Exchange (CBOE) to measure expected overall market volatility based on options pricing information.
Volatility is Wall Street’s definition of risk. At Muhlenkamp & Company, we define volatility as how often, and the degree to which, price movements go up and down.
Wilshire 5000 The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all stocks actively traded in the United States. The index is intended to measure the performance of most publicly traded companies headquartered in the United States, with readily available price data, (Bulletin Board/penny stocks and stocks of extremely small companies are excluded). It can be tracked by following the ticker W5000.
Write Down is reducing the book value of an asset because it is overvalued compared to the market value and is usually indicated in the company's income statement as an expense, thereby reducing net income.
Yield is the income return on an investment and is usually expressed annually as a percentage based on the investment's cost, its current market value, or its face value. For bonds and notes, the coupon rate is divided by the market price, but it is not an accurate measure of total return, since it does not factor in capital gains. For stocks, the annual dividends are divided by the purchase price, but it is not an accurate measure of total return, since it does not factor in capital gains.
Yield Curve shows the various yields that are currently being offered on bonds of different maturities. It enables investors at a glance to compare the yields offered by short-term, medium-term and long-term bonds. The most frequently reported yield curve compares the three-month, two-year, and five-year and 30-year U.S. Treasury debt.
Yield-to-Maturity (YTM) is the rate of return anticipated on a bond if it is held until the maturity date. The calculation of YTM takes into account the current market price, par value, coupon interest rate, and time to maturity. It is also assumed that all coupons are reinvested at the same rate.