Glossary of Investment Terms

As you learn about investing, you will likely come across unfamiliar investment related words and phrases. BetterInvesting provides this list to help you become comfortable with this terminology. 
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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Money owed by a company to its suppliers.

Money owed to a company by its customers.

Stock exchange with the third-highest volume of trading in the United States, located in New York. The bulk of trading on AMEX is in index options (computer technology index, institutional index, major-market index), but shares of small- to medium-sized companies are also traded there. The exchange was founded as an alternative to the NYSE. In 1998 the AMEX merged with the National Association of Securities Dealers (NASD). Under the merger the NASD assumes the role of parent company, with AMEX operating as an independent entity within the larger NASD family of companies.

See American Stock Exchange

Meeting of a company's stockholders held once a year at which its managers report on the year's results. It is at the annual meeting that shareholders can ask questions of management.

Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, management's discussion of the year's results, as well as a balance sheet, income statement and cash flow statement information. Securities and Exchange Commission rules require that it be distributed to all shareholders. A more detailed version is called a 10-K and is filed with the SEC.

Any possession that has value in an exchange.

The ratio of a company's net sales to its total assets.

Market in which the prevailing price of a security is determined through the free interaction of prospective buyers and sellers, as on the floor of the New York Stock Exchange. The Nasdaq market, by contrast, is a dealer market, meaning that intermediaries, called market makers, act on behalf of investors, executing their trades and often increasing investors' costs of trading.

An arithmetic mean return of selected stocks intended to represent the behavior of the market or some component of it. One example is the widely quoted Dow Jones industrial average (DJIA), which adds the current prices of the 30 DJIA stocks and divides the results by a predetermined number, the divisor.

B

Also called the statement of financial condition, it is a summary of a company's assets, liabilities and net worth at a specific time.

An investor who believes a security or the overall market in one asset class will decline. A bear market is a prolonged period of falling stock or bond prices, usually by 20 percent or more.

An overall downward trend in securities prices that reflects slower economic activity or investors' anticipation of it. In the post-World War II period, bear markets have typically lasted just under 12 months.

A predetermined set of securities whose performance is used for comparison purposes by professional money managers or individual investors. Such sets may be based on published indexes such as the S&P 500 Composite index or may be customized to suit a particular investment strategy.

A nickname for the New York Stock Exchange (NYSE), where approximately 3,000 common and preferred stocks are traded. Founded in 1792, the NYSE is the oldest exchange in the United States and the largest. It is located at the corner of Broad and Wall streets in Manhattan. See New York Stock Exchange.

A large, credit-worthy company known for the quality and wide acceptance of its products or services and its ability to make money and often pay dividends. Blue chip shares refer to stocks in these companies.

Individuals elected by a company's shareholders who carry out certain tasks established in its charter. Boards are usually composed of a combination of inside and outside directors. The inside directors may include certain key executives, such as the chief executive officer, as well as directors who are considered close to the firm, such as representatives from firms that do a substantial amount of business with the company. Outside directors, on the other hand, have no direct connection with the firm. Members of the board serve on various committees created to rule on significant issues at the company. For example, the audit committee oversees the company's accounting methods and the compensation committee rules on executive pay at the company. Good corporate governance involves having strong, independent outside directors and a chairman of the board who is an outside director.

A company's total assets minus liabilities, such as debt, and sometimes intangible assets as well. Companies whose shares trade below their book values are often sought out by so-called value investors.

A company's book value divided by its shares outstanding. Book value per share reflects accounting valuation but not necessarily market valuation.

A company that conducts various aspects of securities trading, analysis and advisory services. Such firms employ brokers who buy and sell securities for customers' accounts, and investment bankers who provide advice on acquisitions and restructurings to corporate clients. These firms also trade securities for their own profit. Most are publicly traded companies.

An investor who thinks the market or a particular stock will rise.

A market characterized by generally rising security prices. Historically, at least in the postwar period, bull markets have lasted longer than bear markets. The longest bull market in history began in late 1990 and lasted until March 2000.

Repetitive cycle of economic expansion and contraction, also known as boom and bust. The official peaks and troughs of the U.S. cycle are determined by the National Bureau of Economic Research in Cambridge, Mass.

An investment strategy with little active buying and selling of stocks from the time the portfolio is created until the end of the investment horizon. Investors who adhere to this strategy do so in hopes of reducing their trading costs, thereby generating more net income.

C

Money invested in a firm or stock.

Growth of capital; increase in the market price of a common stock.

When a stock is sold for a profit, the capital gain is the difference between the net sales price of the securities and their net cost, or original basis price. If a stock is sold below cost, the difference is a capital loss.

The tax levied on profits from the sale of capital assets. A long-term capital gain, which is achieved once an asset is held for at least 12 months, is taxed at a maximum rate of 15 percent or 5 percent, depending on a taxpayer's income. Assets held for less than 12 months are currently taxed at regular income tax levels, which are considerably higher.

In investments, cash flow represents earnings before depreciation and amortization, known as noncash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations by real estate and other investment trusts) is important because it indicates the ability to fund ongoing operations and pay dividends.

The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or their dollar value. In 1975 deregulation led to the establishment of discount brokers, who charge lower commissions than full-service brokers. Full-service brokers offer advice and usually have a staff of analysts who follow specific industries. Discount brokers simply execute a client's order and usually do not offer an opinion on a stock.

Securities that represent equity ownership in a company. Common stock lets an investor vote on such matters as the election of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. Common stockholders have junior status to the claims of secured/unsecured creditors, bondholders and preferred shareholders in the event of a company's liquidation.

The rate of growth of a figure, compounded over some period. Returns in an investment are usually figured using compound growth rates.

The process of accumulating the value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent period.

The total cost of buying raw materials and paying for all the factors that go into producing finished goods.

Value of cash, accounts receivable, inventories, marketable securities and other cash assets that can be converted to cash in less than one year.

Amount a company owes for salaries, interest, accounts payable and other debts due within one year.

Indicator of a company's short-term debt-paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.

Stock that tends to rise quickly when the economy turns up and that falls quickly when the economy turns down. Examples are shares of housing, automobile and paper companies.

D

Investors purchase securities directly from the issuer. These plans benefit investors because they can buy shares without paying a commission. Discount Broker -- A brokerage house that charges relatively low commission rates in comparison to a full-service broker. The discount broker's fees are lower because they usually do not offer services such as client advice and research.
 

A portion of a company's profit paid to holders of its common and preferred stocks. A stock selling for $20 with an annual dividend of $1 a share yields the investor 5 percent. Dividends on common stock are discretionary and depend on the company's profits. (SSG Section 3F)

Automatic reinvestment of shareholder dividends in more shares of a company's stock, often without commissions. Some plans provide for the purchase of additional shares at a discount to the prevailing market price. Dividend reinvestment plans allow shareholders to accumulate stock over the long term. The DRIP is usually administered by the company without charges to the holder.

Represents annual dividends paid to shareholders divided by the prevailing price of the stock. (SSG Section 5A)

Method of purchasing securities by investing a fixed amount of money at set intervals. The investor buys more shares when the price is low and fewer shares when the price is high, thus reducing the overall cost.

The best known U.S. index of stocks. A price-weighted average of 30 actively traded, well-established companies' shares. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing. There are hundreds of investment indexes around the world for stocks, bonds, currencies and commodities. Even though the Dow is composed of only 30 stocks, its performance has tracked that of the broader market indexes, such as the S&P 500, remarkably closely over long periods. 

E

Net income from a company over a specific period. Colloquially referred to as the "bottom line" because net earnings is the entry at the bottom of the income statement after all expenses and costs are deducted.

A measure of the income before taxes made by a company during a specified period; used by investors as a measure of that portion of earnings over which management has more control. A related measure is earnings before interest, taxes, depreciation and amortization (EBITDA). EDGAR - The Securities and Exchange Commission (SEC) uses Electronic Data Gathering and Retrieval (EDGAR) to transmit company documents such as annual reports (10-Ks), quarterly reports (10-Qs), and other SEC filings to investors.Undervalued

A company's profit divided by the number of shares it has outstanding. If a company earns $2 million in one year and has 2 million shares of stock outstanding, its EPS would be $1 per share. If a company reduces the shares outstanding by buying back its own stock, for example, it can make earnings look better, even if the actual amount that it earned remains the same. (SSG Section 3C) 

A condition where the company has been able to produce fairly predictable earnings per share results over time. This is typically represented by a calculated 'R-squared' value between 0 and 1 where higher numbers are more desirable. 

See Earnings per Share. 

Ownership interest in a firm or asset. In real estate, dollar difference between what a property could be sold for and debts claimed against it, such as a mortgage. In a brokerage account, equity equals the value of the account's securities minus any money borrowed from a brokerage firm in a margin account. "Equities" is another name for stocks or company shares. 

A place in which shares, options and futures on stocks, bonds, commodities and indexes are traded. Principal U.S. stock exchanges are: New York Stock Exchange (NYSE), American Stock Exchange (AMEX), Chicago Board Options Exchange, Philadelphia Stock Exchange and Pacific Coast Exchange located in San Francisco. Because the shares on the National Association of Securities Dealers Automated Quotation System (Nasdaq) market are not traded in one physical location, it is not called an exchange but instead a stock market. 

F

Professional who studies companies, analyzes financial statements, interviews corporate executives and attends investment presentations to write reports recommending either purchasing, selling or holding various stocks. Also called securities analyst and investment analyst. 

Accounting period covering 12 consecutive months over which a company determines its earnings and profits. The fiscal year serves as a period of reference for the company and does not necessarily correspond to the calendar year. 

A report required by the SEC from public companies that provides for annual disclosure of certain audited financial information. This is the most common tool used by investors to compare a company's operations from year to year. The 10-K often includes more detailed information than the company's annual report, such as sales by product group, officer compensation, the status of legal proceedings and the management team's assessment of future risks and opportunities. The "Management Discussion" portion of the 10-K describes the company's performance and strategies in plain English. 

The quarterly financial report required of public companies by the SEC. The SEC does not require that financial statements in the 10-Q, as compared to the annual 10-K, be audited, but the filing often provides details about a company's announced quarterly earnings. 401(k) -- Under section 401(k) of the Internal Revenue Code, a deferred-compensation plan set up by an employer so that employees can set aside money for retirement on a pretax basis. Employers may match a percentage of the amount that employees contribute to the plan. Contributions by both employees and employers, as well as investment earnings and interest, are not taxed until the employee withdraws the money. If the employee withdraws the money before retirement age, he or she pays an early withdrawal penalty tax. Many employers now offer these deferred-compensation plans in lieu of or in addition to pensions. 

A tax-deferred annuity that is the equivalent of a 401(k) plan for nonprofit entities. Available to employees of educational institutions, churches and other employers organized for charitable pursuits. Employees are allowed to contribute up to 20 percent of their salary annually. 

FTM is a term for the estimated sum of data for the future 12 consecutive months (usually represented as the estimated sum of the next 4 quarters) used for reporting estimated financial figures. 

A security analysis that seeks to detect misvalued securities through an analysis of the firm's business prospects. Research often focuses on earnings, dividend prospects, expectations for future interest rates and risk evaluation of a company. Opposite of technical analysis. In macroeconomic analysis, information such as interest rates, gross domestic product, inflation, unemployment and inventories is used to predict the direction of the economy and, therefore, the stock market. In microeconomic analysis, information such as that found on the balance sheet, income statement, an assessment of products, management and other market items is used to forecast a company's future success or failure, and expected price action of the stock. BetterInvesting's stock study methods are based on this type of fundamental analysis. 

G

An investing style that seeks capital appreciation rather than income. Growth investors assume more risk than income-seeking investors. Compare with value investing.

H

The highest price of a stock over the past 52 weeks, or other periods, adjusted for any stock splits. Can be measured using either closing prices or intraday prices. (SSG Section 3A)

I

A financial statement showing a company's revenues and costs over a specific period. The difference between revenues and expenses is net income. Investors consult income statements to see that a company's sales are rising and that its costs are being kept under control. An income statement is also where investors go to check that a company's operations are generating enough money to cover the interest costs on its debt, for instance. When all costs, including taxes, are deducted from a company's sales, the resulting net income is divided by the number of shares outstanding to compute earnings per share. 

A retirement account (also known as an Individual Retirement Arrangement per the IRS) which allows one to make tax-deferred investments. IRA contributions have pre-established annual limits (up to $6000 for 2022 for contributions made as late as April 15, 2023, plus a catch-up contribution of an additional $1000 for those age 50 or older). There are several types of IRAs with the most common IRAs being a Roth IRA and a traditional IRA. A traditional IRA is a tax-advantaged personal savings plan where contributions may be tax-deductible. A Roth IRA is a tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax-free. 

Ownership of company securities by the company's officers or directors or beneficial owners of more than 10% of a class of the company's equity securities. Insider ownership is usually calculated as the number of shares owned by insiders divided by the total number of shares outstanding. 

Ownership of company securities by mutual funds, insurance companies, large trust and money management firms and other entities that purchase large blocks of stock for their portfolios or inventories. Institutional ownership is usually calculated as the number of shares owned by institutions divided by the total number of shares outstanding. 

A group of people who combine their money into a larger pool, then invest collectively in stocks and bonds making decisions and advancing their investment education as a group.

L

A stock with a high level of capitalization, usually at least $5 billion in market value. BetterInvesting guideline: $10 billion or more in revenues. 

A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation. 

A person who makes investments for a period of at least five years to finance his or her long-term goals. 

The lowest price of a stock over the past 52 weeks or other periods, adjusted for any stock splits. Can be measured using either closing prices or intraday prices. (SSG Section 3B) 

M

The people who administer a company, create policies and provide the support necessary to implement the owners' business objectives. 

A report from management to shareholders that accompanies the firm's financial statements in the annual report. It explains the period's financial results and allows management to discuss topics that may not be apparent in the financial statements in the annual report. 

The total dollar value of all outstanding shares based on current prices. Computed as shares times market price. Market capitalization is one measure of a corporation's size. Another is its total sales, used as a proxy for market capitalization by many BetterInvesting investors. 

Market measure that consists of a list of companies representing a wide variety of industries and therefore the overall market. The S&P 500 is a relatively broad market index that includes shares in 500 diverse companies. An even broader index is the Wilshire 5000, which consists of most publicly traded companies. 

The reported price at which a security trades on an exchange at a given time.

Asset allocation in which investment in the equity market is increased if one forecasts that the equity market will outperform Treasury bills and is decreased when the market is anticipated to underperform. 

(1) The price at which a security is trading and could presumably be purchased or sold. (2) What investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares. Also known as market capitalization. 

A stock with $1 billion to $5 billion in market value. BetterInvesting guideline: $1 billion to $10 billion in revenues. 

N

The first electronic stock market, listing more than 4,000 companies; it is an acronym for National Association of Securities Dealers Automated Quotation System. The Nasdaq stock market comprises two separate markets: the Nasdaq National Market, which trades large, active securities, and the Nasdaq Bulletin Board, which lists young companies or those whose shares are trading for less than $1. 

A company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses. Investors want to see a company's net income rise year to year. 

Also known as the Big Board or The Exchange, it is the nation's oldest stock exchange, founded in 1792. The Exchange is also a self-regulatory organization that oversees its members and ensures that they abide by its rules. The exchange has stringent requirements that companies must meet before their shares can be traded there: They must have 2,000 shareholders or more, average monthly trading volume of 100,000 shares and stock market value of $100 million or more. More than 3,000 companies are currently listed on the exchange. The Big Board is located at Broad and Wall Streets in New York City. 

Acronym for 'Not meaningful'. This is typically used where data cannot be calculated or is not meaningful. For example, calculating a P/E ratio when the stock has zero or negative earnings is not meaningful. 

O

Revenue from a firm's regular activities less costs and expenses and before such deductions as taxes or depreciation. 

Acronym for 'Over The Counter'. In the context of investing, OTC stocks are unlisted stocks which are traded by brokers/dealers who negotiate directly with each other. 

With respect to equities, OTC refers to Nasdaq, a decentralized electronic market, not an exchange market, through which geographically dispersed dealers are linked by telephones and computer screens. The market is for securities not listed on a stock or bond exchange and usually consists of newer or smaller companies than those on an exchange. The Nasdaq is also known as a dealer market rather than an auction market as the NYSE or AMEX are. In general, OTC trading takes place in many assets, such as bonds and options. OTC usually means not traded on an exchange. See also NYSE; AMEX. 

P

See Price-Earnings Ratio. 

Generally, the proportion of earnings paid out to the common stockholders as cash dividends. More specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period. If the ratio declines significantly, the company might have to suspend payment of its common stock dividend. (SSG Section 3G) 

Investing in different asset classes and in securities of many issuers in an attempt to reduce overall investment risk and to avoid damaging a portfolio's performance by the poor performance of a single security, industry or country investment. 

In the Stock Selection Guide (SSG) methodology, a potential high price five years in the future is calculated from the user's forecasts (judgments). The total % of price appreciation (from current price to future high price) is then annualized to provide a better comparison to other investments. 

Net income before federal income taxes are deducted.

A measure of the multiple of earnings at which a stock sells. Determined by dividing a stock's price by its earnings per share. Earnings per share for the P/E ratio is typically determined by dividing earnings for the past 12 months by the number of common shares outstanding. Earnings expected in the year ahead can also be used to calculate the P/E ratio. A higher multiple may mean investors have higher expectations for future growth and have bid up the stock's price. (SSG Sections 3D-E) 

Comparison of a company's earnings with its net sales, figured by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Indicator of profitability. Also called net profit margin; pre-tax margin when income before taxes is used. (SSG Section 2A) 

PAR, or Projected Average Return, is the potential return on your investment when you purchase the stock at today’s price and sell it in five years at an average price. The future average price is calculated by multiplying the forecast high EPS by the forecast Average P/E rather than the forecast Average High P/E. The result is a more conservative figure and, certainly, a more realistic expectation.

Projected relative value uses your EPS growth rates and high and low P/E projections (projected P/E) to present a more forward-looking view of relative value. 

Document intended to provide shareholders with information necessary to vote in an informed manner on matters to be brought up at a stockholders' meeting. Includes information on closely held shares. Information required by the SEC that must be provided to shareholders who wish to vote for directors and on other company decisions by proxy. These filings are also where shareholders find out how much a company's top executives are being paid in cash, stock and other perks. 

R

R-squared is a statistical measure of how close the data are to the fitted regression line. In the BetterInvesting methodology, the R-squared of the earnings per share (EPS) data points may be calculated as an indicator of 'earnings stability'. The data varies from 0 to 1 where 1 indicates the data is 100% correlated with a straight line. Higher numbers are more desirable. 

Calculated as the current value minus the value at the time of purchase divided by value at time of purchase. For equities, dividends are included with the current value. Often expressed in compound annual terms.

Use of investment income to buy additional securities. Many mutual fund companies and investment services and some corporations offer investors automatic reinvestment in the fund or stock of dividends and capital gains distribution earned. See also dividend reinvestment plans (DRIPs). 

Relative value compares the current P/E to the average P/E ratio (adjusted by removal of any outliers) for the last five years — it measures how much investors are currently paying for a stock compared with the average P/E during the past five years. 

Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends. 

Key indicator of profitability. A percentage determined by dividing net income for the past 12 months by common shareholders' equity, or dividing earnings per share by book value per share. May be decomposed into return on assets multiplied by financial leverage or total assets divided by total equity. Investors use return on equity as a measure of how efficiently a company is using its money. (SSG Section 2B) 

See Sales. 

The degree of uncertainty of return on an asset. There are many types of risk. For example, market risk refers to the volatility in stock prices; currency risk refers to the impact a rising or falling currency might have on an investment; and interest rate risk is the risk associated with the rise or fall in interest rates. 

S

Index of 500 widely held common stocks that measures the general performance of the market. This index is the benchmark against which many investment managers are judged. The mix of companies changes over time to reflect dominance of certain industries. Unlike the Dow Jones industrial average, the S&P 500 is a capitalization-weighted index, which means that as stocks rise in value they carry a heavier weighting in the index. As they fall, they hold less sway over the entire index. 

Income received by a company in exchange for goods and services recorded for a given accounting period. (Shown visually in SSG Section 1) Securities and Exchange Commission (SEC) - The federal agency that regulates the U.S. financial markets. The SEC also oversees the securities industry and promotes full disclosure to protect the investing public against malpractice in the securities markets. 

Acronym for Stock Comparison Guide 

Expenses such as salespersons' salaries and commissions, advertising and promotion, travel and entertainment, office payroll and expenses, and executives' salaries. These costs fall immediately below the cost of goods sold on the income statement. 

This is a company's total assets minus total liabilities, or its net worth. 

A stock with a small capitalization, typically less than $1 billion in market value. BetterInvesting guideline: Under $1 billion in revenues. 

Acronym for 'Stock Selection Guide' 

BetterInvesting's primary investment tool for analyzing a company and arriving at expectations for its growth and profitability in the future. Also known as the 'SSG'. 

Securities held by a broker on behalf of a client and registered in the name of the brokerage firm to make trading easier. Stocks held in street name can be loaned out to speculators selling shares short. 

T

The total long-term debt plus all types of equity for a company, which constitutes its capital structure. 

TTM is a term for the sum of data from the past 12 consecutive months (usually represented as the sum of the last 4 quarters) used for reporting financial figures. 

A technical chart line that depicts the past movement of a security and is used in an attempt to help predict future price movements. 

U

A stock price perceived to be too low, as indicated by a particular valuation model. For instance, some might consider a particular company's stock price cheap if the company's price-earnings ratio is much lower than the average for its industry. Another method of valuation that might indicate a cheap stock would be if a company's shares are trading for a price below its asset value. 

V

An investing style that focuses on the fundamental worth of a company measured by its book value or dividend yield. Compare to growth investing.

A proprietary investment service that provides research on stocks and ranks them for timeliness and safety.

W

Generic term for securities industry firms that buy, sell and underwrite securities and provide investment advice to institutional and individual investors. 

Defined as the difference between current assets and current liabilities, excluding short-term debt. Current assets may or may not include cash and cash equivalents, depending on the company.

Y

The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.

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