Bond

A debt investment, with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.

ARR

ARR provides a quick estimate of a project's worth over its useful life. ARR is derived by finding profits before taxes and interest.

Acid Test Ratio

A stringent test that indicates if a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets.

Calculated by: cash+AR+ Short Term Investments/CL

Acquisition

When one company purchases a majority interest in the acquired.

Acquisitions can either be friendly or unfriendly. Friendly acquisitions occur when the target firm agrees to be acquired, unfriendly acquisitions don't have the same agreement from the target firm.

When one company purchases a majority interest in the acquired.

Acquisitions can either be friendly or unfriendly. Friendly acquisitions occur when the target firm agrees to be acquired, unfriendly acquisitions don't have the same agreement from the target firm.

Acquisition Debt

Debt incurred to construct, improve, or acquire a principal or secondary residence.

Activity Based Budgeting - ABB

A method of budgeting in which activities that incur costs in each function of an organization are established and relationships are defined between activities. This information is then used to decide how much resource should be allocated to each activity.

Activity Ratio

Accounting ratios that measure a firm's ability to convert different accounts within their balance sheets into cash or sales.

Actuarial Analysis

The analysis of an investment's risk done by an actuary.

Ad Valorem Tax

A tax based on the assessed value of real estate or personal property. In other words ad valorem taxes can be property tax or even duty on imported items. Property ad valorem taxes are the major source of revenues for state and municipal governments.

Adjusted Present Value - APV

The Net Present Value (NPV) of a project if financed solely by equity plus the Present Value (PV) of any financing benefits (the additional effects of debt).

Air Pocket Stock

When the price of a stock plunges unexpectedly, similar to an airplane when it hits an air pocket. This is almost always caused by shareholders selling because of unexpected bad news.

Alpha

1. A measure of a mutual fund's risk in relation and the market. The formula for alpha is the following:

[ (sum of y) - ((b)(sum of x)) ] / n

Where:
n =number of observations (36 mos.)
b = beta of the fund
x = rate of return for the market
y = rate of return for the fund

The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the CAPM. An alpha of 1.0 means the fund outperformed the market 1.0%. A positive alpha is the extra return awarded to the investor for taking an risk instead of accepting the market return.

American Depository Receipt - ADR

A stock representing a specified number of shares in a foreign corporation. ADRs are bought and sold in the American markets just like regular stocks. An ADR is issued by a U.S. bank, consisting of a bundle of shares of a foreign corporation that are being held in custody overseas.

American Depository Share - ADS

A share issued under deposit agreement that represents an underlying security in the issuer's home country. The term ADR and ADS are often thought to be the same. Technically, an ADS is the actual share trading, while an ADR represents a bundle of ADS's.

American Option

An option that can be exercised anytime during its life.

Amortization

1. The paying off of debt in regular installments over a period of time.

2. The deduction of capital expenses over a specific period of time. Similar to depreciation, it is a method of measuring the consumption of the value of long-term assets like equipment or buildings

Angel Investor

A financial backer providing venture capital funds for small start-ups or entrepreneurs.

Ankle Biter

Stock issues that are worth less than $500 million in terms of market capitalization. They are known as “small cap” stocks.

Annuity

A series of fixed-amount payments paid at regular intervals over the specified period of the annuity

Anonymous Trading

Visible bids and offers on the market without the identity of the bidder and seller being revealed. Anonymous trades allow the high profile investors to execute transactions without the scrutiny and speculation of the market.

Arbitration

An informal hearing regarding a dispute. The dispute is judged by a group of people (generally three) who have been selected by an impartial panel. Once a decision has been reached, there is no further appeal process.

Asian Tail

An option feature whereby a reference price is activated at the end of an option should the underlying fall below a specified average before option expiry.

Asian Option

An option whose payoff depends on the average price of the underlying asset over a certain period of time as opposed to at maturity. Also known as an average option.

Asset Coverage Ratio

A test that determines a company's ability to cover debt obligations with its assets after all liabilities have been satisfied.

Association of Southeast Asian Nations - ASEAN

An organization of countries in southeast Asia set up to promote cultural, economic and political development in the region. ASEAN was officially formed in 1967 with the signing of the Bangkok Declaration.

Asymmetric Digital Subscriber Line - ADSL

A new technology that provides high transmission speeds for video and voice to homes over ordinary copper telephone wire. It will be most cost-effective in areas with a low market penetration of cable TV.

At The Market

An order to buy or sell a futures contract at the best available price upon entrance into the exchange for execution.

At the Money

An option is at-the-money if the strike price of the option equals the market price of the underlying security.

Authorized Stock

The maximum number of shares that a corporation is legally permitted to issue under its articles of incorporation. This figure is usually listed in the capital accounts section of the balance sheet.

Aval

A guarantee added to a debt obligation by a third party who ensures payment should the issuing person default.

Axe

The interest a person or trader shows in buying or selling a bond. A trader may have specific interest in a certain type of bond based on his or her existing positions.


Butterfly Spread

An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used.

Business to Business - B2B

Business conducted between companies, rather than between a company and individual consumers. An example of a B2B company is a firm that makes parts that are sold directly to an automobile manufacturer.

Business to Consumer - B to C

Business conducted between companies and individual consumers, rather than between two companies.
Ex: Walmart

Business Model

The way, or ways, in which a company makes generates revenue (and profit). Business model is a buzzword that everybody used (or overused) during the dot-com boom. It merely describes a model based on how a company makes money.

Bullion

Gold and silver that is officially recognized as high quality (at least 99.5% pure), and is in the form of bars rather than coins.

Bullet Trade

The act of purchasing an "in the money" put option so that the buyer can capitalize on a bear market by effectively shorting a stock without waiting for an uptick.

Bull/Bear Ratio

A market sentiment indicator published weekly by Investor's Intelligence that uses information polled directly from market professionals. The ratio is derived by dividing the total number of bullish investment advisors by the number of bearish and bullish advisors.

Bull

An investor who thinks the market, a specific security, or an industry will rise. Bulls are optimistic investors that predict good things for the market. In this respect they are the exact opposite of the Bears.

Bull Market

A market in which prices of a certain group of securities are rising or are expected to rise.

Bubble

A speculative market or stock in which prices rise very rapidly and then fall sharply.

Bottom Fisher

An investor who looks for bargains among stocks whose prices have recently dropped dramatically. The investor believes that the recent price drop is temporary and a recovery is soon to follow.

Bottom Line

Slang for net income or profit.

Book Value

The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation.

Bonus Issue (Scrip Issue)

Additional shares issued in a company that are free to existing shareholders. The decision to distribute further shares may be an alternative to increasing a company’s dividend payout.

Blue Chip Stock

Stock of a well-established and financially-sound company that has demonstrated its ability to pay dividends in both good and bad times.

Blind Trust

A trust in which the executors have full discretion over the assets and the trust beneficiaries have no knowledge of the holdings of the trust.

Blend Fund

A type of mutual fund that invests in a combination of value and growth stocks.

Bermuda Option

A type of option that can only be exercised on predetermined dates, usually every month.

Benchmark

A standard against which the performance of something can be measured.

Bell

The ring that marks the open and close of each trading day on many organized financial exchanges, most notably the NYSE.

Bear Hug

An offer made by a company to buy the shares of another company that is too high for the board of the target firm to refuse.

Balloon Option

An option whose notional payments increase significantly after a set threshold is broken.

Capital Asset Pricing Model - CAPM

A model describing the relationship between risk and expected return that is used in the pricing of risky securities. CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return then the investment should not be undertaken.

Cage

A term used to describe the department of a brokerage firm that receives and distributes physical securities

Call Option

An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

Capital Adequacy Ratio (CAR)

A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

Capital Allocation Line - CAL

A line created in a graph of all possible combinations of risky and risk-free assets. The graph displays to investors the return they can make by taking on a certain level of risk.

Capital Budgeting

The process of determining whether or not projects such as building a new plant or investing in a long-term venture are worthwhile.

Capital Goods

Any goods used by an organization to produce other goods.

Capital Lease

A lease considered to have the economic characteristic of asset ownership. A capital lease is an example of accrual accounting's inclusion of economic events.

Capital Market Line - CML

The line used in the Capital Asset Pricing Model to illustrate the rates of return for efficient portfolios depending on the risk free rate of return and the level of risk (beta) for a particular portfolio. Represents the risk premium as a result of taking on extra risk.

Capital Markets

The market where capital, such as stocks and bonds, are traded. Capital markets are used by firms to raise additional funds.

Capital Note

Fixed income products issued by companies as a source of short term debt. Capital notes are unsecured, and rely upon the company's credit rating for backing, as they are generally ranked lowest in the order of repayment.

Capital Structure

The means by which a firm is financed. A firm can finance operations through common and preferred stock, with retained earnings, or with debt. Usually a firm will use a combination of these financing instruments.

Capital Structure

The means by which a firm is financed. A firm can finance operations through common and preferred stock, with retained earnings, or with debt. Usually a firm will use a combination of these financing instruments.

Capitalization

The sum of a corporation's stock, long-term debt and retained earnings. OR A company's outstanding shares multiplied by its share price, better known as market capitalization.

Capped Option

An option with a pre-established profit cap. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Option's cap price.

Capping

The practice of selling large amounts of a commodity or security close to the options expiry date in order to prevent a rise in market price.

Captive Fund

A fund that provides investment services solely to the one firm holding ownership. A captive fund is funded entirely by one institution or the clients of an institution holding ownership.

Carbon Trade

An idea presented in response to the Kyoto Protocol that involves the trading of greenhouse gas (GHG) emission rights between nations.

Cartel

A small group of producers of a good or service who agree to regulate supply in an effort to control or manipulate prices.

Carve-out (Equity Carve-Out)

Sometimes known as a partial spinoff, a carve out occurs when a parent company sells a minority (usually 20% or less) stake in a subsidiary for an IPO or rights offering.

Where an established brick-and-mortar company hooks up with venture investors and a new management team to launch an Internet spinoff.

Cash Budget

An estimation of the cash inflows and outflows for a business. A cash budget is extremely important, especially for small businesses because it allows a company to determine how much credit can be extended to customers before they begin to have liquidity problems.

Cash Cow

One of the four categories (quadrants) in the BCG growth-share matrix that represents the division within a company that has a large market share within a mature industry.

Cash Flow

The amount of cash a company generates and uses during a period, calculated by adding noncash charges (such as depreciation) to the net income after taxes. Cash Flow can be used as an indication of a company's financial strength. It is also sometimes referred to as the "money value" of trades in a stock during a trading day.

Cash Market

The market for a cash commodity or actual, as opposed to the market for its futures contract. A cash market may take the following forms: self-regulated centralized markets, such as commodity exchanges; decentralized over-the-counter markets where private transactions may occur; or localized community organizations, such as grain elevators. At these locations, you can purchase the actual physical commodity rather than just the futures contract.

Cashier's Check

A check drawn by a bank upon itself and thus secured by the issuing bank.

Caveat Emptor

Another way to say, "let the buyer beware."

Cats and Dogs

A slang term referring to speculative stocks that have short or suspicious histories for sales, earnings, dividends, etc.

Certificate of Deposit - CD

A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified interest rate, and can be issued in any denomination. CDs are generally issued by commercial banks.

Chameleon Option

An option that has the ability to change its structure, should certain pre-determined terms of the contract be met.

Chinese Wall

A slang term for the barrier within a brokerage firm that prevents insider information from being handed out by corporate advisers to investment traders.

Churning

An unethical practice employed by some brokers to increase their commissions by excessively trading in a client's account. This practice violates the NASD Fair Practice Rules. It is also referred to as "twisting."

Class A Shares

A division of common stock accompanied by more voting rights than Class B shares.

For example, one Class A share may be accompanied by five voting rights while one Class B share may be accompanied by only one right to vote. A detailed description of each share division of a company is included in its bylaws and charter.

Class B Shares

A division of common stock accompanied by fewer voting rights than Class A Shares.

Coattail Investing

An investment strategy where investors mimic the trades of well-known and historically successful investors.

Cockroach Theory

A market theory that states bad news tends to be released in bunches.

Cold Calling

A method used by brokers to obtain new business by making unsolicited calls to potential clients.

Collar

A general term meaning any restriction on market activities.

Commodity Pool

A fund that collects investor contributions for use in future and commodity option trading. Commodity pools limit investors' risk to the amount they have contributed into the fund.

Common Stock

A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy.

Compounding

The ability of an asset to generate earnings that are then reinvested and generate their own earnings.

Conglomerate

A company that consists of a grouping of businesses from unrelated streams. Conglomerates diversify their business risk through profit gained from profit centers in various lines of business.

Consignment

When goods are delivered to another company with the understanding that payment for the goods is only made once the goods are sold.

Consolidation

A term used mainly by technical analysts to refer to the movement of a stock's price within a well-defined pattern or barrier of trading levels.

Contingency

An economic event, usually negative, that is in the process of occurring and, therefore, has not yet been resolved.

Contra Account

An account on the balance sheet of a corporation or entity that offsets the balance of a related and corresponding account. An example of a contra account would be accumulated amortization. This contra asset account credits the amortization account, offseting the debit position.

Convertible Debenture

Any type of debenture that can be converted into some other security.

Corporation

A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.

Correlation Coefficient

A measure that determines the degree to which two variable's movements are associated


Correlation

A complementary or parallel relationship between two securities.

Cost of Capital

The required return necessary to make a capital budgeting project worthwhile. Cost of capital would include the cost of debt and the cost of equity.

Cost of Equity

The return that stockholders require for a company. The traditional formula is the dividend capitalization model:

Cost of Goods Sold - COGS

A figure reflecting the cost of the product or good that a company sells to generate revenue, appearing on the income statement as an expense unto itself. Also referred to as "cost of sales."

Coupon

The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually.

Credit

A contractual agreement in which a borrower receives something of value now, with the agreement to repay the lender at some date in the future. Also, the borrowing capacity of an individual or company

Credit Rating

An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

Crown Jewels

The most valuable unit of a corporation because of profitability, asset value, future prospects, etc.

Currency Basket

A selected group of currencies whose weighted average is used as a measure of the value or the amount of an obligation

Currency Forward

A forward contract that locks-in the price an entity can buy or sell currency on a future date. In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity, and on a specified future date.

Currency Futures

A transferable futures contract that specifies the price at which a specified currency can be bought or sold at a future date. Currency future contracts allow investors to hedge against foreign exchange risk. Since these contracts are marked-to-market daily, investors can--by closing out their position--exit from their obligation to buy or sell the currency prior to the contract's delivery date.

Currency Option

A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified price during a specified period of time. Investors can hedge against foreign currency risk by purchasing a currency option put or call.

Current Ratio

Indicator of company's ability to pay short-term obligations; calculated by dividing current assets by current liabilities. Current Ratio is useful for comparing companies within the same industry. The higher the ratio, the more liquid the company.

Current Yield

Annual income (interest or dividends) divided by the current price of the security.

Cushion Bond

A type of callable bond that sells at a premium because the issued coupon payments are above market interest rates.

Custodian

A financial institution that has the legal responsibility for a customer's securities. This implies management as well as safekeeping.

Cyclical Stock

A stock that rises quickly when economic growth is strong, and falls rapidly when growth is slowing down.

Cylinder

A term used to describe a transaction, involving two derivatives, where there is no initial cost bourne by the investor when entering into the position.


Dematerialization - DEMAT

The move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

Day Order

Any order to buy or sell a security that automatically expires if not executed on the day the order is placed.

Day Trader

A stock trader who holds positions for a very short time (from minutes to hours) and makes numerous trades each day. Most trades are entered and closed out within the same day.

De-merger

A corporate strategy to sell off subsidiaries or divisions of a company.

Deadweight Loss

The costs to society created by an inefficiency in the market.

Dear Money

A situation in which money or loans are very difficult to obtain in a given country. If you do have the opportunity to secure a loan, then interest rates are usually extremely high.

Debenture

An unsecured debt backed only by the credit worthiness of the borrower. Debentures have no collateral, and the agreement is documented by an indenture. The yields may vary from high to low depending on who backs the debenture.

Debit

An accounting entry which results in either an increase in assets or a decrease in liabilities on a company's balance sheet or in your bank account.

Debt

An amount of money borrowed and owed by one party to another.

Debt Financing

When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.

Debt Ratio

A ratio that indicates what proportion of debt a company has relative to assets. It is calculated by dividing total debts by total assets. A debt ratio greater than 1 indicates that a company has more debt in relation to assets, and a debt ratio less than 1 indicates a company has more assets relative to debt.

Debt Security

A security representing a loan given by an investor to an issuer. In return for the loan, the issuer promises to pay interest and to repay the debt on a specified date. Issuers may include corporations, municipalities, the federal government, or a federal agency.

Debt-Service Coverage Ratio - DCSR

A ratio often used by bank loan officers when making loans to perspective income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.

Debt/Equity Ratio

A measure of a company's financial leverage calculated by dividing long-term debt by shareholders equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Note: Sometimes investors only use interest bearing long-term debt instead of total liabilities.

Decimalization

The process of changing the prices that securities trade at from fractions to decimals.

Dedicated Portfolio

A passive form of portfolio management that involves the matching of future cashflows with future liabilities.

Defensive Acquisition

The act of firms acquiring other firms and assets for the purpose of defending against market downturns or possible takeovers.

Defensive Stock

A stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market.

Deflation

The rate at which the general level of prices for goods and services is falling. The opposite of inflation.

Degearing

The action of a company altering its capital structure by replacing long-term debt with equity, thereby easing the burden of interest payments and also increasing management's flexibility.

Delivery Date

The final date by which the underlying commodity for a futures contract must be delivered in order for the terms of the contract to be fulfilled. The maturity date of a currency forward contract.

Delta

The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative.

Demand Note

A loan with no fixed term or set duration of repayment. It can be recalled upon the lenders request, assuming the notice required by the provisions of the loan are met.

Demutualization

The process of changing corporate structure from a mutual fund company to some other form, such as a limited liability or corporation.

Depletion

An accounting term describing the amortization of assets that can be physically reduced. Unlike depreciation and amortization, which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical reduction of natural resources by companies.

Depository Trust Company - DTC

One of the world's largest securities depositories, it holds in excess of $10 trillion worth of securities in custody. The DTC acts like a clearing house to settle trades in corporate and municipal securities.

Derivative

A security, such as an option or futures contract, whose value depends on the performance of an underlying security or asset.

Dialing and Smiling

A slang term for the practice of cold calling. When brokers use cold-calling to attract new customers, they typically use a friendly tone of voice to encourages trust.

Dilution

A reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities.

Discount Bond

A bond that is valued at less than its face amount.

Discount Rate

The interest rate used in determining the present value of future cash flows. The interest rate that an eligible depository institution is charged to borrow short term funds directly from a Federal Reserve Bank.

Disinflation

A slowing of the rate at which prices increase. Typically, this occurs during a recession as sales drop and retailers are not able to pass on higher prices to customers.

Disposition

Getting rid of an asset or security through a direct sale or some other method.

Dividend

A cash payment from profits announced by a company's board of directors and distributed among stockholders.

Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies will typically have a higher payout ratio.

Dog

One of the four categories (quadrants) of the BCG growth-share matrix that represents the division within a company that has a small market share in a mature industry.

Dog Eat Dog

When the market for a good or service is ruthlessly competitive.

Dove

An economic policy advisor that promote the maintenance of low interest rates. Their premise is that inflation and its negative effects upon society are minimal.

Dow Jones Industrial Average - DJIA

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.

Dragon Bond

A bond that is issued in Asia but denominated in U.S. dollars. The bond is denominated in U.S. dollars because the currency is more stable and might entice foreign investors.

Du Pont Analysis

A method of performance measurement that was started by the DuPont Corporation in the 1920s, and has been used by them ever since. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher ROI.

Du Pont Identity

An expression breaking down return on equity (ROE) into three parts: profit margin, total asset turnover, and financial leverage.

The Du Pont identity tells us that ROE is affected by 3 things: Operating efficiency (as measured by profit margin); Asset use efficiency (as measured by total asset turnover); and Financial leverage (as measured by the equity multiplier).

Dual Class Stock

Dual stock issued for a single company with varying classes indicating the different voting rights and dividend payments.

Dual Listing

The listing of a company's shares on more than one stock exchange.

Dual Trading

The action of a broker executing customer orders and on the same day trading for his or her own account or an account in which he or she has significant interest.

Due Diligence - DD

An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. Generally, due diligence refers to the care a reasonable person should take before entering in an agreement or transaction with another party.

Duopoly

A situation in which two companies own all or nearly all of the market for a given type of product or service.

Durables

A category of consumer goods, durables are products that do not have to be purchased frequently. Some examples of durables are appliances, home and office furnishings, lawn and garden equipment, consumer electronics, toy makers, small tool manufacturers, sporting goods, photographic equipment, and jewelry.

Dutch Auction

An auction where the price on an item is lowered until it gets its first bid, and then the item is sold at that price. The U.S. Treasury (and other countries) uses a Dutch auction when it sells securities.

Dwarf

A name given to a pool of mortgage-backed securities, issued by Fannie Mae, with a maturity of 15 years.


Zero Basis Risk Swap - ZEBRA

A swap agreement between a municipality and a financial intermediary.

Zero-Beta Portfolio

A portfolio constructed to have zero systematic risk or, in other words, a beta of zero

Zero-Sum Game

A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another.

Zombies

Companies that continue to operate even though they are insolvent. Also known as living dead.

Zero-Coupon Bond

A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. Also known as an accrual bond.

Zig Zag

A technical analysis indicator that filters out changes in an underlying plot that are less than a specified amount

Earnings Before Interest, Taxes, Depreciation, and Amortization - EBITDA

An indicator of a company's financial performance calculated as:

EBITDA = Revenue - Expenses (excluding tax, interest, depreciation, and amortization)

EBITDA can be used to analyze the profitability between companies and industries, because it eliminates the effects of financing and accounting decisions.

Compound Annual Growth Rate - CAGR

The year over year growth rate of an investment over a specified period of time.

Calculated by taking the nth root of the total percentage growth rate where n is the number of years in the period being considered.

Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.

Bo Derek

A slang term used to describe a perfect stock or investment.

Generally Accepted Accounting Principles - GAAP

The common set of accounting principles, standards and procedures. GAAP is a combination of authoritative standards (set by policy boards) and the accepted ways of doing accounting.

Earnings per Share - EPS

The portion of a company's profit allocated to each outstanding share of common stock.

Chartered Financial Analyst - CFA

A professional designation given by the Association for Investment Management and Research (AIMR) that measures the competence and integrity of financial analysts. Candidates are required to pass three levels of exams covering areas such as accounting, economics, ethics, money management, and security analysis.

Short Selling

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Stop-loss Order

An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. This is sometimes called a “stop market order”.

Reverse Stock Split

A reduction in the number of a corporation's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.

Split-Off

Exchanging the stock of a subsidiary for shares in a parent company

A Nasdaq stock symbol specifying that the stock has no voting rights.

Kangaroos

Slang term for Australian stocks, it refers mostly to the stocks on the All Ordinaries index, which is composed of 280 of the most active Australian companies.

Kappa

Used in regression analysis, Kappa represents the ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility.

Keepwell Agreement

A contract between a parent company and its subsidiary to maintain solvency and financial backing throughout the term set in the agreement. This is a method by which subsidiary companies may increase the creditworthiness of debt instruments and corporate borrowing.

Key Rate Duration

Holding all other maturities constant, this measures the sensitivity of a security or value of a portfolio to a 1% change in yield for a given maturity.

The calculation is as follows: price of a security after a 1% decrease in yield / 2* (Initial price of security)*1%

There are 11 maturities along the Treasury spot rate curve, and a key rate duration is calculated for each. The sum of the key rate durations along a portfolio yield curve is equal to the effective duration of the portfolio.

Kiddie Tax

A tax on children under 14 who earn income over $1,200. The extra income is taxed at the guardian's rate.

Since children under 14 can not legally work, this income usually results from dividends or interest from bonds.

Killer Bees

Investment bankers who help companies go about soliciting a hostile takeover.

Keynesian Economics

An economic theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.

A supporter of Keynesian economics believes it is the government's job to smooth out the bumps in business cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation.

Knock-In Option

A latent option contract that begins to function as a normal option (knocks in) only once a certain price level is reached before expiration.

Technically, this type of contract is not an option until a certain price is met, so if the price is never reached it is as if the contract never existed. Knock-ins are a type of barrier option that may be either 'down and in' or 'up and in'.

Knock-Out Option

An option with a built in mechanism to expire worthless should a specified price level be exceeded.

An exotic option mainly used for commodities and currencies.

Labor Intensive

A process or industry that requires large amounts of human effort to produce goods.

A good example is the hospitality industry (hotels, restaurants, etc), they are considered to be very people-oriented.

Ladder Option

An option that locks-in gains once the underlying reaches predetermined price levels or rungs, guaranteeing some profit even if the underlying security falls back below these levels before the option expires.

For example, consider a ladder call option with an underlying price of 50, with a strike price of 55 and rungs at 60, 65 and 70. If the underlying price reached 62, the profit would be locked-in to be at least 5 (60-55); however, if the underlying reached 71, then the profit would be locked-in to being at least 15 (70-55), even if the underlying falls below these levels before the expiration date.

Last In, First Out - LIFO

An inventory management and valuation method that assumes that the products acquired last are the ones sold first.

Last Trading Day

The final day that a futures or options contract may trade or be closed out before delivery of the underlying asset must occur.

Last-Sale Reporting

An electronic entry, to the Nasdaq Stock Market, of the amount and price of shares involved in a transaction's not less than a board lot.

Trades reported must be submitted to Nasdaq within 90 seconds of the execution of the trade.

Late Day Trading

An unethical (if not illegal) practice where a hedge fund purchases and sells securities (usually mutual fund shares) after the close of a trading day, but makes the transactions appear as though they occurred before the market close.

For mutual funds, net asset value is determined at 4pm (the market close). Hedge funds involved in late-day trading work out a special relationship with a mutual fund who, usually for higher-than-average fees/commissions, allows the hedge fund to buy and sell mutual fund shares after hours but record the trade at 4pm. Therefore the net asset value set at the market close might not represent the actual asset value, allowing hedge fund traders to profit by buying shares after the market closes and then selling them the next day once the market opens. New York Attorney General Elliot Spitzer has likened late-day trading to "betting on yesterday's horse races."

Law of Diminishing Marginal Returns

A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.

Consider a factory that employs laborers to produce its product. If all other factors of production remain constant, at some point each additional laborer will provide less output than the previous laborer. At this point, each additional employee provides less and less return. If new employees are constantly added, the plant will eventually become so crowded that additional workers actually decrease the efficiency of the other workers, decreasing the production of the factory.

Law of Diminishing Marginal Utility

A law of economics stating that as a person increases consumption of a product--while keeping consumption of other products constant--there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

This is the premise on which buffet-style restaurants operate. They entice you with "all you can eat," all the while knowing each additional plate of food provides less utility than the one before. And despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original.

For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food. Since you're not as hungry, your enjoyment rates at a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three. If you kept eating, you would eventually reach a point at which your eating makes you sick, providing dissatisfaction, or 'dis-utility'.

Law of Supply

A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases, and vice versa.

As the price of a good increases, suppliers will attempt to maximize profits by increasing the quantity of the product sold.

Layoff

1. When a company eliminates jobs regardless of how good the employees' performance. 2. A risk reduction, made by investment bankers, that minimizes the potential downside associated with a commitment to purchase and sell a stock issue unsubscribed by stockholders holding rights.

1. This is usually because the company is facing financial difficulties. 2. This is a method whereby an investment banking firm, who has committed to buying up all the unsubscribed shares during a rights offering, will reduce the time risk involved due to the difference between entering into the contract and selling the shares. In other words, they are hedging against any losses due to time.

Lead Time

In terms of a supply chain, the total time needed for an order to be processed.

Lead time starts when the order is received by the sales department and ends when the client pays the invoice.

Lease

An agreement in which one party gains a long-term rental agreement, and the other party receives a form of secured long-term debt.

The lessee gains a long term contract for the use of an asset, and the lessor is assured of regular payments for a specified number of years.

Lessee

The person who rents land or property from a lessor.

The lessee is also known as the tenant. Always read your lease agreement carefully, it is a legally binding document.

Lessor

The person who rents land or property to a lessee.

The lessor is also known as the "landlord."

Leveraged Buyout - LBO

A strategy involving the acquisition of another company using borrowed money (bonds or loans). The acquiring company uses its own assets as collateral for the loan in hopes that the future cash flows will cover the loan payments.

There is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds are usually not investment grade and are referred to as junk bonds.

Leveraged Lease

A lease agreement wherein the lessor, by borrowing funds from a lending institution, finances the purchase of the asset being leased.

The lessor pays the lending institution back by way of the lease payments received from the lessee. Under the loan agreement, the debtor has rights to the asset and the lease payments if the lessor defaults.

Leveraged Recapitalization

A strategy where a company takes on significant additional debt with the purpose of either paying a large dividend or repurchasing shares. The result is a far more financially leveraged company.

This is often used in risk arbitrage. It is also a form of shark repellent.

Limited Liability

A type of liability that does not exceed the initial amount a person invested into a partnership.

Limited liability refers to the terms of limited partnerships, which comprise at least one general partner, who takes on unlimited liability, and one or more limited partners, who would never lose more than their original initial investment in fulfilling the partnership's obligations. Limited liability protects a partner's personal assets from being liquidated should the company become insolvent.

Additionally, limited liability can refer to an investment that has limited downside risk, such as a long position in a stock, with which the investor can lose no more than his or her initial investment.

Limited Liability Company - LLC

A corporate structure whereby the shareholders of the company have a limited liability to the firms actions.

Basically, a LLC is a hybrid between a partnership and a corporation.

Limited Partnership - LP

Two or more partners formed to conduct a business jointly, and in which one or more of the partners is liable only to the extent of the amount of money they have invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses.

The main advantage is the owners are generally not liable for the debts of the company.

Limited Risk

The risk of an investment that has a predetermined maximum downside potential, which is usually the initial amount invested.

When choosing a limited risk investment, the investor is fully aware of the potential amount he or she could lose. For example, entering into a long position in a stock has limited risk because the investor can lose no more than the initial amount invested. Similarly, option contracts have limited risk as only the initial premium paid for the option can be lost.

Line of Credit - LOC

An arrangement between a financial institution (usually a bank) and a customer establishing a maximum loan balance that the bank will permit the borrower to maintain.

The advantage of a line of credit over a regular loan is that you usually don't pay interest on the part of the line of credit that you don't use.

Liquid Market

A market with many bid and ask offers. The market is characterized by high liquidity, low spreads, and low volatility.

Changes in supply or demand have a smaller impact on price. A liquid market is the opposite of a thin market.

Liquidating Dividend

Payment by a firm to its owners from capital rather than from earnings.

This isn't really a good thing. It would be preferable to have dividends come from earnings.

Liquidation

1. When a business or firm is terminated or bankrupt, its assets are sold and the proceeds pay creditors. Any leftovers are distributed to shareholders.

2. Any transaction that offsets or closes out a long or short position.

Creditors liquidate assets to try and get as much of the money owed to them as possible. They have first priority to whatever is sold off. After creditors are paid, the shareholders get whatever is left with preferred shareholders having preference over common shareholders.

Liquidity

1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity.

2. The ability to convert an asset to cash quickly.

Investing in illiquid assets is riskier because there might not be a way for you to get your money out of the investment. Examples of assets with good liquidity include blue chip common stock and those assets in the money market. Also known as marketability.

Liquidity Cushion

A reserve fund for a company or person containing money market and highly liquid investments.

This is a cushion used by large and small investors. By maintaining cash reserves in money market instruments, unexpected demands on cash doesn't require the immediate sale of securities.

Liquidity Path

A way of referring to the process of taking a company public.

For example, after the IPO for ABC Company was postponed, its path to liquidity was uncertain.

Liquidity Preference Theory

The hypothesis that forward rates offer a premium over expected future spot rates.

Proponents of this theory believe that, according to the term structure of interest rates, investors are risk-averse and will demand a premium for securities with longer maturities. A premium is offered by way of greater forward rates in order to attract investors to longer-term securities. The premium received normally increases at a decreasing rate due to downward pressure from the decreasing volatility of interest rates as the term to maturity increases.

Liquidity Risk

The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.

Usually reflected in a wide bid-ask spread or large price movements.

Liquidity Trap

A situation in which prevailing interest rates are low and savings rates are high. As a result, monetary policy is ineffective.

In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise. Since bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset whose price is expected to decline.

Should the regulatory committee try to stimulate the economy by increasing the money supply, there would be no effect on interest rates as people do not need to be encouraged further to hold additional cash.

Listed Security

Securities that have been accepted for trading purposes by a recognized and regulated exchange.

Listed securities have the advantage of higher liquidity within a regulated environment. In addition, investors are able to find accurate information on all listed companies.

Load Fund

A mutual fund with shares sold at a price including a large sales charge. This sales fee may range from 3% to as high as 8% of the full purchase.

In exchange for paying your fees up front, mutual fund companies don't usually make you pay high administration fees.

Loan to Value Ratio - LTV Ratio

A lending risk ratio calculated by dividing the total amount for the mortgage or loan by the appraised value of the property.

Bankers usually require a ratio of at least 75% for mortgage to be approved.

Lobster Trap

A strategy used by a target firm to prevent a hostile takeover. In a lobster trap, the company passes a provision preventing anyone with more than 10% ownership from converting convertible securities into voting stock.

Examples of convertible securities include convertible bonds, convertible preferred stock, and warrants.

Lock Limit

Commonly associated with the futures market, a lock limit occurs when the trading price of a futures contract arrives at the exchanges predetermined limit price. At the lock limit, trades above or below the lock price are not executed.

For example, if a futures contract had a lock limit of $5, as soon as the contract traded at $5 the contract would no longer be permitted to trade above this price if the market is on an up trend, and the contract would no longer be permitted to trade below this price if the market is on a down trend. The main reason for these limits is to prevent investors from substantial losses due to the volatility found in futures markets.

Lock-up Agreement

A legally binding contract between the underwriters and insiders of the company prohibits them from selling any shares of stock for a certain specified period of time.

When lock-ups expire, restricted people are permitted to sell their stock, sometimes resulting in a drastic drop in share price.

Lock-Up Option

A stock option offered by a target company to a white knight for additional equity or for the purchase of a valuable portion of their company.

An undesired third party is deterred from acquiring a major portion of the target company due to the very high value of the lockup option. Also known as Lock-Up Defense.

Locked Market

A short-term situation occurring within a market where both the bid and ask are identical, resulting in no bid-ask spread.

This usually occurs in stocks that are highly volatile and experience a significant trading volume. Locked markets are typically corrected immediately through subsequent trades. This abnormal market condition occurs mainly on the Nasdaq exchange for orders entered before the opening bell.

Logistics

The overall management of the way resources are moved to the areas where they are required.

This term originated in a military context, referring to how personnel acquire, transport, and store supplies and equipment. In the business community, the term is used to refer to how resources are acquired, transported and stored along the supply chain. By having an efficient supply chain and proper logistical procedures, a company can cut costs and increase efficiency.

Long-Term Assets

1. Reported on the balance sheet, it's the value of a company's property, equipment and other capital assets, less depreciation.

2. A stock, bond or other asset that you plan on holding in your portfolio for a lengthy period of time.


Be aware that these are usually recorded at the price at which they were purchased and so do not always reflect the current value of the assets.