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Sortino ratio

A variation of the Sharpe ratio which differentiates harmful volatility from volatility in general by replacing standard deviation with downside deviation in the denominator. Thus the Sortino Ratio is calculated by subtracting the risk free rate from the return of the portfolio and then dividing by the downside deviation. The Sortino ratio measures the return to "bad" volatility. This ratio allows investors to assess risk in a better manner than simply looking at excess returns to total volatility, since such a measure does not consider how often the price of the security rises as opposed to how often it falls. A large Sortino Ratio indicates a low risk of large losses occurring.

cash flows from operating activities

Section of a cash flow statement that shows cash receipts and payments resulting from transactions associated with the determination of net income of a firm. Also called cash provided by operating activities. Formula: Net income + Depreciation and amortization + Net changes in accounts receivable + Changes in accounts payable + Changes in inventories + Changes in other operating activities.

1. The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad, however; it can increase the shareholders' return on investment and often there are tax advantages associated with borrowing. also called financial leverage.

exchange rate mechanism (ERM)

Process by which member countries of an economic community (such as the European Union) maintain exchange rate parity among their currencies. The currencies are allowed to fluctuate with respect to one another within a specified limit. If the exchange rate between any two currencies reaches the limit, the central banks of both countries intervene to bring it back within the limit.

Taylor Rule
A rule that suggests appropriate adjustments to interest rates, based on various economic factors such as inflation and employment rate. The rule indicates that if inflation or employment rates are higher than desired, interest rates should be increased in response to these conditions, and the opposite action should be taken under the opposite conditions. The Federal Reserve Board seems to take this rule under consideration, but does not always follow its suggestions when adjusting the interest rate. This rule was developed by John Taylor, a 20th century economist.

economic life
Period over which an asset (machine, property, computer system, etc) is expected to be usable, with normal repairs and maintenance, for the purpose it was acquired, rented, or leased. Expressed usually in number of years, process cycles, or units produced, it is usually less than the asset's physical life, and is the period over which the asset's depreciation is charged. Also called average life, service life, effective life, mean life, or useful life.

exchange rate risk

The risk that a business' operations or an investment's value will be affected by changes in exchange rates. For example, if money must be converted into a different currency to make a certain investment, changes in the value of the currency relative to the American dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects businesses, but it can also affect individual investors who make international investments. also called currency risk.

The capacity and willingness to undertake conception, organization, and management of a productive venture with all attendant risks, while seeking profit as a reward. In economics, entrepreneurship is regarded as a factor of production together with land, labor, natural resources, and capital. Entrepreneurial spirit is characterized by innovation and risk-taking, and an essential component of a nation's ability to succeed in an ever changing and more competitive global marketplace.

debt/equity ratio

A measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt. For example, if a company has long-term debt of $3,000 and shareholder's equity of $12,000, then the debt/equity ratio would be 3000 divided by 12000 = 0.25. It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity.

financial accounting standards board (FASB)

Independent US body responsible for establishing and interpreting the GAAP mainly for use in the North America. Its accounting standards, generally speaking, result in greater transparency and ease of analysis of a firm's finances than the accounting standards of several other countries. The comparable UK body is Accounting Standards Board (ASB).

free cash flow

Operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends. Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments. While free cash flow doesn't receive as much media coverage as earnings do, it is considered by some experts to be a better indicator of a company's financial health.

fixed charge
Lien or mortgage on a specific fixed-asset (such as a parcel of land) to secure the repayment of a loan. In this arrangement the asset is signed over to the creditor and the borrower would need the lender's permission to sell it. The lender also registers a charge against the asset which remains in force until the loan is repaid. Also called fixed debenture. See also floating charge and fixed charges.

stock purchase plan

A trust established by a corporate which acts as a tax-qualified, defined contribution plan by making the corporation's employees partial owners. contributions are made by the sponsoring employer, and can grow tax-deferred, just as with an IRA or 401(k) plan. But unlike other retirement plans, the contributions must be invested in the company's stock. The benefits for the company include increased cash flow, tax savings, and increased productivity from highly motivated workers. The main benefit for the employees is the ability to share in the company's success. Due to the tax benefits, the administration of stock purchase plans is regulated, and numerous restrictions apply. also called Employee Stock Ownership Plan (ESOP).

Specialized workgroup software (such as Lotus Notes) that provides structure and means to collaborate, exchange ideas, debate, decide, and coordinate activities. It allows the members of a team to use the same pool of data, via connection to a local or wide-area network (such as Internet) spanning countries and continents. Also called collaborative tools.

naked option
A put or call that is written by an investor who does not own a position in the underlying asset that locks in the cost of delivering the shares if the option holder elects to exercise the option. Trading naked options can be a highly risky business because if the option holder chooses to exercise his or her contractual right to buy or sell the underlying assets at the specified price, the grantor will be forced to acquire them on the open market and at the prevailing price. Compare to Covered Put.

credit default swap

A specific kind of counterparty agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange of regular periodic payments (essentially an insurance premium). If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. In turn, the insurer pays the insured the remaining interest on the debt, as well as the principal.

A group of homogeneous tasks related by similarity of functions. When performed by an employee in an exchange for pay, a job consists of duties, responsibilities, and tasks

(performance elements) that are (1) defined and specific, and (2) can be accomplished, quantified, measured, and rated. From a wider perspective, a job is synonymous with a role and includes the physical and social aspects of a work environment. Often, individuals identify themselves with their job or role (foreman, supervisor, engineer, etc.) and derive motivation from its uniqueness or usefulness.

price to book ratio

A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis. This ratio compares the market's valuation of a company to the value of that company as indicated on its financial statements. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. A low ratio may signal a good investment opportunity, but the ratio is less meaningful for some types of companies, such as those in technology sectors. This is because such companies have hidden assets such as intellectual property which are of great value, but not reflected in the book value. In general, price to book ratio is of more interest to value investors than growth investors.

currency swap
An arrangement in which two parties exchange specific amounts of different currencies initially, and a series of interest payments on the initial cash flows are exchanged. Often, one party will pay a fixed interest rate, while another will pay a floating exchange rate (though there may also be fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are exchanged back. Unlike an interest rate swap, the principal and interest are both exchanged in full in a currency swap.

business tax
Five major types of business taxes are: (1) corporate franchise tax, (2) employment (withholding) tax, (3) excise tax, (4) gross-receipts tax, and (5) value added tax (VAT). Some types of firms (such as insurance, mining, and petroleum extraction companies) pay additional taxes peculiar to their industries. While firms too pay income, property, and sales taxes, such taxes are not specific to businesses. In terms of economic impact, however, all taxes are 'people taxes' because they affect human beings and not some abstraction labeled 'business.' Also called business activity tax.

Federal Reserve Act of 1913

Landmark legislation that created the central banking system (the Federal Reserve) and thereby laid the foundation of the modern U.S. financial system. Enacted by President Woodrow Wilson with a view to reform banking and the currency system, its objectives included prevention of financial panics with the ready availability of cash from a money reserve, an expandingcontracting money supply to match the state of the economy, and a new currency - the federal reserve note. In its present state it includes nearly 200 amendments.

aggregator model
Electronic commerce business model where a firm (that does not produce or warehouses any item) collects (aggregates) information on goods and/or services from several competing sources at its website. The firm's strength lies in its ability to create an 'environment' which draws visitors to its website, and in designing a system which allows easy matching of prices and specifications. See also affiliate model.

affiliate model
Electronic commerce business model that enables a firm to generate revenue streams on hundreds (even thousands) of items without carrying inventories, managing orders, processing payments, or handling packaging and shipping. In this arrangement, a website concentrates on a relationship with a very specific group of individuals as its core competence (see core competencies). It develops and continuously upgrades content and services to attract and retain the patronage of this group. Once it has a sizable number of regular visitors, it can generate revenue by carrying ads or links to merchants with products that its visitors seek or are interested in. See also aggregator model.

banking syndicate
1. A group of investment banks which jointly underwrite and distribute a new security offering, or jointly lend money to a specific borrower. A banking syndicate is not a permanent entity, but forms specifically to handle a deal that might be too difficult or too risky for a single underwriter or borrower to handle. also called underwriting group or purchase group or banking syndicate or investment banking syndicate or distributing syndicate. 2. A group of investors who act together when investing in a company.


A Classification Of Residential Neighborhoods. Directory that groups the UK residential areas into 39 types, (and the US residential areas into 36 types) according to age, composition, facilities, household size, income, marital status, mode of travel to work, occupation, ownership of car, ownership of home, etc. It's based on the concept that areas with similar demographic and social characteristics tend to share common life styles and patterns of buying behavior. Designed mainly for marketing and promotional campaigns by the UK researcher Richard Webber, and first published in 1977.

credit union
A non-profit financial institution that is owned and operated entirely by its members. Credit unions provide financial services for their members, including savings and lending. Large organizations and companies may organize credit unions for their members and employees, respectively. To join a credit union, a person must ordinarily belong to a participating organization, such as a college alumni association or labor union. When a person deposits money in a credit union, he/she becomes a member of the union because the deposit is considered partial ownership in the credit union.

embedded derivative
A component of a hybrid security that is embedded in a non-derivative instrument. An embedded derivative can modify the cash flows of the host contract because the derivative can be related to an exchange rate, commodity price or some other variable which frequently changes. For example, a Canadian company might enter into a sales contract with a Chinese company, creating a host contract. If the contract is denominated in a foreign currency, such as the U.S. dollar, an embedded foreign currency derivative is created. According to the International Financial Reporting Standards (IFRS), the embedded derivative has to be separated from the host contract and accounted for separately unless the economic and risk characteristics of both the embedded derivative and host contract are closely related.

The activity of leading a group of people or an organization, or the ability to do this. In its essence, leadership in an organizational role involves (1) establishing a clear vision, (2) sharing that vision with others so that they will follow willingly, (3) providing the information, knowledge, and methods to realize that vision, and (4) coordinating and balancing the conflicting interests of all members or stakeholders. A leader comes to the forefront in case of crisis, and is able to think and act in creative ways in difficult situations. Unlike management, leadership flows from the core of a personality and cannot be taught, although it may be learned and may be

enhanced through coaching or mentoring. The individuals who are the leaders in an organization, regarded collectively.

blanket mortgage
A mortgage which creates a lien on two or more pieces of property. Blanket mortgages are often used by individuals or companies that have more than one piece of real estate, and that want to take out a mortgage or second mortgage on the combined value of their properties. For example, a real estate developer with several undeveloped lots could mortgage those lots in order to build homes on them. Instead of taking a mortgage on each property, the real estate developer takes out one mortgage on the combined value of the properties.

balance sheet ratios

Comparisons of balance sheet items to gain insight into the (1) changes in the financial position, (2) strength/weakness of the financial position, and (3) relationship between different items. Two basic balance sheet ratios are the debt ratio (total debt total assets) and debt to equity ratio (total debt total equity).

management system
Documented and tested step-by-step method aimed at smooth functioning through standard practices. Used primarily in franchising industry, management systems generally include detailed information on topics such as (1) organizing an enterprise, (2) setting and implementing corporate policies, (3) establishing accounting, monitoring, and quality control procedures, (4) choosing and training employees, (5) choosing suppliers and getting best value from them, and (6) marketing and distribution.

leading and lagging

Accounting technique of expediting (leading) or delaying (lagging) receipts and payments of cash to gain a business advantage. In foreign trade, for example, if a manufacturer has to pay $1 million on a certain date for imported material and receives an export order for $1 million, it might try either to delay the payment for imports or to press for an early payment by the buyer, or both, so that the cash inflow from export is used as cash outflow for imports. It will thus try to escape devaluation risk in import-payment and default risk in export-receipt by juggling two cash flows. Similarly, in transactions between the subsidiaries of the same firm, receipts and payments of cash may be delayed or expedited to defer taxes.

A management practice of sharing information, rewards, and power with employees so that they can take initiative and make decisions to solve problems and improve service and performance. Empowerment is based on the idea that giving employees skills, resources, authority, opportunity, motivation, as well holding them responsible and accountable for outcomes of their actions, will contribute to their competence and satisfaction.

foreign exchange derivatives

Any financial instrument that locks in a future foreign exchange rate. These can be used by currency or forex traders, as well as large multinational corporations. The latter often uses these products when they expect to receive large amounts of money in the future but want to hedge their exposure to currency exchange risk. Financial instruments that fall into this category include: currency options contracts, currency swaps, forward contracts and futures contracts.

Firm without enough cash to meet its current needs and obligations. Illiquidity is one of the major causes of business failure because a firm can survive without profit for a while but not without cash. Even firms rich in fixed assets (land, buildings, machinery) become insolvent from want of cash because it takes time to convert these assets into cash, and that too usually at a loss in value.

permanent life insurance

An umbrella term for a variety of plans that combine a death benefit similar to a term life insurance plan with tax-sheltered savings arrangements. Permanent life policies, as their name implies, are meant to be held and paid into for the duration of the insured's life. Because of this, there are significant fees associated with setting up the policy. Despite these fees, the tax advantages can make permanent life a valuable investment over a long period of time. also called cash value insurance.

corporate policy
Usually, a documented set of broad guidelines, formulated after an analysis of all internal and external factors that can affect a firm's objectives, operations, and plans. Formulated by the firm's board of directors, corporate policy lays down the firm's response to known and knowable situations and circumstances. It also determines the formulation and implementation of strategy,

and directs and restricts the plans, decisions, and actions of the firm's officers in achievement of its objectives. Also called company policy.

dividend yield
The yield a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock's price. For example, if a stock pays out $2 in dividends over the course of a year and trades at $40, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.

An actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments, for money or barter. Markets include mechanisms or means for (1) determining price of the traded item, (2) communicating the price information, (3) facilitating deals and transactions, and (4) effecting distribution. The market for a particular item is made up of existing and potential customers who need it and have the ability and willingness to pay for it.

price to sales ratio

A stock's capitalization divided by its sales over the trailing 12 months. The value is the same whether the calculation is done for the whole company or on a per-share basis. A low price to sales ratio (for example, below 1.0) is usually thought to be a better investment since the investor is paying less for each unit of sales. However, sales don't reveal the whole picture, since the company might be unprofitable. Because of the limitations, price to sales ratio are usually used only for unprofitable companies, since such companies don't have a price/earnings ratio (P/E ratio).

behavior segmentation
A type of market segmentation based on differences in the consumption behavior of different groups of consumers, taking into account their lifestyles, patterns of buying and using, patterns of spending money and time, and similar factors. One of the five common segmentation strategies, its objective is to define specific niches that require custom tailored promotion.

sector fund
A mutual fund which invests entirely or predominantly in a single sector. Sector funds tend to be riskier and more volatile than the broad market because they are less diversified, although the risk level depends on the specific sector. Some investors choose sector funds when they believe that a specific sector will outperform the overall market, while others choose sector funds to hedge against other holdings in a portfolio. Some common sector funds include financial services funds, gold and precious metals funds, health care funds, and real estate funds, but sector funds exist for just about every sector.

dividend discount model

Mathematical formula used generally by stockbrokers to determine the selling price of a firm's stock (shares). Based on the discounted value of the expected future dividend amounts, it is used usually to spot firms that are undervalued by the stockmarket but have potential for high returns. See also dividend valuation model.

stockholders' equity
A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, most companies end up being worth far more in the marketplace than their stockholders' equity would suggest. For this reason, stockholders' equity is of more interest to value investors than growth investors. also called book value.

equity method
Method of accounting used by a parent firm for monies invested in the subsidiaries. The parent firm records the investment in its balance sheet at a valuation that takes into account the profits and losses of the subsidiaries since their acquisition. Also called equity accounting. See also cost method.

above par
Bond, share, or other security selling at a price higher than its par value is said to be selling at above par or 'at premium.' Bond prices are stated on a scale where the par value (whatever the amount) is

assigned the number 100, and the premium is shown as a factor of 100. For example, a bond with a par value of $1,000 and priced at 110 is selling at $1,100. Also called at a premium or at premium.

futures commission merchant

An individual or organization accepting orders to buy or sell futures or futures options. A person or organization in this role needs to be certified by the Commodities and Futures Trading Commission. A futures commission merchant has a role in the futures market similar to that of a broker in the securities market. In addition to accepting buy or sell orders, the futures commission merchant can also hold their client's money or securities in margin accounts in accordance with the rules of the exchange on which they are trading. The work of a futures commission merchant may also occasionally be carried out by a full service broker.

fundamental analysis
Method of evaluating a security (bond, note, share) by investigating the intrinsic (fundamental) value of the business that issued the security. Fundamental analysts believe that a firm's (1) competitive advantage, (2) earnings growth, (3) sales revenue growth, (4) market share, (6) financial reserves, and (6) quality of management all reflected in its financial statements and together called 'fundamental information' are the true indicators of its earning potential and future value of its securities. In contrast, proponents of technical analysis focus on the past and present movements in the market price of a security to estimate its future value.

Roth IRA
A new type of IRA, established in the Taxpayer Relief Act of 1997, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow taxfree. Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all. Contributions to the Roth IRA are invested in mutual funds, stocks, or other securities, and the amount that someone is able to contribute is dependent upon their income, age, and tax filing status. Unique features of a Roth IRA are that it does not require you to start making withdrawals at a certain age, and also it allows an individual to make a qualified withdrawal up to $10,000 for a first time home purhcase.

An observable and measurable end result having one or more objectives to be achieved within a more or less fixed timeframe.

horizontal integration
The merger of companies at the same stage of production in the same or different industries. When the products of both companies are similar, it is a merger of competitors. When all producers of a good or service in a market merge, it is the creation of a monopoly. If only a few competitors remain, it is termed an oligopoly. Also called lateral integration. See also vertical integration.

inventory to cost of sales ratio

Percentage of cost of sales attributable to average inventory. A decreasing number indicates higher efficiency in use of resources; an increasing number suggests potential cash flow problems due to greater sums tied up in inventory. Formula: (Average inventory during a period cost of sales during that period) x 100.

up-and-in barrier option

A type of barrier option in which the spot price of the underlying is set below the barrier level, and the price of the underlying must close up in order for the option to be exercised. It is named "up-and-in" because the right to exercise the option appears if the price of the underlying is above the barrier.

The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income. Also called sales, or (in the UK) turnover.

bias ratio
A way of uncovering price manipulation by the managers of an investment portfolio, such as a hedge fund or mutual fund. The bias ratio measures how far a portfolio's reported performance differs from an unbiased valuation.

Keynesian economics

A school of economic thought founded by the UK economist John Maynard Keynes (1883-1946) and developed by his followers. In 1936, at the height of the great depression, Keynes' landmark book The General Theory Of Employment, Interest And Money caused a paradigm shift for economics: it suddenly replaced their emphasis on study of the economic behavior of individuals and companies (microeconomics) to the study of the behavior of the economy as a whole (macroeconomics).

The main plank of his revolutionary theory is the assertion 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. This theory further asserts that free markets have no selfbalancing mechanisms that lead to full employment. Keynesian economists urge and justify a government's intervention in the economy through public policies that aim to achieve full employment and price stability. Their ideas have greatly influenced governments the world-over in accepting their responsibility to provide full or near-full employment through measures (such as deficit spending) that stimulate aggregate demand. See also classical economics, neo-classical Economics, new classical economics and supply side economics.

holder of record
The name of an individual or entity that an issuer carries in its records as the registered holder (not necessarily the beneficial owner) of the issuer's securities. Dividends and other distributions are paid only to holders of record. also called shareholder of record or holder of record or owner of record.

creative accounting
Use of unorthodox 'massage parlor' techniques which, while following provisions of GAAP, paint a desired (negative or positive, as the case may be) picture of a firm's finances. For example, selling an asset (whose market value is high but book value is low) to create non-operating profit that offsets operating loss. Unlike cooking the books, creative accounting is generally legal. Euphemistically also called financial engineering or earnings management. See also creative financing. creative

accounting is in the Accounting & Auditing, Banking, Commerce, Credit, & Finance, Corporate,
Commercial, & General Law and Entrepreneurship, Management, & Small Business subjects.

creative accounting appears in the definitions of the following terms: opportunistic behavior,
price to sales (PS) ratio, cooking the books, financial engineering, and massaging the figures.

Presence of matter (gas, liquid, solid) or energy (heat, noise, radiation) whose nature, location, or quantity directly or indirectly alters characteristics or processes of any part of the environment, and causes (or has the potential to cause) damage to the condition, health, safety, or welfare of animals, humans, plants, or property.

Roth 401(k)
A contribution-based retirement account, which combines features of the traditional Roth IRA and 401(k) plan accounts. The Roth 401(k) contains many benefits for employees, such as being able to contribute post-tax money, but many companies do not yet offer this as a retirement plan option, due to the increased amount of work it takes to maintain this plan. Companies were given the option to begin offering this plan in 2006.

non profit organization (NPO)

Associations, charities, cooperatives, and other voluntary organizations formed to further cultural, educational, religious, professional, or public service objectives. Their startup funding is provided by their members, trustees, or others who do not expect repayment, and who do not share in the organization's profits or losses which are retained or absorbed. Approved, incorporated, or registered NPOs are usually granted tax exemptions, and contributions to them are often tax deductible. Most non governmental organizations (NGOs) are NPOs. Also called not for profit organization.

double bottom

A technical analysis term used to describe a chart on which the price of a security has made two approximately equal bottoms over a period of time. Technical analysts try to buy at one of the bottoms in anticipation of a rise (which would make the shape of a "W" on the chart). opposite of doublefixed income investment
Money invested in bonds, certificates of deposit, preferred stock (preference shares), etc., which regularly generate a fixed amount of interest income. Such investments are preferable during periods of low inflation, but their worth is eroded during periods of high inflation. Also called fixed interest investment. fixed income investment is in the Accounting & Auditing,

Banking, Commerce, Credit, & Finance, Investing and Securities & Futures Trading subjects. top.

linear chart
The standard chart type, on which a given distance always represents the same absolute change in price (unlike on a logarithmic chart, where a given distance always represents the same percentage change in price). In other words, the distance from 1 to 10 is the same as the distance from 10 to 100 on a logarithmic chart, but the latter distance is ten times greater on a linear chart.

information technology (IT)

Set of tools, processes, and methodologies (such as coding/programming, data communications, data conversion, storage and retrieval, systems analysis and design, systems control) and associated equipment employed to collect, process, and present information. In broad terms, IT also includes office automation, multimedia, and telecommunications.

private equity
Money invested in firms which have not 'gone public' and therefore are not listed on any stock exchange. Private equity is highly illiquid because sellers of private stocks (called private securities) must first locate willing buyers. Investors in private equity are generally compensated when: (1) the firm goes public, (2) it is sold or merges with another firm, or (3) it is recapitalized . private equity is in the Accounting & Auditing, Banking, Commerce, Credit, & Finance and Investing subjects. private

equity appears in the definitions of the following terms: private securities, Oman Investment Fund,
and capital IQ.

financial analyst
An employee of a bank, brokerage, advisor, or mutual fund who studies companies and makes buy and sell recommendations, often specializing in a single sector or industry. Financial analysts use a wide variety of techniques for researching and making recommendations. The reports and recommendations they publish are often used by traders, mutual fund managers, portfolio managers and investors in their decision making processes. also called securities analyst or analyst.

interim dividend
Distribution of profits to stockholders (shareholders) before a firm's annual earnings have been computed, or at any time between two successive annual general meetings (AGM). Interim dividend is generally paid quarterly in the US and half-yearly in the UK. Firms paying interim

dividend try to be reasonably certain they can afford it, and make the necessary adjustments (if any) in the subsequent or year-end dividend payments. interim dividend is in the Accounting & Auditing, Banking, Commerce, Credit, & Finance, Investing and Securities & Futures Trading subjects.

Dow dividend theory

Investment strategy that advocates buying the ten DJIA stocks with the highest yields. Some investors believe that these stocks are currently undervalued and are worth buying. Typically, investors following this strategy re-adjust portfolios at the beginning of each calendar year, as the fluctuating stock prices change the yields. also called dogs of the dow.

asset allocation fund

A single mutual fund which tries to accomplish the goals of asset allocation all by itself. Such a fund invests in a variety of securities in different asset classes. The purpose is to provide investors with truly diversified holdings and consistent returns, while sparing the investor the trouble of having to accomplish asset allocation by purchasing a large number of different funds. Some asset allocation funds have a specific breakdown of asset classes that they try to maintain over time, while others vary the composition as opportunities and circumstances change.

Loudermill rights
Employee rights deriving from a 1985 US Supreme court decision ('Cleveland Board of Education vs. Loudermill') that most public (but not private) employees have a property right in their jobs. An employee cannot be dismissed without due process involving pre-termination hearing that gives them the opportunity to present their side of the story.

investment portfolio
Pool of different investments by which an investor bets to make a profit (or income) while aiming to preserve the invested (principal) amount. These investments are chosen generally on the basis of different risk-reward combinations: from 'low risk, low yield' (gilt edged) to 'high risk, high yield' (junk bonds) ones; or different types of income streams: steady but fixed, or variable but with a potential for growth.

overhead ratio
Operating expenses divided by the sum of taxable equivalent net interest income and other operating income. This ratio shows the proportion of expenses, in relation to total income, that cannot be allocated directly to production of the good or service. Operating expenses include items such as office rent, maintenance of machinery, depreciation costs, etc. In general, companies want to minimize these costs since it is difficult to quantify the revenues generated by undertaking these costs.
Life Path Number 5: The Wind Those born under a Life Path Number 5 are as hard to catch, and as freedom-loving as the wind itself. Naturally changeable and versatile, you thrive on all things new and different. Just like the wind, if anyone tries to capture you, you will die. This is not cruelty - although the broken hearts you leave behind you might argue - it is simply your nature. The love of freedom for a Life Path Number 5 exists on all levels: Intellectually, you have an eclectic array of interests, although you may not have a deep knowledge of any one thing. Emotionally, you will love many people, and move on just as quickly. This is not to say you will be an unfaithful love partner, only that your ideal mate will need to understand that you may not be home for dinner if you have decided to catch a last minute flight to Timbuktu for a month or so. Spiritually, you are intrigued by religion and are probably knowledgeable about many of them, but prefer to develop your own brand of spirituality rather than be tied to any one dogma. This constant changing is not, as some people think, an attempt to run away from the things you don't like about yourself. In fact, it is just the opposite: You are always looking for ways to improve things, including yourself. In your own way you are chasing, and contributing to, the perfect world. Being so open to new experiences make you very compassionate. You feel other people's pain deeply and are quick to draw upon your vast resources to help whenever you can. In true Number 5 style though, you don't like to be shown a lot of gratitude and will often help anonymously when you can. Thanks and gratitude just take up too much time! Occasionally a Life Path Number 5 will suffer from a permanent feeing of restlessness and discomfort. This is usually when he or she is trying to fit a role that goes against their nature. If you feel this way, perhaps you need to stop feeling guilty for being a free spirit. It is not in everyone's nature to live in the same neighbourhood for their whole life or stay in the same job forever. Give yourself permission to embrace the freedom you so badly need. A Life Path Number 5 is truly the wind of change.

Weighted Average Cost of Capital. An average representing the expected return on all of a company's securities. Each source of capital, such as stocks, bonds, and other debt, is assigned a required rate of return, and then these required rates of return are weighted in proportion to the share each source of capital contributes to the company's capital structure. The resulting rate is what the firm would use as a minimum for evaluating a capital project or investment.

upstream industries
Industrial firms that process the basic or raw material into an intermediary product which is converted into finished product by the downstream industries. For example, petroleum processors who refine crude oil into intermediary chemicals which are converted into plastics by other industries, and farmers or growers whose produce is used by agro-processors.

sale and leaseback

Off balance sheet financing in which an owner sells an asset or property to a leasing firm and, at the same time, leases it (as a lessee) on a long-term basis to retain exclusive possession and use. Although this arrangement frees capital tied up in a fixed asset, the original owner loses depreciation and tax benefits. Also called leaseback. See also sale and buyback.

butterfly spread
An options strategy built on four trades at one expiration date and three different strike prices. For call options, one option each at the high and low strike price are bought, and two options at the middle strike price are sold. For put options, the trades are reversed. This is a limited risk, limited return strategy that pays off when the price of the underlier remains around the middle strike price. This strategy is essentially a combination of a bull and bear spread.

Top rating awarded to qualifying corporate bonds by the bond rating agencies such as Standard & Poor's (AAA) and Moody's (Aaa). These ratings mean: (1) the bonds are of the highest quality (are 'gilt edged'), (2) carry the least degree of investment risk, and (3) are fully expected to pay both interest and principal on time. Other rating agencies use different designations. See also bond ratings.

rabbi trust

A specific trust set up by employers for employees who are under non-qualified deferred compensation plans. The funds are highly regulated, and usually involve a degree of risk of forfeiture if certain guidelines are not followed. Once the money is placed in the fund, the employer is no longer able to access the money, and it is saved for the employee as long as all the guidelines are followed. It gets its name because the first of these trusts was developed for a rabbi.

money market
Network of banks, discount houses, institutional investors, and money dealers who borrow and lend among themselves for the short-term (typically 90 days). Money markets also trade in highly liquid financial instruments with maturities less than 90 days to one year (such as bankers' acceptance, certificates of deposit, and commercial paper), and government securities with maturities less than three years (such as treasury bills), foreign exchange, and bullion. Unlike organized markets (such as stock exchanges) money markets are largely unregulated and informal where most transactions are conducted over phone, fax, or online. Long-term borrowing and lending markets are called capital markets.

consumer confidence index

A measure of consumer optimism toward current economic conditions. The consumer confidence index was arbitrarily set at 100 in 1985 and is adjusted monthly on the basis of a survey of about 5,000 households. The index considers consumer opinion on both current conditions (40% of the index) and future expectations (the other 60%). The Consumer Confidence Index is closely watched because many economists consider consumer optimism an important indicator of the future health of the economy.

overhead ratio
Operating expenses divided by the sum of taxable equivalent net interest income and other operating income. This ratio shows the proportion of expenses, in relation to total income, that cannot be allocated directly to production of the good or service. Operating expenses include items such as office rent, maintenance of machinery, depreciation costs, etc. In general, companies want to minimize these costs since it is difficult to quantify the revenues generated by undertaking these costs.

Research method for testing different assumptions (hypotheses) by trial and error under conditions constructed and controlled by the researcher. During the experiment, one or more conditions (called independent variables) are allowed to change in an organized manner and the effects of these changes on associated conditions (called dependent variables) is measured, recorded, validated, and analyzed for arriving at a conclusion.

Laffer Curve
A curve which supposes that for a given economy there is an optimal income tax level to maximize tax revenues. If the income tax level is set below this level, raising taxes will increase tax revenue. And if the income tax level is set above this level, then lowering taxes will increase tax revenue. Although the theory claims that there is a single maximum and that the further you move in either direction from this point the lower the revenues will be, in reality this is only an approximation.

blanket mortgage
A mortgage which creates a lien on two or more pieces of property. Blanket mortgages are often used by individuals or companies that have more than one piece of real estate, and that want to take out a mortgage or second mortgage on the combined value of their properties. For example, a real estate developer with several undeveloped lots could mortgage those lots in order to build homes on them. Instead of taking a mortgage on each property, the real estate developer takes out one mortgage on the combined value of the properties.

balance sheet ratios

Comparisons of balance sheet items to gain insight into the (1) changes in the financial position, (2) strength/weakness of the financial position, and (3) relationship between different items. Two basic balance sheet ratios are the debt ratio (total debt total assets) and debt to equity ratio (total debt total equity).

operating activities
<p>An activity that directly affects an organization's cash inflows and outflows, and determine its net income.</p> <p>Cash inflows result from sales of goods or services, sale of shares, and from income earned on investments. Cash outflows result from equipment and inventory purchases, interest and principal payments on loans, salaries, dividends, and various other costs and expenses.

bull trap
A sign which supposedly indicates that a security is reversing its path, and is starting to rise instead of decline, but in actuality the security continues to decline after this signal is seen. It is seen as a trap because some people will see this signal and purchase the stock because they believe they will benefit from this increase in value, but they are trapped with a poor performing stock when they find out that the stock is still falling.

key performance indicators (KPI)

Key business statistics such as number of new orders, cash collection efficiency, and return on investment (ROI), which measure a firm's performance in critical areas. KPIs show the progress (or lack of it) toward realizing the firm's objectives or strategic plans by monitoring activities which (if not properly performed) would likely cause severe losses or outright failure.

brought over the wall

Situation in which a research analyst at an investment bank works for the underwriting department for a corporate client. Legally, these two departments are supposed to be kept separate because of the risk in the transfer of inside information and potential conflicts of interest. also called "brought over the Chinese Wall".

balance of payments
An accounting record of all transactions made by a country over a certain time period, comparing the amount of foreign currency taken in to the amount of domestic currency paid out.

brand development index (BDI)

Percentage of a brand's sales in a particular area in relation to the percentage of the country's population in that area. If a brand has 10 percent of sales, for example, in an area where the 20 percent of country's people live then its BDI in that area is 50 (10 x 100 20). BDI indicates where significant groups of a brand's customers live and helps direct marketing efforts.

settlement options
The different methods for paying out a benefit available to beneficiaries when an individual covered by a life insurance policy dies. The simplest method is a lump sum payment of the value of the policy. It is also possible to leave the entire settlement with the insurance company and collect interest, retaining the right to withdraw principal funds at any time. Payment schedules

are also available based on payment amount or duration. In either case, interest will accrue on the money that remains with the insurance company. There are also a range of options that pay benefits over the entire life of the beneficiary.

economic growth
<p>Increase in a country's productive capacity, as measured by comparing gross national product (GNP) in a year with the GNP in the previous year.</p> <p>Increase in the capital stock, advances in technology, and improvement in the quality and level of literacy are considered to be the principal causes of economic growth. In recent years, the idea of sustainable development has brought in additional factors such as environmentally sound processes that must be taken into account in growing an economy.

forex hedge
Tactic used by a forex trader to protect a current position from undesirable changes in exchange rates. For example, if a trader predicted that the dollar may take a turn for the worst, he/she may implement a forex hedge to protect the investment.

<p>A party to whom money is owed.</p> <p>Common classifications of a creditor include (1) Secured: who has a legal right to take a specific property of the borrower and sell it in case of a default. (2) Unsecured: who does not have any such right. (3) Preferential or senior: who takes precedence over other creditors in laying claim to a bankrupt borrower's property. (4) Junior: whose claim is addressed after satisfying the claims of preferential or senior creditors.

currency basket
A group of securities whose weighted average is used to determine the value of an obligation or the value of another currency. For instance, a country that does not peg the value of its currency to a single other currency, such as the U.S. dollar, could value its currency to the value of a currency basket comprised of Euros, U.S. dollars, and Japanese Yen.

sell signal
A situation in which a parent company sells a minority share of a child company, usually in an IPO, while retaining the rest. The child company will have its own board of directors and financial statements, but will benefit from the parent company's resources and strategic support. Usually, the parent company will eventually sell the rest of the child company in the open market. also called carve-out.

confirmed irrevocable letter of credit (L/C)

L/C that adds the endorsement of a seller's bank (the accepting-bank) to that of the buyer's bank (the issuing bank). It provides the highest level of protection to the seller because not only the L/C cannot be canceled (or its terms changed) unilaterally by the buyer (the account party), but also both banks involved in the transaction guaranty its payment on its due (maturity) date.

point of service
A feature of an insurance plan that allows a patient to choose between in-network care and outof-network care every time he or she sees a doctor. The patient is allowed the freedom to go to whichever doctor is most convenient, although the cost will vary depending upon which option the patient chooses.

exchange rate
Price for which the currency of a country can be exchanged for another country's currency. Factors that influence exchange rate include (1) interest rates, (2) inflation rate, (3) trade balance, (4) political stability, (5) internal harmony, (6) high degree of transparency in the conduct of leaders and administrators, (7) general state of economy, and (8) quality of governance.

A proceeding in a federal court in which an insolvent debtor's assets are liquidated and the debtor is relieved of further liability. Chapter 7 of the Bankruptcy Reform Act deals with liquidation, while Chapter 11 deals with reorganization.

1. In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of a brokerage account, it is the net value of the account, i.e. the value of securities in the account less any margin requirements. 2. Ownership interest in a corporation in the form of common stock or preferred stock. 3. Total assets minus total liabilities; here also called shareholder's equity or net worth or book value. 4. Real Estate: The difference between what a property is worth and what the owner owes against that property (i.e. the difference between the house value and the remaining mortgage or loan payments on a house).

current ratio
An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liablities exceed current assets, then the company may have problems meeting its short-term obligations. For example, if XYZ Company's total current assets are $10,000,000, and its total current liabilities are $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be in relatively good short-term financial standing.

triple net lease

A lease in which the lessee pays rent to the lessor, as well as all taxes, insurance, and maintenance expenses that arise from the use of the property.

working capital
Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. also called net current assets or current capital.

Definitions (2)
1. The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad, however; it can increase

the shareholders' return on investment and often there are tax advantages associated with borrowing. also called financial leverage. 2. What the debt/equity ratio measures.

Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings. From an accounting perspective, assets are divided into the following categories: current assets (cash and other liquid items), long-term assets (real estate, plant, equipment), prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), and intangible assets (trademarks, patents, copyrights, goodwill).

interest rate
A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve Board policies. For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%.

From a consumer's perspective, the interest rate is expressed as annual percentage yield (APY) when the interested is earned, for example, from a savings account or a certificate of deposit. When the interest is paid, for example, for a credit card, a mortgage, or a loan, the interest rate is expressed as annual percentage rate (APR).

Definitions (2)
1. An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity. The official definition, from

the Securities Exchange Act of 1934, is: "Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited." 2. Property which is pledged as collateral for a loan.

Earnings Before Interest, Taxes, Depreciation and Amortization. An approximate measure of a company's operating cash flow based on data from the company's income statement. Calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization. This earnings measure is of particular interest in cases where companies have large amounts of fixed assets which are subject to heavy depreciation charges (such as manufacturing companies) or in the case where a company has a large amount of acquired intangible assets on its books and is thus subject to large amortization charges (such as a company that has purchased a brand or a company that has recently made a large acquisition). Since the distortionary accounting and financing effects on company earnings do not factor into EBITDA, it is a good way of comparing companies within and across industries. This measure is also of interest to a company's creditors, since EBITDA is essentially the income that a company has free for interest payments. In general, EBITDA is a useful measure only for large companies with significant assets, and/or for companies with a significant amount of debt financing. It is rarely a useful measure for evaluating a small company with no significant loans. Sometimes also called operational cash flow. bond

A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer

does not gain any kind of ownership rights to the issuer, unlike in the case of equities. On the hand, a bond holder has a greater claim on an issuer's income than a shareholder in the case of financial distress (this is true for all creditors). Bonds are often divided into different categories based on tax status, credit quality, issuer type, maturity and secured/unsecured (and there are several other ways to classify bonds as well). U.S. Treasury bonds are generally considered the safest unsecured bonds, since the possibility of the Treasury defaulting on payments is almost zero. The yield from a bond is made up of three components: coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains). A bond might be sold at above or below par (the amount paid out at maturity), but the market price will approach par value as the bond approaches maturity. A riskier bond has to provide a higher payout to compensate for that additional risk. Some bonds are tax-exempt, and these are typically issued by municipal, county or state governments, whose interest payments are not subject to federal income tax, and sometimes also state or local income tax.

debt/equity ratio
A measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt. For example, if a company has long-term debt of $3,000 and shareholder's equity of $12,000, then the debt/equity ratio would be 3000 divided by 12000 = 0.25. It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity.

Definitions (2)
1. For a company, this is the total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in owner's equity and is calculated before any expenses are subtracted. Net income can be calculated by subtracting expenses from revenue. In terms of reporting revenue in a company's financial statements, different companies consider revenue to be received, or "recognized", different ways. For example, revenue could be recognized when a deal is signed, when the money is received, when the services are provided, or at other times. There are rules specifying when revenue should be

recognized in different situations for companies using different accounting methods, such as cash basis and accrual basis accounting. 2. For the government, the increase in assets of governmental funds that do not increase liability or recovery of expenditure. This revenue is obtained from taxes, licenses and fees.

market capitalization
MCAP. Market capitalization represents the aggregate value of a company or stock. It is obtained by multiplying the number of shares outstanding by their current price per share. For example, if XYZ company has 15,000,000 shares outstanding and a share price of $20 per share then the market capitalization is 15,000,000 x $20 = $300,000,000. Generally, the U.S. market recognizes three market cap divisions: large cap (usually $5 billion and above), mid cap (usually $1 billion to $5 billion), and small cap (usually less than $1 billion), although the cutoffs between the categories are not precise or fixed. In our example above, XYZ would be considered a small cap company. also called market cap.

Definitions (2)
1. A branch of economics concerned with resource allocation as well as resource management, acquisition and investment. Simply, finance deals with matters related to money and the markets. 2. To raise money through the issuance and sale of debt and/or equity.

net income
1. In business, what remains after subtracting all the costs (namely, business, depreciation, interest, and taxes) from a company's revenues. Net income is sometimes called the bottom line. also called earnings or net profit. 2. For an individual, gross income minus taxes, allowances, and deductions. An individual's net income is used to determine how much income tax is owed.net income 1. In business, what remains after subtracting all the costs (namely, business, depreciation, interest, and taxes) from a company's revenues. Net income is sometimes called the bottom line. also called earnings or net profit.

2. For an individual, gross income minus taxes, allowances, and deductions. An individual's net income is used to determine how much income tax is owed.

Definitions (2)
1. The ability to be sold or transferred to another party as a form of payment. Something which is negotiable is transferable by endorsement and delivery. A negotiable instrument could be a check made out to you, because you could endorse it for payment to you or transfer it to someone else as payment to them. 2. For a price or other terms of a contract or agreement, the ability to be adjusted. For example, when a price is said to be negotiable, it means that the seller is open to the possibility of reducing the price.

Definitions (3)
1. The annual rate of return on an investment, expressed as a percentage. 2. For bonds and notes, the coupon rate divided by the market price. This is not an accurate measure of total return, since it does not factor in capital gains. 3. For securities, the annual dividends divided by the purchase price. This is not an accurate measure of total return, since it does not factor in capital gains. here, also called dividend yield or current yield.

net profit
Often referred to as the bottom line, net profit is calculated by subtracting a company's total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time (usually one year). also called net income or net earnings.

net worth

Definitions (2)
1. For a company, total assets minus total liabilities. Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation. Net worth can be used to determine creditworthiness because it gives a snapshot of the company's investment history. also called owner's equity, shareholders' equity, or net assets. 2. For an individual, the value of a person's assets, including cash, minus all liabilities. The amount by which the individual's assets exceed their liabilities is considered the net worth of that person.

deficit net worth

On a balance sheet, the excess of liabilities over assets and capital stock, usually resulting from operating losses. also called negative net worth.

surety bond
Definitions (2)
1. A bond issued by an entity on behalf of a second party, guaranteeing that the second party will fulfill an obligation or series of obligations to a third party. In the event that the obligations are not met, the third party will recover its losses via the bond. 2. A fee that is charged when a person loses a physical security issued to him/her and has to have a duplicate issued.

A financial instrument whose characteristics and value depend upon the characteristics and value of an underlier, typically a commodity, bond, equity or currency. Examples of derivatives include futures and options. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline. These techniques can be quite complicated and quite risky.

Unsecured debt backed only by the integrity of the borrower, not by collateral, and documented by an agreement called an indenture. One example is an unsecured bond.

capital net worth

Total assets minus total liabilities of an individual or company. For a public company, the excess of assets over liabilities consist of retained earnings, common stock and additional paid-in surplus; here also called owner's equity or shareholders' equity or net assets. For an individual, the excess of assets over liabilities is most likely to come from savings and any additional contributions to income that they have received. Some economists say net worth is not very useful, since financial statements value most assets and liabilities at historical cost, which is usually not a good indicator of true value. also called capital net worth.

The quantifiable likelihood of loss or less-than-expected returns. Examples: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk, event risk.

tangible net worth

Net worth minus intangible assets.

tangible asset value

Variationtangible net worth noun the value of all the assets of a company less its intangible assets, e.g. goodwill, shown as a value per share

sovereign risk
A type of risk whereby foreign exchange regulations could be reduced or altogether nullified by a foreign central bank. This risk is prevalent when an investor holds foreign exchange contracts.

debenture stock
Stock issued under a contract to pay specified amounts at specified intervals. The name is misleading, since it's more like preferred stock than a debenture.

White's rating
A municipal bond rating system that seeks to evaluate a number of factors including potential or current risks to provide an accurate rating and corresponding yield for the bond. A majority of bond rating agencies simply evaluate the issuing party's credit worthiness and not outside factors.

The overall general upward price movement of goods and services in an economy (often caused by a increase in the supply of money), usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could. While the annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero

inflation to 23% inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 23% but can vary depending on circumstances. opposite of deflation.

exchangeable debenture
Type of debenture that provides the issuer with the ability to convert it into common stocks while on some occasions maintaining the same rates. The benefiting party may be a subsidiary or affiliate. Exchangeable debentures are often compared to convertibles because they have similar characteristics, but convertibles cannot be exchanged in this manner.

Trust Indenture Act of 1939

Federal legislation that requires that corporate bonds, debentures, and notes valued over $5 million be issued with a written agreement between the issuer of a bond and his/her bondholders. Under this legislation, a trustee must be appointed to ensure that the indenture meets all the requirements set forth and that none of the bondholder's rights have been compromised.

Definitions (2)
1. A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be. 2. More generally, a product which trades on a commodity exchange; this would also include foreign currencies and financial instruments and indexes.

Gross Domestic Product. The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. The GDP report is released at 8:30 am EST on the last day of each quarter and reflects the previous quarter. Growth in GDP is what matters, and

the U.S. GDP growth has historically averaged about 2.5-3% per year but with substantial deviations. Each initial GDP report will be revised twice before the final figure is settled upon: the "advance" report is followed by the "preliminary" report about a month later and a final report a month after that. Significant revisions to the advance number can cause additional ripples through the markets. The GDP numbers are reported in two forms: current dollar and constant dollar. Current dollar GDP is calculated using today's dollars and makes comparisons between time periods difficult because of the effects of inflation. Constant dollar GDP solves this problem by converting the current information into some standard era dollar, such as 1997 dollars. This process factors out the effects of inflation and allows easy comparisons between periods. It is important to differentiate Gross Domestic Product from Gross National Product (GNP). GDP includes only goods and services produced within the geographic boundaries of the U.S., regardless of the producer's nationality. GNP doesn't include goods and services produced by foreign producers, but does include goods and services produced by U.S. firms operating in foreign countries.

A service offered by banks to companies in which the company receives payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the company's account, and notifies the company of the deposit. This enables the company to put the money to work as soon as it's received, but the amounts must be large in order for the value obtained to exceed the cost of the service.

Johannesburg Stock Exchange (JSE)

Premier stock exchange in Africa that researches and trades in a range of financial products by means of electronic trading, clearing and settlement in equities, financial and agricultural derivatives and other financial instruments.

common stock
Securities representing equity ownership in a corporation, providing voting rights, and entitling the holder to a share of the company's success through dividends and/or capital appreciation. In the event of liquidation, common stockholders have rights to a company's assets only after bondholders, other debt holders, and preferred stockholders have been satisfied. Typically, common stockholders receive

one vote per share to elect the company's board of directors (although the number of votes is not always directly proportional to the number of shares owned). The board of directors is the group of individuals that represents the owners of the corporation and oversees major decisions for the company. Common shareholders also receive voting rights regarding other company matters such as stock splits and company objectives. In addition to voting rights, common shareholders sometimes enjoy what are called "preemptive rights". Preemptive rights allow common shareholders to maintain their proportional ownership in the company in the event that the company issues another offering of stock. This means that common shareholders with preemptive rights have the right but not the obligation to purchase as many new shares of the stock as it would take to maintain their proportional ownership in the company. also called junior equity.

equity note
A debt security which is converted into common stock at its maturity. During the life of the debt, the equity note pays interest like an ordinary debt but at its maturity, the holder swaps the note for a common stock.

Definitions (2)
1. The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest. 2. Writing off an intangible asset investment over the projected life of the assets.

mutual fund
An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its

underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund. Benefits of mutual funds include diversification and professional money management. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment. A closed-end fund is often incorrectly referred to as a mutual fund, but is actually an investment trust. There are many types of mutual funds, including aggressive growth fund, asset allocation fund, balanced fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund, crossover fund, equity fund, fund of funds, global fund, growth fund, growth and income fund, hedge fund, income fund, index fund, international fund, money market fund, municipal bond fund, prime rate fund, regional fund, sector fund, specialty fund, stock fund, and tax-free bond fund.

constant dollar plan

An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought. also called constant dollar plan. also called dollar cost averaging.

command economy
An economywhere supply and price are regulated by the government rather than market forces. Government planners decide which goods and services are produced and how they are distributed. The former Soviet Union was an example of a command economy. Also called a centrally planned economy.

convertible bond
A corporate bond, usually a junior debenture, that can be exchanged, at the option of the holder, for a specific number of shares of the company's preferred stock or common stock. Convertibility affects the performance of the bond in certain ways. First and foremost, convertible bonds tend to have lower interest rates than non-convertibles because they also accrue value as the price of the underlying stock rises. In this way, convertible bonds offer some of the benefits of both stocks and bonds. Convertibles earn interest even when the stock is trading down or sideways, but when the stock prices rise, the value of the convertible increases. Therefore, convertibles can offer protection against a decline in stock price. Because they are sold at a premium over the price of the stock, convertibles should be expected to earn that premium back in the first three or four years after purchase. In some cases, convertibles may be callable, at which point the yield will cease.

accounts payable
Money which a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that the liability will be fulfilled in less than a year. When accounts payable are paid off, it represents a negative cash flow for the company.

net book value

The net value of an asset. Equal to its original cost (its book value) minus depreciation and amortization. also called net book value and depreciated cost.

intrinsic value
Definitions (3)
1. The actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often dificult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value. 2. The amount by which a call option is in the money, calculated by taking the difference between the strike price and the market price of the underlier. For example, if a call option for 100 shares has a strike price of $35 and the stock is trading at $50 a share than the call option has an intrinsic value of $15 share, or $1500. If the stock price is less than the strike price the call option has no intrinsic value. 3. The amount by which a put option is in the money, calculated by taking the difference between the strike price and the market price of the underlier. For example, if a put option for 100 shares has a strike price of $35 and the stock is trading at $20 a share than the put option has an intrinsic value of $15 per share, or $1500. If the stock price is greater than the strike price the put option has no intrinsic value.

The amount by which withdrawals exceed deposits, or the extension of credit by a lending institution to allow for such a situation.

A quantitative measure of the volatility of a given stock, mutual fund, or portfolio, relative to the overall market, usually the S&P 500. Specifically, the performance the stock, fund or portfolio has experienced in the last 5 years as the S&P moved 1% up or down. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile.

Certificate representing one unit of ownership in a corporation, mutual fund, or limited partnership.

To obtain ownership of a security or other asset in exchange for money or value. also called buy.

preferred stock
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock is that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. also called preference shares.

P/E ratio

price/earnings ratio. The most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per-share basis. For example, the P/E ratio of company A with a share price of $10 and earnings per share of $2 is 5. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. Companies with high P/E ratios are more likely to be considered "risky" investments than those with low P/E ratios, since a high P/E ratio signifies high expectations. Comparing P/E ratios is most valuable for companies within the same industry. The last year's price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. also called earnings multiple.

Schumer's box
Box of text included on credit card applications or disclosure paperwork that outlines important information about the account such as the annual percentage rate (APR), overdraft fee, late payment fee, and rate calculation methods. The box is named after Senator Charles Schumer that assisted with passing the landmark consumer protection legislation

Securities and Exchange Commission

SEC. The primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets. The securities and Exchange Commission enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act. The supervision of dealers is delegated to the self-regulatory bodies of the exchanges. The securities and Exchange Commission is an independent, quasi-judiciary agency. It has five commissioners, each appointed for a five year term that is staggered so that one new commissioner is being replaced every year. No more than three members of the commission can be of a single political party. The securities and Exchange Commission is comprised of four basic divisions. The Division of Corporate Finance is in charge of making sure all publicly traded companies disclose the required financial information to investors. The Division of Market Regulation oversees all legislation involving brokers and brokerage firms. The Division of Investment Management

regulates the mutual fund and investment advisor industries. And the Division of Enforcement enforces the securities legislation and investigates possible violations.

book value
Definitions (2)
1. A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, market capitalization is higher than book value for most companies. Since book value is a more accurate measure of valuation for companies which aren't growing quickly, book value is of more interest to value investors than growth investors. 2. The value of an asset as it appears on a balance sheet, equal to cost minus accumulated depreciation.

compound interest
Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Compound interest differs from simple interest in that simple interest is calculated solely as a percentage of the principal sum. The equation for compound interest is: P = C(1+ r/n)nt Where: P = future value C = initial deposit r = interest rate (expressed as a fraction: eg. 0.06 for 6%) n = # of times per year interest is compounded t = number of years invested

Buttonwood agreement
An agreement signed in 1792 between twenty-four stockbrokers that effectively created the New York Stock Exchange. The terms of the agreement indicated that stockbrokers were to only deal with each other (no auctioneers), and that they would use a set commission rate of 0.25%. The agreement was so named because it was signed under a buttonwood tree outside of 86 Wall Street.

Pre-trial disclosure process during which several legal devices can be employed by any litigating party to obtain relevant non-privileged information from the opposing or non-opposing party/parties. These devices include depositions, examinations of witnesses, inspection of documents, and interrogatories. If any party is unwilling to cooperate, the court may subpoena the party or the documents, or (after failure to make discovery) dismiss the action or enters a summary judgment.

cost estimate
<p>An approximation of the probable cost of a product, program, or project, computed on the basis of available information.</p> <p>Four common types of cost estimates are: (1) Planning estimate: a rough approximation of cost within a reasonable range of values, prepared for information purposes only. Also called ball park estimate. (2) Budget estimate: an approximation based on well-defined (but preliminary) cost data and established ground rules. (3) Firm estimate: a figure based on cost data sound enough for entering into a binding contract. (4) Not-to-exceed /Not-less-than estimate: the maximum or minimum amount required to accomplish a given task, based on a firm cost estimate.</p>

Markets in Financial Instruments Directive

MFID. A set of guidelines created by the European Union that created common regulations across the various investment services in each member state. MFID authorizes member states to regulate their own financial firms, requires that firms offer sufficient transaction transparency, and requires that firms offer the best trade execution for clients..

self-supporting bond
Bond sold to finance a project whose revenues will be used to pay off the interest and principal on that bond. Such bonds are generally issued by municipalities, who use the proceeds to finance various kinds of development projects. Self-supporting bonds are sometimes named after the specific kind of project that they are financing (for example, hospital revenue bond). Municipalities might opt for a revenue bond structure in cases where they have the power to levy charges on users of the projects, such as roads, airports, or hospitals. Since a self-supporting bond is supported by project-specific revenues as opposed to more secure general tax revenues, they are of slightly lower quality than general obligation bonds, and so they tend to have higher yields. However, self-supporting bonds issued by municipalities have a good track record, and are generally considered low risk, liquid investments provided they are backed up by viable projects. Thus, the most important factor to keep in mind when investing in such bonds is the revenue prospects of the project that is being financed by the bond. Like all municipal bonds, interest earned on the bonds is exempt from federal tax. In the case that the bond is bought by a resident of the state that issued the bond, the interest payments are also exempt from state tax.

Interest payments are further exempt from local tax if they are bought by residents of the locality that issued the bond.

daily trading limit

The highest and lowest prices that a commodity or option is permitted to reach in a given trading session. Once reached, no trading occurs on that commodity or option until the following session. also called fluctuation limit or price limit.

Written or formal information, notification, or warning about a fact, required to be made in law or imparted by an operation of law. A party is deemed to have cognizance of a fact if the party (1) has actual knowledge of it, (2) has received notice of it, (3) ought reasonably to know it, (4) knows about a related or associated fact, or (5) would have known by making reasonable enquiries about it.

Taylor Rule
A rule that suggests appropriate adjustments to interest rates, based on various economic factors such as inflation and employment rate. The rule indicates that if inflation or employment rates are higher than desired, interest rates should be increased in response to these conditions, and the opposite action should be taken under the opposite conditions. The Federal Reserve Board seems to take this rule under consideration, but does not always follow its suggestions when adjusting the interest rate. This rule was developed by John Taylor, a 20th century economist.

Certification or confirmation that the doer of an action (such as the writer of an audit report), or the manufacturer or supplier of a product, meets the requirements of accepted practices, legislation, prescribed rules and regulations, specified standards, or the terms of a contract. See also conformance.

unemployment rate
Percentage of total workforce who are unemployed and are looking for a paid job. Unemployment rate is one of the most closely watched statistics because a rising rate is seen as a sign of weakening economy that may call for cut in interest rate. A falling rate, similarly, indicates a growing economy which is usually accompanied by higher inflation rate and may call for increase in interest rates

buying hedge

Buying futures to hedge against the sale of a cash commodity. An investor might use a buying hedge if he/she expects to buy a certain amount of the commodity in the future, but is worried about price fluctuations. He/she will buy a futures contract in order to be able to buy the commodity at a fixed price later. also called long hedge.

Period of general economic decline, defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer. Marked by high unemployment, stagnant wages, and fall in retail sales, a recession generally does not last longer than one year and is much milder than a depression. Although recessions are considered a normal part of a capitalist economy, there is no unanimity of economists on its causes.

return on investment (ROI)

<p>The earning power of assets measured as the ratio of the net income (profit less depreciation) to the average capital employed (or equity capital) in a company or project.</p> <p>Expressed usually as a percentage, return on investment is a measure of profitability that indicates whether or not a company is using its resources in an efficient manner. For example, if the long-term return on investment of a company is lower than its cost-of-capital, then the company will be better off by liquidating its assets and depositing the proceeds in a bank. Also called rate of return, or yield.</p>

fiduciary duty
A legal obligation of one party to act in the best interest of another. The obligated party is typically a fiduciary, that is, someone entrusted with the care of money or property. Also called fiduciary obligation.

terms of trade
Not the contractual conditions of sale between a buyer and a seller, but the quantity of foreign goods and services (imports) that a country can purchase from the proceeds of the sale of its goods and services (exports) of a given quantity. It is a measure of a country's trading clout and is expressed as the ratio of an index of export prices to an index of import prices. Terms of trade of a country improve when the prices of its exports rise in comparison with the prices of its imports, vice versa.

certificate of origin
Document that certifies a shipment's country of origin. It is used between members of a trading block or where special privileges are granted to goods produced in certain countries. Certificate of origin is commonly issued by a trade promotion office, or a chamber of commerce in the exporting country. Also called declaration of origin.

marginal risk
The risk assumed by the issuer of a foreign exchange contract or debt in the event that the investor goes into default. It is the risk of the marginal, or final, dollar of a transaction or asset going into default.

Firm or person (such as a broker or consultant) who acts as a mediator on a link between parties to a business deal, investment decision, negotiation, etc. In money markets, for example, banks act as intermediaries between depositors seeking interest income and borrowers seeking debt capital. Intermediaries usually specialize in specific areas, and serve as a conduit for market and other types of information. Also called a middleman. See also intermediation.

double-entry bookkeeping
An accounting technique which records each transaction as both a credit and a debit. Credit entries represent the sources of financing, and the debit entries represent the uses of that financing. Since each credit has one or more corresponding debits (and vice versa), the system of double entry bookkeeping always leads to a set of balanced ledger credit and debit accounts. Selected entries from these ledger balances are then used to prepare the income statement.

core competencies
A unique ability that a company acquires from its founders or develops and that cannot be easily imitated. Core competencies are what give a company one or more competitive advantages, in creating and delivering value to its customers in its chosen field. Also called core capabilities or distinctive competencies. See also core rigidities.

deferred tax asset

An asset that is used to reduce the amount of tax that a company will have to pay in a later tax period. It is often associated with a loss carryover, and is used as a future write-off if the next tax period is expected to produce positive earnings. The asset is kept on the balance sheet. For example, a deferred tax asset of $100,000 from the previous year could be applied to before-tax income of $250,000 this year, resulting in taxable income of $150,000 ($250,000 - $100,000).

Laffer curve
Graphical representation of a conceptual relationship between marginal tax rates and total tax collections. Named after the US economics professor Arthur Laffer who proposed that lower taxes encourage additional output (supply) and thus increase aggregate income. Laffer curve is used by the supporters of supply side economics to back their claim that low income tax policies spur noninflationary growth by encouraging new investment.