A “Need-to-Know” Glossary for all Medical Professionals
[By Staff Writers]
ADRs (American Depository Receipts): Securities that allow trading of shares of foreign stocks on U.S. exchanges. ADRs are issued by U.S. banks in place of foreign shares that the banks hold in trust.
Advance/decline ratio (A/D ratio): The number of stocks that have advanced divided by the number that has declined over a certain time period. Ratios plotted one after another show the direction of the market, and the steepness of the line shows the strength of that direction.
Alpha: The measure of the amount of a stock’s expected return that is not related to the stock’s sensitivity to market volatility.
Arbitrage: Profiting from differences in price by simultaneously buying and selling the same security on different exchanges or using different types of contracts on the same security (buying rights and selling the stock, for instance).
Asset allocation: Apportioning investments among different categories of assets (cash, stocks, and bonds, for example, or different subcategories like cyclical stocks, small capitalization stocks, blue chips, and defensive stocks). An important financial planning tool used to control both risk and return.
Beta: The measure of a stock’s volatility relative to the market. A beta lower than 1 means the stock is less sensitive than the market as a whole; higher than 1 indicates the stock is more volatile than the market.
Book value: Determined from a company’s balance sheet by adding all current and long-term assets and subtracting all liabilities, including outstanding bonds and preferred stock. This total net-asset figure is divided by the number of common shares outstanding to arrive at book value per share.
Callable: Preferred stock or bonds that may be redeemed by the issuing corporation before their stated maturity at a pre-stated “call price” that is higher than the original issue price.
Capitalization ratios: Analysis of the components of a company’s capital structure, including debt (bonds), stock, and surplus, which show the relative importance of the sources of financing.
Common stock: Units of ownership of a public corporation that usually carry voting rights; common stock is sometimes called “capital stock” when the company has no preferred stock. Common stock is the last to be paid off at liquidation but generally has the most potential for appreciation.
Convertible securities: Preferred stock or bonds that are exchangeable for a stated number of shares of common stock at a pre-set price (“conversion price”). The “conversion ratio” is determined by dividing the par value of the convertible security by the conversion price. The amount by which the conversion price exceeds the current market price is the “conversion premium.”
Coverage ratios: The number of times income will meet the fixed charges of bond interest and preferred dividends.
Cyclical stock: Stocks that tend to rise or fall quickly, corresponding to the same movements in the economic cycle. Automobiles and housing, for instance, are more in demand when consumers can afford high-ticket durables. Lumber, steel, and paper are more in demand when manufacturing production is high.
Defensive stock: Stocks from companies that make necessities, such as food, drugs, and utilities that are in demand regardless of the economic cycle. These stocks tend to respond less negatively to down market cycles.
Dilutive effect: The lowering of the book or market value of the shares of a company’s stock as a result of more shares outstanding. A company’s initial registration may include more shares than are initially issued when the company goes public for the first time. Later, an issue of more stock by a company (called a “primary offering,” distinguished from the “initial public offering”) dilutes the existing shares outstanding. Also, earnings-per-share calculations are said to be “fully diluted” when all common stock equivalents (convertible securities, rights, and warrants) are included. “Fully diluted” numbers are used in analysis when there is a likelihood of conversion or exercise of rights and warrants.
Earnings per share (EPS): The amount of a company’s profit available to each share of common stock. EPS = Net income (after taxes and preferred dividends) divided by Number of outstanding shares.
Efficient market theory: Belief that all market prices and movements reflect all that can be known about an investment. If all the information available is already reflected in stock prices, research aimed at finding undervalued assets or special situations is useless.
Emerging growth stocks: Shares of companies participating in new markets or niches with greater future expectations than those in established industries or services. Companies are usually smaller and do not yet have steady earnings streams or pay dividends. They may be more highly priced relative to the rest of the market.
Ex-dividend: When dividends are declared by a company’s board of directors, they are payable on a certain date (“payable date”) to shareholders recorded on the company’s books as of a stated earlier date (“record date”). Purchasers of the stock on or after the record date are not entitled to receive the recently declared dividend, so the ex-dividend date is the number of days it takes to settle a trade before the record date (currently three business days). A stock’s price on its ex-dividend date appears in the newspaper with an X beside it.
Form 10-K and Form 10-Q: Annual and quarterly reports, respectively, required by the Securities and Exchange Commission (SEC) of every issuer of a registered security, including all companies listed on the exchanges and those with 500 or more shareholders or more than $1 million in gross assets. Audited financial statements for the fiscal year must include revenues, sales, and pretax operating income, a 5-year history of sales by product line and a sources and uses of funds statement comparative to the prior year. The quarterly report is not required to be as extensive, nor must it be audited, but it should contain a comparison to the same quarter in the prior year. As a matter of public information, these reports are available to the general public and are required to be filed on a timely basis.
Free cash flow: Cash flow after operating expenses; a good indicator of profit levels.
Fundamental analysis: Equity research aimed at predicting future stock prices based on financial statements. FA considers past records of sales, earnings, markets, and management to attempt to determine future performance. Technical analysis relies on charting patterns of price and volume movements; it does not take financial fundamentals into account.
Growth stock: A stock that has a record of relatively fast earnings growth—usually 1½ to 2 times the average for the market as a whole. If the growth is expected to continue, the stock carries a higher price/earnings multiple (see price/earnings ratio) than the average for the market.
Hedging: Offsetting investment risk by using a security that is expected to move in the opposite direction. Options and short selling are commonly used to hedge stock positions.
Index: Stock indexes measure changes in groups of stocks. They range from broad to narrow, measuring the overall “market” or small industry sectors. Some indexes are averages; others are weighted based on market capitalization. The most often quoted major stock indexes are the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500).
Initial public offering (IPO): A corporation’s first offering of stock to the public (sometimes called “going public”).
Insider: Technically, an officer or director of a company or anyone owning 10% of a company’s stock. The broader definition includes anyone with non-public information about a company.
Leverage: Financial leverage is the amount of long-term debt in a company’s capital structure relative to shareholders’ equity. Operating leverage measures the sensitivity of a company’s profits to sales levels.
Limit order: An order to buy or sell a security at a set price or better.
Liquidity ratios: Financial measurements of the ability of a company to meet short-term obligations quickly. Helps analysts determine a company’s credit quality.
Listed stock: Stock that trades on one of the registered securities exchanges. “Listed” usually implies listing on the two major exchanges—the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). “Unlisted” company’s trade “over the counter,” usually through the National Association of Securities Dealers Automated Quotation System (NASDAQ). Listed stock symbols are three letters; unlisted symbols are four or more letters.
Maintenance call: Sometimes called a “margin call”; a demand on a customer with a margin account to deposit cash or securities to cover account minimums required by regulatory agencies and the brokerage firm. Because these minimums are based on the current value of the securities in the account, maintenance calls can occur as a result of movements in the market price of securities.
Margin account: Brokerage account established to extend credit to the customer. Market capitalization: Current stock price multiplied by number of common shares outstanding. The higher the market capitalization is relative to book value, the more highly the investment community values the company’s future.
Market timing: Buy and sell strategy based on general outlook, such as economic factors or interest rates, or on technical analysis.
Multiple: See price/earnings ratio. The “relative multiple” is the company’s P/E ratio relative to the multiple of the market, usually the S&P 500, but sometimes the price/earnings ratio of an index that more closely mirrors the company’s sector.
Naked option: An uncovered option position. When the writer (seller) of a call option owns the underlying stock (said to be “long” the stock), the option position is a “covered call.” If the writer (seller) of a put option is short the stock, then the position is a “covered put.” Writing a covered call is the most conservative options strategy, but writing a covered put is the most dangerous because there is no limit to how high the stock can go and thus to how great the loss can be on the short sale.
Odd-lot theory: Supposition that small investors, who tend to buy in smaller units than the standard round lot of 100 shares, are always wrong. The idea is to buy when odd-lot investors are selling and sell when they are buying. The theory has not proved to be correct in modern times and is no longer very popular.
Options: Contracts to buy (call option) or sell (put option) a security at a stated price within a stated time period. Puts and calls are “types” of options. All the same type options of the same security are said to be of the same “class.” Options of the same class may have different exercise prices (the stated buy or sell price, called the “strike price”) and different dates. All options of the same class with the same strike price and expiration date are called a “series.” The price of an option is called a “premium.” The price of a premium is made up of “intrinsic value” (the difference between the current price and the strike price) and “time value” (the difference between the premium and the intrinsic value). An option is said to be “covered” when the investor has another position that will meet the obligation of the option contract. When option rights are used they are “exercised”; unexercised options are said to “expire” after their set time period is up. A buyer of an option is called a “holder” and a seller is called a “writer.”
(NOTE: Companies often offer employees “incentive options” as part of their compensation. These operate more like rights or warrants and allow the employee to purchase stock in the company at a specified price for a certain number of years).
Par value: For common stocks, the value on the books of the corporation. It has little to do with market value or even the original price of shares at first issuance. The difference between par and the price at first issuance is carried on the books of a corporation as “paid-in capital” or “capital surplus.” Par value for preferred stocks is also liquidating value and the value on which dividends (expressed as a percentage) are paid—generally $100 per share.
Penny stocks: Stocks selling for under $1; usually highly speculative.
Pink sheets: Daily publication of wholesale prices of over-the-counter (OTC) stocks that are generally too small to be listed in newspapers.
Preferred stock: A class of stock with a higher claim on the company’s earnings than common stock. Preferred stock usually is entitled to dividends and does not carry voting rights. Also, dividends on preferred stock must be paid before any dividend can be paid on common stock. “Cumulative” preferred stock accumulates dividends, and all past dividends owed must be paid before common stock can receive dividends. “Convertible” preferred stock is exchangeable for a set number of shares of common stock, and “participating” preferred stock allows shareholders to collect dividends above the set level, sharing in the profits allocated to common stock.
Price/earnings ratio (P/E ratio): Often called a stock’s “multiple.” PE is the current price per share divided by earnings per share. Earnings can be “forward” (predicted) or “trailing” (actual last four quarters).
Quantitative analysis: Financial analysis, based on measurable mathematical actualities, that ignores considerations of quality of management. Advanced quantitative analysis has produced historical measures of stocks’ volatility relative to their own past history and the market’s.
Quote: Current buy and sell prices of a security. The lowest price any seller will accept at a given time is “asked,” and the highest price any buyer has offered for a stock at a given time is the “bid.” The difference between bid and asked is the “spread.”
Random-walk theory: A direct refutation of technical analysis, this theory posits that markets cannot be predicted because they move in a random manner like the walking pattern of a drunken person.
Retained earnings: That part of a company’s profits that is not paid out in dividends but used by the company to reinvest in the business.
Rights: Granted to existing shareholders when a company issues more shares in a new issue. Usually the rights last for only a short time and the shares are offered at a lower price than they will be offered to the public. “Preemptive rights” are sometimes mandated by state laws to allow existing shareholders to maintain a proportionate share of ownership, thus preventing “dilution” of their existing shares.
Risk tolerance: The ability of an investor to tolerate the chance of loss on an investment. Risk measurement attempts to quantify these chances, which can result from inflation, interest rates, market fluctuations, political factors, foreign exchange, etc.
Round lot: Standard unit of trading. For stocks, a round lot is usually 100 shares, although 10 shares may make a round lot for inactive or highly priced stocks.
Secondary offering: A sale of a large block of securities already issued by a corporation and held by a third party. Because the block is so large, the sale is usually handled by “investment bankers” who may form a “syndicate” and peg the price of the shares close to current market value.
Sector: A group of stocks in one industry.
Sell discipline: An investor’s criteria for selling a stock. A value investor, for instance, may sell when the price/earnings ratio of the security is a certain percentage higher than its historical level.
Shareholders’ equity: Total assets minus total liabilities of a company divided by the number of common shares outstanding. Theoretically, this is the value of the company to the shareholder at liquidation.
Short interest theory: When short interest positions in a stock are high (see short sale), although it is an indication that many investors feel the stock price will drop, the theory is that the phenomenon is bullish for the stock because the short sellers will all have to purchase the stock in the near future to cover their short positions.
Short sale: An investor anticipates that the price of a stock will fall, so he sells securities borrowed from the brokerage firm. The securities must be delivered to the firm at a certain date (the “delivery date”), at which time the investor expects to be able to buy the shares at a lower price to “cover his position.”
Small capitalization stocks: Publicly traded company with a market capitalization (see market capitalization) of $500 million or less.
Stock buyback: A corporation may repurchase shares outstanding on the open market and retire them as “treasury shares.” This anti-dilutive action increases earnings per share, which consequently raises the price of the outstanding shares. Companies often announce a “share repurchase plan” when insiders feel the company is undervalued; the action strengthens the company and helps preclude a takeover.
Stock dividend: Payment of a dividend in stock rather than cash, usually as a percentage of existing shares held. A dividend may be stock in the original company or that of a subsidiary. A stock dividend is a way for a corporation to maintain its cash position without being subject to the accumulated earnings tax, since it reduces retained earnings and increases capital stock on a company’s books. A stock dividend also carries a tax advantage for the shareholder, since a dividend would be subject to ordinary income tax but the tax on capital gains is not payable until the shares are sold.
Stock split: The division of the outstanding shares of a company into a larger number of shares, while the overall equity in the company remains the same. Shareholders have more shares but the same proportionate interest in the company. Unlike a stock dividend, a stock split does not affect the books of the company. After a split, the shares will immediately fall to a proportionate market value (that is, in a 2-for-1 split, $30 shares will fall to $15 each). A split makes the stock cheaper and helps to broaden ownership in the company. A “reverse split” (1-for-10) allows a company with low share value to be noticed by institutional investors who may be restricted from considering low-priced stocks.
Stop order: An order to buy or sell at the market price once a security has traded at a set price, called the “stop price.” A stop order to buy is placed above the market price and is used to protect a profit or limit a loss on a short sale. A stop order to sell is placed below the market price and is used to protect a profit or limit a loss on a stock that is already owned. Although stop orders are designed to be used to protect investors from market movements, there is no guarantee that the order, when it is executed, will be at the stop price. The buy or sell order could be triggered by a temporary market movement that was no longer in effect when it was executed. For this reason, stop orders are sometimes combined with limit orders (see limit orders).
Style: Investment style is attributed to sophisticated institutional investors. Major styles include “value,” “growth,” and “contrarian” (going the opposite way of most investors at the time). “Bottom-up” and “top-down,” respectively, refer to picking stocks based exclusively on their individual characteristics or as a part of a broader economic view that predicts certain sectors will do better than others.
Subscription price: The price at which a right or warrant is offered.
Technical analysis: Research based on price and volume movement “patterns” in an attempt to predict stock movements based on supply and demand. When a stock shows a “breakout” above a “resistance level,” it is said to be “oversold”; this is considered a good time to buy. When a stock shows a “breakout” below a “support level,” it is said to be “overbought”; this is considered a good time to sell. An “accumulation area” is a place on a technical analyst’s chart where the stock does not drop below a certain price range, indicating that buying is occurring. A “distribution area” shows that the stock is weak—selling is occurring. Technical analysis usually focuses on short-term stock movements and does not consider the financial situation of a company. It may be applied to the overall market as well as to individual stocks.
Tick: Move up or down in price as a security trades, which may also apply to the overall market when index movements are measured in ticks. Zero-minus and zero-plus ticks are ticks at the same price as the preceding trade when the last preceding trade took place at a lower or higher price, respectively.
Total return: Measure of performance that includes capital appreciation (or depreciation) and reinvestment of dividends.
Turnaround: Positive reversal in the performance of a company.
Undervalued: Company that has an asset or a business niche that is not recognized for its true worth or value by the rest of the investment community.
Value stock: Stock trading below its own historical value for market, economic, or other reasons. If the stock is a large capitalization stock in a viable industry that has a relatively stable history, it usually can be expected to revert back to its prior value.
Warrants: Certificates that allow the holder to buy a security at a set price, either within a certain time period or in perpetuity. Warrants are usually issued for common stock, at a higher price than current market price, in conjunction with bonds or preferred stock as an added inducement to buy.
Note: Feel free to send in your own related terms and definitions so that this section may be updated continually in modern Wiki-like fashion.
Filed under: Glossary Terms, Investing | Tagged: Investing Basics | 2 Comments »
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