Glossary of Investment Terms

10-K: The 10-K is an annual filing that contains detailed information about the company’s financial performance and situation. It includes the company’s financial statements and presents the sales, costs, earnings, earnings per share, cash flows, etc., of the company over the past couple of years. It also includes important non-financial information, such as insider stock holdings and brief biographies of the management team. You can also read management’s analysis of the business’ condition and their goals and expectations for the future. *

10-Q: A quarterly version of the 10-K. The 10-Q is important because it provides investors regular updates of the company’s operating results. *

*These are reports that must be filed by publicly traded companies with the Securities and Exchange Commission. You can use these reports in your research to determine the financial condition of the company, to decide whether its past and anticipated future performance meets the criteria for investing your money, and to compare one company to another. You can obtain the reports by contacting the SEC or on the Internet at

ADR: American Depositary Receipts: certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADRs are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are a similar form of certification.

Annualized: The return on an investment expressed in terms of one year, usually expressed as a percentage. This is calculated by dividing the percent return by the period of time elapsed on the investment as a percentage of one year.

Annuity: A regular periodic payment made by an insurance company to a policyholder for a specified period of time.

Arms index: Also known as a trading index (TRIN)= ((number of advancing issues)/ (number of declining issues))/((Total up volume)/(total down volume)). An advance/decline market indicator. Less than 1.0 indicates bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

Average: (As in index average) An arithmetic mean of selected stocks intended to represent the behavior of the market or some component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the current prices of the 30 DJIA's stocks, and divides the results by a predetermined number, the divisor.

Back office: Brokerage house clerical operations that support, but do not include, the trading of stocks and other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory compliance.

Basis Point: One hundredth of one percent. 25 basis points equals 1/4 of 1%.

Bear Market: The general trend in the stock market is falling, a severe decline in stock prices, with the popular indexes usually losing 20%.

Blue chip stocks: One of the safer, higher quality investments you can make. These are big, usually well established companies. They are also often older companies such as IBM and AT&T. They generally take more time and patience to profit with, depending upon many factors.

Bond: An interest bearing certificate issued by a government or business promising to pay the holder a specified sum on a specified date. It is a common way of raising capital.

Book Value: Shareholder’s equity (the amount of the company owned by the stockholders) divided by the number of common shares of stock outstanding.

Bubble theory: Security prices sometimes move wildly above their true values. This might be a result of a public mania of some sort. Many people today consider the buying of Internet stocks to be a mania that is producing a "bubble" that will eventually burst, bringing the prices of these stocks down to more rational levels.

Bull Market: The general trend in the stock market is rising, a market in which the general trend of prices is upward.

CIBCR Index: Center for International Business Cycle Research Index tracks leading indicators of inflation.

Call: A contract that gives the purchaser the right to buy (call) an item at a specified price for a specified period of time. This term is usually used within the context of options. If you sell a Compaq 25 Call for example, you are selling someone a contract that gives them the right to buy 100 shares of Compaq from you at $25.00 per share (strike price). You immediately bring in some cash when you sell the call contract, but the stock may be "called" away from you at the strike price. If it doesn’t get called by the time of expiration, you still have the shares plus the extra cash from having sold the call. Calls can be bought and sold on individual stocks, index options, and futures.

Capacity Utilization: The relationship between output and capacity. Some economists consider high utilization rates inflationary.

Capital: The initial money used to start a business or government funded project. Or that which generates income.

Capital Appreciation: The increase in value of an investment, as distinguished from the interest or dividend earned on that investment.

Capitalization: The debt and/or equity mix that funds a firm's assets.

Cash: The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and money market funds.

Cash Flow From Operations: The amount of cash generated from the prime business activity of the company, as opposed to earnings, which may be registered on the income statement before the company receives any cash.

Common Stock: The basic stock issued by a corporation. It indicates that you own a fraction of the company. The failures and successes of the company directly influence common stocks. Owners of common stock are issued their dividends after those who own preferred stock (see later definition of this.)

Consumer Price Index (CPI): The CPI measures changes in consumer prices (food, transportation, housing, entertainment, medical care, etc.). It is published monthly by the U.S. Bureau of Labor, and it is used as a gauge for measuring inflation. The CPI is also used as a cost of living index.

Control Person: On brokerage firm applications you have probably seen the phrase "is customer a control person?" In this sense a control person is a director or other high power employee of a corporation that might trade its stock publicly. If you or your spouse is a control person you are required to fill out certain forms when you buy or sell securities in that company.

Correction: A drop in the price of a stock or stock index. Bull markets are usually punctuated by many corrections over the years. A severe correction is also known as a bear market.

Current Ratio: Current assets divided by current liabilities. A current ratio of 2 usually assures that the claims of short-term creditors are covered by short-term assets.

Debenture: Debt obligation which is unsecured, backed by the integrity of the borrower.

Debt: An obligation to pay or return money or something that is owed.

Deflation: The opposite of inflation; the marketplace is flooded with goods (supply) but the currency in circulation is relatively low, as are prices. "Fewer dollars chasing many goods."

Deflation: The opposite of inflation; the marketplace is flooded with goods (supply) but the currency in circulation is relatively low, as are prices. "Fewer dollars chasing many goods."

Dilution: The effect on earnings if all warrants or stock options were exercised or if all convertible securities were converted. The dilutive effect takes place because the number of shares is increased while the total earnings remain the same, thus lowering the Earnings per Share.

Dis-inflation: A decline in the inflation rate.

Dividend Yield: The annualized dividend rate divided by the current price of a stock.

Dividends: Cash payments made to stockholders of a company, usually on a quarterly basis. These payments come out of company earnings. Small growth companies usually do not pay dividends; rather they put their earnings back into the company to promote growth.

Earnings Per Share (EPS): This is calculated by dividing the net earnings of the company by the number of shares outstanding. Growth of EPS is an important factor in assessing the financial health of a company. Investor’s Business Daily prints an EPS rank, 99 being the highest, which you will see in the Master Portfolio published in our newsletter (p. 6 & 7).

Equity: This term is used in various ways within the broad scope of economics. In investing, equity generally refers to ownership as opposed to the obligation of a debt. In most cases stocks are considered equity while bonds are non-equity. Equity also refers to the positive side of the accounting ledger.

Exercise Date: The date on which an option is exercised; must be before the expiration date. This date depends upon many factors relating to the type of option and the choices of the option holder.

Exercise Price: Also called the strike price, this is the price at which the option holder has the right either to purchase or to sell the item.

Exercise: The act of fulfilling an option contract. You would exercise a call option that you own by "calling" the item(s) away from someone. You would exercise a put option that you own by "putting" the item(s) to someone.

The FED: The Federal Reserve System is responsible for regulating the monetary and banking system in the United States. The FED also controls many important interest rates and thus has a huge impact on the stock market.

Federal Funds: Excess reserves that banks lend to one another for brief periods of time. The Federal Funds Rate is the rate of interest charged to borrow these funds.

Float: The number of shares of a company that are available for public trading. Stocks with smaller floats or fewer shares outstanding may more easily make dramatic price moves, while stocks with hundreds of millions of shares in the market take much more buying or selling to make price moves.

Futures Contract: Standardized contracts made on domestic or foreign commodity exchanges that call for the future delivery of a specified quantity of a commodity at a specified time and place. The purchaser and seller of a futures contract are obligating themselves to act at a specific time in the future. If you buy a wheat futures contract, you are obligating yourself to take delivery sometime during the life of the contract, usually the last few days. Futures contracts are traded on agricultural commodities, currencies, and precious metals.

GDP: Gross domestic product is the total of goods and services produced in the United States. It differs from the GNP (Gross national product) in that GNP includes production of US companies in foreign lands. As of 1992 GDP is considered the bellwether indicator of the country’s economic growth. Real GDP refers to gross domestic product minus inflation.

Hedge: A transaction that reduces the risk of an investment or a position taken to guard against a rapid decline or other undesirable move in the markets. We often buy index puts as an "insurance policy" in case of a rapid decline in the markets. We also use gold this way.

Inflation: Shrinking currency value and rising prices. Inflation often occurs as a result of an increase in the supply of money in circulation and/or sharp increases in demand for consumer products. Sometimes called "many dollars chasing fewer goods."

Initial Public Offering (IPO): A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing IPO stock generally must be prepared to accept very large risks for the possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting fees that represent a load or commission to buyers.

January Effect: During December and at the end of the year generally, many stocks are sold for income tax reporting purposes. Also losses are often established to mitigate gains taken throughout the year. All of this selling creates investment capital that is often re-invested in January at the start of the new calendar year, causing significant up-moves in prices of many stocks and thus in the indexes as well. The "January effect" tends to affect smaller stocks more than the larger ones because price moves occur more easily in the smaller stocks.

Limit Order: An order to execute a trade at a specified price or better. As contrasted with a stop order, a limit order does not become a market order when the limit price is reached.

Liquidity: The ability to convert assets into cash without significant loss.

Margin: Money or securities borrowed from a broker for use in some kind of investment transaction. There are many situations in which you must have a margin account. A margin balance in an account is usually a debit, or negative balance on which an interest rate is charged.

Market Order: An order to execute a trade at the prevailing price as soon as possible.

Moving Average: Used in charts and technical analysis, the average of security or commodity prices constructed in a period as short as a few days or as long as several years and showing trends for the latest interval. As each new variable is included in calculating the average, the last variable of the series is deleted. A moving average incorporates time going by; adding the newest information and deleting the oldest in order to calculate properly.

Mutual Fund: If you own shares in a mutual fund, you have combined your money with many other people to form a large "pool" of money which is then invested by a professional manager in various stocks and/or bonds.

NASD: The National Association of Securities Dealers, Inc.

NASDAQ: National Association of Securities Dealers Automatic Quotation System. An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the OTC market. About 4,000 common stock issues are included in the NASDAQ system.

National Association of Purchasing Management Index: Measures the buying intentions of corporate purchasing agents. A figure above 50% usually means the economy is expanding rather than contracting.

Option: The right to either buy or sell a specified amount or value of a particular underlying interest at a fixed exercise price by exercising the option before its specified expiration date. An option that gives a right to buy is a call option, and an option that gives the right to sell is a put option. Calls and puts are distinct types of options, and the buying or selling of one type does not involve the other. For example, an option to buy 100 shares of common stock of the XYZ Corporation at a specified exercise price would be an XYZ call option. An option to sell 100 shares of common stock of the XYZ Corporation at a specified exercise price would be an XYZ put option.

OTC: Over-the-counter market: a decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked together by telephones and computer screens. The market is for securities not listed on a stock or bond exchange. The NASDAQ market is an OTC market for U.S. stocks.

OTC-BB: The OTC Bulletin Board is a listing of smaller, infrequently traded stocks. Most of these issues are not able to meet NASDAQ’s stricter listing requirements. A new rule permits only those companies that report their current financial information to the SEC (Securities and Exchange Commission), banking, or insurance regulators to be quoted on the OTC Bulletin Board.

P/E Ratio: Price to earnings ratio, calculated by dividing price per share by earnings per share. P/E ratios are often used as one of many tools to measure risk when investing in a company. Generally, low P/E ratios are better than high P/E ratios.

Pink Sheets: The National Quotation Bureau’s (NQB) Pink Sheets are where you are likely to find companies that are no longer eligible to be quoted on the OTC-BB. It is more difficult to get stock quotes for Pink Sheet stocks than OTC-BB stocks. Note that some relatively strong but small start-up companies may not be able to qualify for OTC-BB quotations in their earliest stages and therefore may be found on the Pink Sheets.

Preferred Stock: Distributed after common stock, but owners of preferred are paid dividends before owners of common stock. If the company goes out of business, preferred stock owners are paid back the money they invested before common stock owners. Preferred stocks also have fixed dividend payments.

Price to Book Ratio: Expresses the relationship between the price of a stock and the book value (assets minus liabilities) of the company. Value stocks usually have low Price/Book ratios and growth stocks often have high Price/Book ratios.

Producer Price Index (PPI): The PPI measures changes in the cost of wholesale goods. The PPI tends to forecast changes in the CPI before they actually occur, and therefore, it is a carefully watched leading indicator. The U.S. Bureau of Labor publishes it monthly.

Profit Margin: The relationship between net sales and gross profits. It indicates whether a company can cover operating expenses and yield a profit. Gross profit margins are obtained by dividing gross income by net sales. We would seek stocks with high profit margins.

Put: A contract that gives the purchaser the right to sell (put) an item at a specified price for a specified period of time. This term is usually used within the context of options. If you buy a Compaq 25 put for example, you are buying a contract that gives you the right to sell 100 shares of Compaq to someone at $25.00 per share (strike price) for a specified number of days. In other words, you now have the right to "put" those shares to someone if the stock reaches the strike price. Puts can be bought and sold on individual stocks, index options and futures. Investors often use puts as a hedge or protection from falling prices.

Rally: A rise in a stock, groups of stocks, or an index. Rallies can last several hours to several months.

Restructuring: The reorganization of a company to improve profits and reduce costs.

Return on Equity: Measures the return of the investment to the stockholders. It is calculated by dividing net income after taxes by stockholder’s equity.

S&P 500: Standard and Poor’s benchmark indicator of 500 stocks. It is a market capitalization weighted index often used as an index against which money managers measure their performance. Because the index is weighted by market capitalization, it is primarily composed of large capitalization companies.

Security: Piece of paper that proves ownership of stocks, bonds and other investments.

Short selling: Selling stocks you don’t own (borrowed stocks), anticipating they will go down in price, buying them back at a lower price and thus profiting from the transaction.

Stock split: More stocks are distributed, but the value also adjusts accordingly. For example, in a 2 for 1 split you now have twice as many stocks, but each stock has halved in value. In a reverse split your stocks would double in value, but you would have half as many. Companies often declare stock splits to bring prices back to more reasonable levels, making them more attractive investments to the average individual.

Stockholder’s Equity: The stockholder’s ownership of the company (also called net worth). It is calculated by subtracting liabilities from assets.

Stop Order: An order given to a broker to execute a trade in a futures interest when the contract price reaches the specified stop order price. Stop orders become market orders when the stop price is reached.

Tightening: A term used to describe the Fed’s decision to restrict the money supply thus making credit harder to obtain. This usually leads to an increase in interest rates. The opposite action is called easing.

Trailing Earnings: A company’s earnings for the previous 12 months.

Underwriter: The party that guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities. Or, stated differently, a firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors.

Value Investing: Investing in undervalued stocks, usually those stocks with low P/E multiples, low price to book ratios, and those with assets considered undervalued by the market.

Value Stocks: Stocks with low P/E multiples, low price to book ratios, and those with assets considered undervalued by the market.

Warrants: A long-term option to purchase a specified number of shares at a specific price during a specific time period. Warrants are typically used to increase the marketability of stock offerings.

Working Capital: Current assets minus current liabilities. Refers to the excess of resources over obligations.

Yield: The return on an investment, usually expressed as a percentage.

Compiled by Adam J. Coppock


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