Wall Street is losing clients by the boat full ever since they were bailed out by the government with the recent $2 billion trading loss by JPMorgan Chase & Co. (NYSE:JPM) being the latest example. People want to trust the stock market but just aren’t sure exactly how to invest, especially when one brokerage firm’s buy ratings are really hold ratings and hold ratings are really sell ratings. With Wall Street confusing investors by using very different ratings systems, one firm’s “buy” rating may be its top rating, while another firm might have one or two ratings above its “buy rating.”
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In order to take control and understand how to invest in stocks correctly in a manner that suits both your risk appetite and your trading strategy, what better way than to refresh yourself with what the financial terms used actually mean.
How To Invest In Stocks: Understanding Financial Terms
• Accounts Receivable: A record of money owed to a business from customers for products and/or services.
• Accrued Expenses: Business expenses that have not been paid off. Listed on an income statement.
• After-Hours Trading: The trading of stocks after major exchanges have closed.
• Aftermarket: A type of share that is traded after it was initially offered to the public.
• Alpha: A value that reflects the excess of a mutual fund’s performance when compared to its expected Beta performance.
• American Depositary Receipt (ADR): A foreign share-bearing certificate that trades on the U.S. stock exchange.
• Amortization: An asset’s reduced value as determined through proration.
• Analyst: Person who forecasts stock earnings and recommends when to buy, hold, and/or sell.
• Annuity: (1) Regular income received from an investment. (2) A life insurance contract that issues specific benefits (payments) at a later time, like retirement for example.
• Arbitrage: When a person buys the same security at a lower price in one market, and then sells it at a higher price in a different market.
• Ask Price: The price at which a stock is offered. See Bid Price
• Asset Allocation: A division of funds spread throughout various investments, bonds, and stocks.
• Average Daily Volume: The average number of daily trades within specified period of time.
• Average P/E Ratio: The average price-to-earnings ratio of mutual fund owned stocks.
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• Back-End Load: A fee attached to a mutual fund’s sale.
• Backtesting: A process that evaluates the results of a criteria-specific view.
• Balance Sheet: A record of an institution’s or person’s assets and claims against those assets on any given date (typically the last day of the current fiscal quarter).
• Basis Points: Indicates changes in what a bond yields. 1 basis point is equivalent to 0.01 percent, so 20 basis points indicate a .20 percent interest rate yield.
• Bear Market: When the majority of stocks in a market lose value.
• Beta: A value that reflects a mutual fund’s or stock’s unpredictability compared to the S&P 500 Index.
• Bid Price: The amount of an offer on a stock that a person is selling.
• Big Board: Another name for the New York Stock Exchange (NYSE).
• Block Trade: The sale or purchase of stock owning 10,000+ shares.
• Blue Chips: Stock in a company that has a stable value and dividends. Blue Chip stocks are generally high price with a low yield.
• Boiler Room: Working environment that uses high-pressure and unsound sales tactics.
• Bond: A certificate of interest-bearing debt supplied through the government or a corporation. A bond will ‘mature’ or become due for repayment after the amount of years for which it was purchased.
• Bond Rating: Rates a bond’s quality.
• Book to Bill Ratio: The ratio of a business’ orders to shipments within a specified period.
• Book Value: The total value of a company’s assets, not counting liabilities and/or intangibles.
• Bottom Line: Earnings that are calculated after taxes are paid.
• Breakout: The point at which the price of a stock breaks out of a former trading range. The break can be above or below this range.
• Bulletin Board System: Lists stocks that for whatever reason, aren’t traded in NASDAQ. Not recommended.
• Bull Market: A time in which the value of the majority of stocks increase.
• Buy Side Analyst: Individual who mutual fund investors consult for financial forecasts and recommendations.
• Call Option: Lets investors buy a hundred shares of a particular stock at a preset price.
• Capital Gains Distribution: Payments from a fund holder’s profits (occurring from stock sales).
• Capital Lease Obligations: Describes lease payments that are due throughout a lease.
• Capitalize: To furnish with capital from investors and lenders.
• Capitalization Weighted Index: A list of the companies that influence index price action.
• Carry Trade: Type of trade that uses interest rate differentials as a means to profit from.
• Cash & Cash Equivalents: Bank stored money and securities that can be liquidated in 3 months at the most.
• Cash Flow: Income that is available after taxes.
• Charting: The process of evaluating a stock’s price and volume history in order to make sound buy and sell decisions.
• Chat Room: A real-time textual communication system for multiple internet users.
• Closed-End Fund: A fund in which investors buy from share holders, but sell to other investors.
• Commission: Fees paid to brokers for making stock or mutual fund transactions.
• Commodities: Tangible goods (minerals, food, animal products).
• Common Stock: Publicly held corporation shares that accompany voting rights.
• Conference Call: A telephone call simultaneously made to more than one party.
• Confirmation: Broker information that explains a stock’s or mutual fund’s purchase or sale.
• Consensus: Estimate or Rating – Analyst’s earnings, forecasts, and/or buy/sell ratings.
• Consolidation: Indicates that a stock’s price is within its trading range. Shows no significant movement.
• Contrarian: An investor who purposely goes against the status quo.
• Convertible Bond: A type of bond that can be converted into stock shares.
• Cost of Sales: The total cost of expenses incurred from producing products or services.
• Coupon Rate: A bond’s interest rate.
• Current Ratio: The product of current assets divided by liabilities payable in one year.
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• Days Sales Outstanding: The number of accounts receivables compared to sales.
• Debt to Equity (Long Term): The product of long term debt divided by shareholder equity.
• Debt to Equity (Total): The product of both short and long term debt divided by shareholder equity.
• Depreciation: An asset’s decrease in value.
• Deferred anything: Expenses that have not been paid.
• Deferred Income Tax: Taxes that are due, but have not been paid.
• Deferred Load: A fee attached to a mutual fund’s sale.
• Deferred Revenue: Payments received for services that have not been performed or products that have not been delivered.
• Diluted Earnings (a.k.a. fully diluted earnings): The product of earnings (after taxes) divided by common shares.
• Direct Stock Purchase Plan (DSP): Lets individuals purchase shares, or fractions of shares, directly from a company.
• Discount: A bond’s face value minus its current market price.
• Dividends: Money (or stock) paid to investors.
• Dividend Reinvestment Plan (DRIP): Lets investors gain stock share dividends instead of cash.
• Derivatives: Investment items with values that fluctuate with the values of underlying securities.
• Discount Broker: Type of stockbroker that doesn’t charge as much commission that a full-service broker would charge. The lack of investment advice accounts for lower fees.
• Dividend Yield: The product of a year’s paid dividends divided by the most current share price.
• Dogs of the Dow: A strategy used to pick stocks. It seeks out the stocks that yield the highest dividends in the Dow Jones Industrial Average.
• Dow Jones Industrial Average: Lists the 30 largest U.S. corporations.
• Downtick: A stock that is traded below the price at which it was previously traded.
• Downtrend: Indicates that a stock’s price is moving down instead of up.
• Due Diligence: A method in which a company’s prospects are examined.
• Dutch Auction: Allocates IPO shares according to a specified share value and specified quantity of shares.
• Earnings per Share (EPS): The product of a year’s earnings (after taxes) divided by the number of outstanding shares.
• EBIT: Acronym for Earnings Before Interest and Taxes.
• EBITDA: Acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.
• ECN: Acronym for electronic trading network.
• EDGAR: U.S. Securities & Exchange Commission (SEC) database. Stores corporate reports.
• Emerging Markets: Markets existing in developing countries.
• EPS: The product of net income divided by the number of outstanding shares.
• Ex-Dividend: The 24 hour period after which dividends are paid.
• Execution: The completion of a trade.
• Expense Ratio: Expenses associated with mutual fund management (operations, marketing, etc.).
• Extended Hours Trading: Trades that occur after normal hours.
• Extraordinary Items: Charges for extraordinary and rare items.
• Fair Value: A stock’s real value. Based a user’s own criteria.
• Fallen Angel: Describes an IPO that trades in the aftermarket under issue price .
• Fed (The): The Federal Reserve Board.
• Federal Open Market Committee (FOMC): The Federal policy committee regarding monetary affairs.
• Financials: All monetary transactions and locations.
• Fiscal Year: A 12-month accounting year.
• Flipping: Purchasing IPO shares at an issue price only to turn around and sell them at the first opportunity.
• Float: Outstanding shares not counting those belonging to insiders, thus available for trading.
• Forex: The foreign exchange market.
• Free Cash Flow: The difference between operating cash flow and expenses and dividends.
• Front-End Load: A mutual funds sales charge (applied when the mutual fund is purchased).
• Full Service Broker: Type of stockbroker that administers investment advice and services that aren’t available from discount brokers.
• Fully Diluted: A number of outstanding shares.
• Fundamental Analysis: Investigation of stocks through earnings, sales, profit margins, etc.
• Fund Family: A group of company owned mutual funds.
• Funds From Operations (FFO): Measures REIT performance.
• Future Inflation Gauge: Predicts inflation’s direction for the upcoming 6 to 12 months.
• Gain-on-sale accounting: Recorded profits that are based on estimated, current trade profitability.
• GARP: (1) Acronym for Growth At a Reasonable Price. (2) Method of purchasing stocks with a price/earnings ratio equal to or less than its estimated growth rate.
• Generally Accepted Accounting Principles (GAAP): Accounting rules and regulations.
• Geographic Funds: Geographic specific mutual funds.
• Good For the Day: A command to buy or sell for a day (that is, at the trading’s close).
• Good til Canceled: A command to buy or sell until canceled.
• Goodwill: A company’s shareholder’s equity value that surpasses hard asset value.
• Green Shoe : Lets a lead underwriter buy additional IPO shares at an offering price even after IPO trading starts.
• Gross Margin: The product of gross profit divided by sales.
• Gross Profit: A company’s total profit not counting overhead expenses, but subtracting the cost of sales.
• Growth Stocks: Stocks that continuously earn annually. Companies with growth stocks have a 15% sales growth (at the very least).
• Hypothecation: When assets are used as collateral.
• Income From Continuing Operations:
• Income Statement: A statement that itemizes a company’s or individual’s sources of income, income amounts, and expenses during a year or three-month period.
• Index: A group of securities that set the standard for measuring investment results.
• Industry Group: Related businesses.
• Initial Public Offering (IPO): The first offer of a company’s stock to the public.
• Insiders: Individuals who own more than 10% of outstanding stock.
• Insider Ownership: Insider owned and controlled shares.
• Insider Trading: Trading that occurs as a result of information not available to the public.
• Intangibles: Intangible assets (intellectual rights, patents, trademarks, etc.)
• Interest Coverage: Indicates a company’s competence in paying debt interests.
• Institutional Ownership: Pension and mutual funds (and bank) owned shares.
• Intraday: Stock trading that is tracked several times a day.
• Intrinsic Value: Describes a corporation’s real value instead of its stock price value.
• Inventory: A company’s list of items in stock.
• Investment Bank: A stock brokerage firm that makes companies public via IPO, advises for or against mergers and acquisitions, and facilitates corporate borrowing.
• January Effect: Stocks that move up in the month of January.
• Junk Bonds: Corporate bonds that have bad credit ratings.
• Large-Cap: A company valued at more than $8 billion dollars.
• Lead Underwriter: The brokerage house that is responsible for IPO.
• Leveraged Buy Out: When borrowed monies assume a public corporation.
• LEAP: A put or call option that lasts up to three years.
• Limit Order: A command to buy stock equal to or less than the limit price or (or to sell stock equal to or higher than the limit price)
• Liquidity: The debt paying ability or dollar value of assets.
• Load: The sales commission attached to a purchased or sold mutual fund.
• Lockup Period: A post-IPO period of time that prohibits insiders from selling shares.
• Long-Term Investments: Investments that may not produce an impressive return for a long length of time.
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• Margin: Borrowed money used to buy stock. Funds are borrowed from a broker.
• Margin Account: A brokerage account whose monies can be borrowed to buy securities.
• Market Capitalization: The product of the most recent stock price times the number of outstanding shares.
• Market Maker: Individual who buys and sells NASDAQ traded stocks and performs off-hours NYSE stock trading on behalf of an investor.
• Market Order: A command to buy or sell stock at the current market price.
• Master Limited Partnership (MLP) : A mutual fund that is a) invested in multiple industries (instead of just one like REITs are), b) traded on the New York Stock Exchange, and c) pays in dividends.
• Median Market Cap: The average market value of a mutual fund’s stocks.
• Message Board: An internet resource that allows online users to publically exchange text messages.
• Mid-Cap: Company stock valued at $2 billion to $7 billion dollars.
• Model: Method that selects specific stocks based on criteria with a positive history.
• Momentum Analysis: Type of investigation that seeks out uptrend stocks, high growth, and high forecasts.
• Momentum Stocks: Describes company stocks that investors hold in high esteem. (High yielding — fast moving stocks)
• Money-Center Bank: Describes the biggest banking companies.
• Money Supply: The amount of money that is currently in the public and in bank accounts.
• Morningstar: A service that rates mutual funds.
• Mortgage REIT: A type of trust that is invested in real estate loans.
• Most Recent Quarter (MRQ): Describes the latest date of a reported fiscal quarter.
• Moving Average (MA): A stock’s average closing price within a set amount of time.
• NASDAQ: A system in which brokers trade securities.
• NASDAQ 100 Index: Lists NASDAQ’s 100 largest companies.
• Net Asset Value: The price of a mutual fund’s share.
• Net Income: Income or earnings received after taxes.
• No Load Mutual Fund: A fund that does not charge a commission when its shares are directly purchased. Does not apply to broker fees.
• Non-Operating Expenses: Expenses that occur outside of a company’s basic operations.
• Non-Operating Income: Income that occurs outside of a company’s basic operations.
• Normalized Earnings: A company’s expected profits provided there are no write-offs, customer bankruptcies, etc.
• Open: Indicates the day’s first trade price.
• Open End Mutual Fund: A fund from which investors buy and sell shares.
• Operating Cash Flow: Extra cash earned through general business operations.
• Operating Earnings: The total value of earnings not counting expenses.
• Operating Income: The total value of sales not counting expenses.
• Operating Margin: The product of dividing operating income by sales.
• Over-the-Counter-Market: Describes NASDAQ traded stocks. Also describes Pink Sheet stocks and bulletin board stocks.
• Payment for Order Flow: A market maker’s complimentary payment to a broker in exchange for stock trade direction.
• Payout Ratio: The percentage of earnings issued as dividends.
• PEG: The product of a price to earnings ratio divided by a forecasted annual earnings growth rate.
• Phase 1, Phase 2, & Phase 3: FDA drug testing phases.
• Poison Pill: An attempt to prevent a company’s takeover.
• Portfolio: A collection of invested stocks, mutual funds, and securities.
• Post-Offering Shares: Outstanding shares occurring after an IPO.
• Preferred Stock: A preferred, stable investment that pays out on a regular schedule.
• Price to Book Ratio (p/b): The product of the most recent share price divided by the most recently reported book value.
• Price to Earnings Ratio (p/e): The product of the most recent share price divided by 12-month earnings per share. Used to identify the market’s exuberance for a particular business.
• Price to Sales Ratio (p/s): The product of the most recent share price divided by 12-month sales per share.
• Profit Margin: The product of earnings (after taxes) divided by the number of sales.
• Pro Forma Earnings: Earnings declared without regard to real expenses.
• Property, Plant and Equipment (PPE): Physical assets (buildings, machinery, etc.)
• Prospectus: A business plan presented to potential investors.
• Proxy Statement: Explains a corporation’s executive compensation plans.
• Put Option: Allows the sale of 100 company shares at a preset price.
• Quick Ratio : The product of current cash and accounts receivables divided by liabilities.
• Quiet Period: Time in which everyone participating in an IPO can not discuss a company’s future prospects. Only after a quiet period ends may underwriter-employed analysts recommend buying, holding, and/or selling.
• Quote: Data regarding the most recent trade, bid, and prices.
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• Range: The daily, weekly, or monthly scope of low and high trade prices.
• Real Estate Investment Trust: A tax designation for a corporate entity investing in real estate.
• Real-Time Quotes: Stock trading price reports occurring in real time without delays.
• Receivables: Amounts due from individuals and/or companies that are expected to be collected in cash.
• Redemption Fee: A charge for selling a mutual fund under its ordained minimum time.
• REIT: (1) Acronym for Real Estate Investment Trust. (2) A mutual fund that is invested in real estate only.
• Relative Dividend Yield: A stock’s dividend yield compared that of the S&P 500.
• Relative Strength: The 12-month performance of a stock price when measured against the S&P 500 or entire market.
• Research and Development (R&D): Company division that studies how and why to develop new products and services (or improve existing products and services).
• Return on Assets: The product of income (after taxes are deducted) divided by the total value of assets.
• Return on Capital (return on invested capital): The product of dividing the most recent 12 months of income (after taxes) by the total of the shareholder’s equity and long term liabilities.
• Return on Equity: The product of the most recent 12 months of income (after taxes) divided by a shareholder’s equity.
• Revenues: Sales income before deductions.
• Road Show: An underwriter’s or IPO company’s effort to generate interest from institutional buyers.
• Russell 2000 Index: Lists 3,000 of the largest publicly traded corporations in the US..
• S&P 500: Lists the U.S.’s 500 largest corporations.
• Sales: Income received for goods and services.
• Sales per Share: The product of annual sales divided by shares outstanding.
• Same Store Sales: Describes the percentage change of a store chain’s revenues over time.
• Screening: The act of searching for and seeking out specific mutual funds or stocks.
• Sector Funds: Industry specific mutual funds.
• Secular Trend: A trend that lasts for a long time.
• Sell Side Analyst: Individual who brokerage houses consult for financial forecasts and recommendations.
• Settlement: The conclusion of paying for stocks or getting credit for stocks purchased.
• Shareholders Equity: A company’s total assets minus liabilities.
• Shares outstanding: The entire number of corporate issued shares.
• Sharpe Ratio: Compares a fund’s past performance to current risk.
• Short Interest: The number of shares that short sellers borrow.
• Short Interest Ratio: The product of short interest divided by average daily volume.
• Short Sale: The act of selling unowned stock so that it can be purchased at lower price.
• Short Squeeze: When stock prices rise to a point that forces sellers to liquidate.
• Short-term Debt: Borrowed funds that are repaid in a year.
• Short-term Investments: Quickly liquidated investments.
• Small Cap: A business with a market value under a million.
• Specialist system: The individual who matches buy and sell orders on the New York and American stock exchange floors.
• Spider: (1) Another name for a S&P 500 Depositary Receipt. (2) Type of security traded as stocks, but valued at one-tenth the S&P 500 index.
• Spread: The range between the asking price and actual bids for a particular stock.
• Standard Deviation: Indicates a mutual fund or a stock’s unpredictability (based on historical performance).
• Stop Order (Stop Loss) : An order to sell a stock at market price as soon as it lowers to a specific limit.
• Stop Limit Order: A command that combines both the stop order and the limit order (the latter is in effect once stock reaches a stop price).
• Surprise: Describes the discrepancy between actual earnings and an earning’s forecast.
• Sweep: To move funds out of a non interest-earning account into an account that does earn interest.
• Tangible Book Value: The difference between book value and intangible assets.
• Technical Analysis: An investigation into current stock price and volume history in an effort to determine appropriate transaction decisions.
• Top: The point at which a stock’s price starts to descend.
• Top-Line: Money or income.
• Total Liabilities: The sum of all money owed, or total debt.
• Triple Witching: The days in which index futures, index future options, and specific stock options end (3rd Friday of March, June, September and December).
• Trailing Twelve Months (TTM): The most recent four quarters that have been reported.
• Turnover Ratio: Indicates the frequency that the stocks in a mutual fund’s portfolio holdings change.
• Undervalued: A stock that is traded below its real or fair value.
• Underwriter: An individual who insures new securities.
• Uptick: A stock transaction that occurs at a price higher than its preceding transaction.
• Uptrend: An upward movement of a stock’s price.
• Value Investor: An individual who specifically seeks out value priced stocks.
• Value Stocks: Company stocks that produce low valuation ratios.
• Venture Capitalist: Type of investor who finances the operations of a company prior to publically seeking a percentage of that company’s ownership.
• Volume: The amount of shares traded in a single day.
• Watch Portfolio: A tracked, unowned group of stocks or funds.
• WEBS (World Equity Benchmark Shares): Stock-like trading indexes specific to 17 countries.
• Whisper Number: An analyst’s interpretation that reflects what the analyst truly believes rather than what he publically declares.
• Working Capital: The monetary difference between standing assets and standing liabilities.
• Yield: The income or profit occurring from transactions, interest, or dividends.
• 10-K: A report that the Securities and Exchange Commission is requires a company to file every year.
• 10-Q: A report that the Securities and Exchange Commission is requires a company to file four times a year.
• 12b-1 Fee: A marketing fee attached to mutual funds. Charged every year.
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