Economic explanatory dictionary

bond ratio A ratio showing the portion of total capitalization represented by bonds. To compute the ratio, divide the dollar value of bonds by total capitalization; the result is expressed as a percentage.
book value per share The intrinsic value of a company's stock, calculated by dividing tangible capital dollar value by the number of outstanding shares of common stock.
bottom line The net profit of a company.
breadth index A measurement of advances and declines in a trading period.
breakout In technical analysis, the movement of a stock's market value above resistance level or below support level.
bull market General market condition characterized by optimism, rising prices in stocks, and a belief that the near-term future will see higher market prices for stocks.
business cycles The patterns of fluctuation in growth patterns experienced by business caused by overall economic and financial trends, competitive forces, and the nature of supply and demand. Cycles are predictable in patterns but not always in durations.
call An option giving the owner of a call the right to buy 100 shares of stock at a specified price by a specified deadline.
capital stock The value of an outstanding share of stock at the time it was issued.
capitalization The combined sources of capital, consisting of debt capital (liabilities) and equity capital (capital stock and retained earnings).
cash flow Increases and decreases in working capital affected by fluctuating income and/or expenses.
cash flow statement Alternative name for the statement of cash flow.
common stock ratio A ratio showing the portion of total capitalization represented by common stock and retained earnings. To compute, add the dollar value of common stock plus retained earnings and divide by total capitalization; the result is expressed as a percentage.
contingent liabilities Potential liabilities known about at the time a financial statement is prepared, which might or might not become actual liabilities in the future.
contrarian An investor who believes that the majority of investors is usually wrong, and that decisions should never be made because the majority follows that course of thinking.
convertible bond A form of bond (debt investment) that can be converted to common stock (equity investment) if the investor so chooses, either at a specified price per share or by a specified deadline.
convertible preferred stock Stock that can be converted to common stock if the investor wishes, at a set price per share or by a specified deadline.
convertible securities Bond or preferred stock that can be converted to common stock if the investor so chooses.
cook the books Term describing accounting practices that misrepresent the true financial status of a company to achieve a desired result, such as showing higher profits or more consistent reports from one period to another. The practice involves the posting of transactions before or after their true periods, creative accounting procedures, and other practices not acceptable under standards of accounting and auditing practice.
cost of sales The costs associated with generating reported sales, including merchandise, direct labor, and other costs attributed to current sales activity.
covered calls A call option that is sold when the seller also owns 100 shares of the underlying stock.
current assets A company's cash assets and assets that are convertible to cash within one year. This classification includes cash accounts, accounts receivable (net of reserve for bad debts), inventory, and marketable securities.
current interest rate The rate being earned on a bond based on its current market value; that value varies with the degree of premium or discount value of the bond.
current portion of long-term debt Those liabilities that are payable within the next 12 months, including accounts and taxes payable, and the current portion (12 months' payments) of notes payable and current liabilities.
current ratio A ratio that tests the strength of a company's working capital. Current assets are divided by current liabilities and the result is expressed as a factor, x to y.
debenture A corporate bond without any collateral; its value is based on the reputation and financial strength of the issuer.
debt/equity ratio A ratio showing the percentage of total shareholders' equity represented by long-term debt. This important fundamental test shows the degree of capitalization that is derived from debt rather than from equity.
debt investments Investments that involve making capital available to others in exchange for interest, through savings accounts, loans, or bonds.
deferred assets Payments that will be assigned as expenses in a later period, but that are paid in advance and temporarily set up as assets on the balance sheet.
deferred credits Deferred income listed in the liability section of the balance sheet.
depreciation An annual deduction for a portion of the value of property, plant, and equipment.
diluted earnings per share A calculation of earnings per share. Add conversion value of preferred stock and convertible bonds to net profits, then divide the result by the number of outstanding shares of common stock that would exist after full conversion; the result is expressed as a dollar value per share.
dilution The reduction in book value per share of stock that occurs when new shares are sold.
direct costs Costs related directly to sales.
discount A value lower than par value; the decreased market value of a bond resulting from its interest rate and safety rating.
discount rate The loan interest rate charged by the Federal Reserve Bank to its member banks.
diversification An investor's practice of spreading risk by placing capital in different stocks, different industries, or dissimilar investments, so that a loss caused by one factor will not adversely affect the entire portfolio.
dividend payout ratio A ratio showing the percentage of net profits paid out in dividends on common stock, after reducing net profits by the amount of dividends paid on preferred stock.
dividend yield A stock's daily percentage summary of yield, calculated by dividing annual dividend per share by the day's closing stock price.
dollar cost averaging A system of investing in which an unchanging dollar amount is invested at regular intervals, regardless of share price.
Dow Theory A theory contending that a primary market trend—one that will last for a year or more—will follow the movements in at least two of the three Dow Jones
Averages (industrials, transportation, and utilities). The theory is based on the belief that trends follow movements set by the indexes.
earnings per share The latest reported net earnings, divided by the number of outstanding shares of common stock; one of the most widely used forms for reporting earnings, also called basic earnings per share and distinguished from diluted earnings per share.
economic indicators Statistical indexes, rates, and other measurements of national financial and social trends, used to predict overall business climate and growth patterns.
efficient market A theory about the stock market stating that the current prices of stocks reflect all that is known about the company at that moment, and that new information is reflected immediately in changes to that stock's market price.
equity investments Investments that involve ownership of shares or units, through purchase of stock or mutual fund shares.
expiration date The date on which an option expires, after which the option cannot be exercised.
extraordinary items Unusual transactions showing up on a company's financial statement that will not recur every year. Extraordinary items may be restructuring, the writing off of losses due to changes in valuation methods, settlement of lawsuits, exceptionally high profit or loss from foreign exchange, or similar transactions not common for the company.
face value Alternative name for par value.
federal funds rate The rate charged by the Federal Reserve to member banks when excess reserve loans are made from one bank to another.
fixed assets Alternative name for noncurrent assets.
full disclosure The principle of providing to investors all information required to make informed buying decisions, normally applied to new listings and specifically to information included in the prospectus.
fundamental analysis A method of research that studies basic financial information to forecast profits, supply and demand, industry strength, management ability, and other intrinsic matters affecting a stock's market value and growth potential.
gross margin The percentage of gross profit (sales minus direct costs) to sales, which should remain fairly consistent when sales rise or fall.
gross profit The profit remaining after direct costs are subtracted from sales, but before any expenses are deducted.
growth in earnings per share A ratio comparing current earnings per share to the same ratio in a base year; it is used to track rates of growth for the company.
growth in sales A ratio comparing current sales levels to sales in a base year; it identifies the percentage of increase in volume.
inflation An increase in prices, also reflected as a decrease in purchasing power, the rate of which is measured by the Consumer Price Index (CPI).
initial public offering (IPO) A corporation's first sale of stock to the public.
insider An officer or director of a company, anyone who owns more than 10 percent of a corporation's voting stock and his or her immediate family members, or anyone who has information about a company that is not available to other investors.
institutional investors Investors other than individuals, such as pension plans, banks, mutual funds, and life insurance companies. Because such investors buy large blocks of shares, they often are given substantial trading cost discounts.
intangible assets A company's assets reported on the balance sheet that have no tangible or physical value. Intangible assets are excluded from the calculation of book value per share.
interest coverage A ratio comparing operating profit to interest obligation on bonds; used to determine how well those profits provide for the cost of long-term debt capitalization.
intrinsic value A portion of option premium reflecting only the difference between an option's strike price and the current market price of the stock. Intrinsic value exists when market value is greater than a call's strike price, or when market value is less than a put's strike price.
inventory turnover A ratio summarizing the average number of times that inventory was replaced during a period of time. It reflects whether management is able to control inventory levels and use working capital effectively.
investment grade Bonds rated in one of the top four rating classifications, appropriately safe, and unlikely to miss interest payments or go into default.
junk bonds Bonds classified below investment grade and considered highly speculative.
lagging economic indicators Statistical information reported by the Department of Commerce used to confirm anticipated economic trends showing up in the leading indicators, including seven indicators representing trends in employment, business inventory levels, prime interest rate and credit levels, and changes in the Consumer Price Index.
law of large numbers A concept in probability and logic stating that if you study a large enough sample, the outcomes of any statistical tests are highly predictable.
leading economic indicators Statistical information developed to monitor the trends in the American economy, including primary indicators representing trends in: productivity; employment; orders and sales in business; purchase of property, plant, and equipment; housing permits; business inventory levels; the stock market; the money supply; and estimates of what consumers expect.
liabilities Obligations of the company, including current liabilities (due and payable within 12 months), long-term liabilities, and deferred credits.
load fund A mutual fund that charges a sales commission against amounts invested, which is then paid to the salesperson placing investors' capital in the fund.
long-term liabilities The dollar amount of loans, notes, and other amounts due and payable as debts, but not due within the coming 12 months.
management fee A fee charged annually to a fund's investors to cover management compensation and expenses; such a fee is usually between .5 percent and 1 percent of the fund's net asset value.
market risk The risk associated with a stock's market price; that the price will fall and the stock will lose value.
monetary aggregates The total money supply, including all money market instruments, deposits, and currency in circulation.
money market The market for short-term debt instruments, including treasury bills, certificates of deposit, money market funds and accounts, bankers acceptances, and short-term corporate and government notes, as well as others.
money supply A measurement of the amount of money in circulation, consisting of cash and checking balances held in financial institutions and in circulation.
moving average An averaging technique in which the field being averaged is maintained at the same number; the oldest value in the field is dropped off when the newest value in the field is added on.
naked call (Also called a uncovered call) A call sold without a corresponding ownership of 100 shares of the underlying stock, exposing the seller to the risk that the call will be exercised and the seller must pay more for the shares to cover the call than the selling price stated in the call.
net margin The percentage of net profit compared to sales for a corporation, either for the quarter or for an entire year. Compute by dividing net profit by total sales; the result is expressed as a percentage.
net profit (Also called net profit after taxes) The profit realized (or "bottom line") after all income is calculated and all costs, expenses, and income taxes are deducted from total income.
net profit before taxes The profit realized when all income, costs, and expenses are included. Income and expenses other than from sales—such as profit or loss from foreign exchange, and interest income and expense—are factored into the net profit before taxes.
net profit from operations Alternative name for operating profit.
no-load fund A mutual fund that does not charge a sales commission against investments. Such a fund usually is selected by people buying over-the-counter and not investing through a commissioned salesperson or financial planner.
nominal interest rate The stated, contractual rate of interest paid on bonds.
noncurrent assets Property, plant, and equipment owned by the company, including real estate, autos and tracks, machinery and equipment, office equipment, and other assets subject to depreciation.
odd lot A lot of stock less than 100 shares.
odd lot theory A theory based on the belief that odd lot traders are usually wrong about market direction. When odd lot buy volume increases, it is seen as a contrarian signal to sell; when odd lot sale volume increases, it is taken as a signal to buy.
operating profit (Also called net profit from operations) A company's profit from selling its primary goods or services, after accounting for costs and expenses but before allowing for extraordinary items (unrelated income and expenses) or for income taxes due and payable on the profit.
options Intangible investments giving the owner the right to buy or to sell 100 shares of a specified stock at a specified price, by a specified date.
PE ratio (price-earnings ratio) A basic indicator of market value for stock; it compares the market price per share to the latest reported earnings per share.
par value (Also called face value) The face value of a bond; the amount that will be paid to the investor on maturity.
parity A condition where common stock is of equal value to a convertible security.
preferred stock A form of stock that normally does not include voting rights (unlike common stock). Holders of preferred stock have priority in the case of liquidation, and will be paid before holders of common stock. If the corporation is unable to make full dividend payments, holders of preferred stock are paid up to a full dividend prior to any monies being apportioned to holders of common stock.
preferred stock ratio A ratio showing the portion of total capitalization represented by preferred stock. To compute, divide the dollar value of preferred stock by total capitalization; the result is expressed as a percentage.
premium A share's value that is greater than par value; the increased market value of a bond resulting from its interest rate payable and safety rating.
pretax profit A company's net profit before taxes.
price-earnings ratio See PE ratio.
primary earnings per share The calculated earnings per share involving a straight comparison between net earnings and outstanding shares of common stock, without considering the effects of dilution in the event that conversion rights of convertible securities investors were to be exercised; usually referred to simply as earnings per share.
prime rate The rate charged by lenders to their customers having the highest credit ratings.
profit and loss statement Alternative name for statement of income.
property, plant, and equipment Those assets purchased by a corporation that are subject to depreciation over several years; they cannot be written off as expenses in the year purchased.
put An option giving the owner the right to sell 100 shares of stock at a specified price by a specified deadline, regardless of the stock's current market value at the time the put is exercised.
quick assets ratio (Also called acid test) A ratio comparing current assets (excluding inventory) to current liabilities.
random walk A theory about the stock market stating that stock price changes are not related to market forces but are based on the random application of new information.
ratio An expression of the relationship between two or more values, for example, the PE (price-earnings) ratio.
recovery periods The groupings of time mandated by the tax code over which depreciation can be claimed for specific classifications of property, plant, and equipment.
resistance level The price that technicians believe represents the highest price a stock is likely to reach under current conditions.
retail investors Individuals trading in the stock market, so-called because they do not trade in large enough blocks to be granted the substantial block trading discounts given to institutional investors.
retained earnings Part of the company's shareholders' equity representing net profits for all years accumulated through the current year, minus federal income taxes and dividends paid out.
return on equity A ratio comparing a company's net income to its shareholders' averaged equity, to arrive at the return on total equity invested during a given year.
risk tolerance The level of risk that an investor is willing to assume.
round lots Trading increments of 100 (or multiples of 100) shares; the normal trading mode used in the stock market.
sentiment indicator A type of indicator used to measure investor attitude, belief, mood, or opinion, as opposed to one that measures a financial or point value or reveals changes in an index.
shareholders' equity The value of the company; the difference between assets and liabilities, and the company's total dollar worth including capital stock and retained earnings.
simple average A method for computing average where the field of values is added together, then divided by the total number of values.
statement of cash flow A financial statement summarizing the company's uses of cash income and current assets, and its uses of its cash expenses and current liabilities; a summary of the changes in working capital expressed for the fiscal year.
statement of income The financial statement summarizing activity during a period of time, usually a full year or the latest quarter. Included are sales, costs of goods sold, general expenses, and net profit.
strike price The set price at which an option can be exercised, regardless of the underlying stock's market price at the time the option is exercised.
sugar bowl The practice of establishing an overly large loss reserve in a good year, with the intention of reducing that reserve in future years so that profits can be reported more consistently than they actually occur.
support level The price that technicians believe represents the lowest price a stock is likely to reach under current conditions.
technical analysis The study of nonintrinsic trends, notably stock price chart patterns, popularity of stocks and industry groups, and the psychological forces in the market, as opposed to the dollars and cents of financial information.
technimental analysis Any form of information based on technical indicators but containing fundamental information as its base, or combining elements of technical and fundamental analysis.
time value A portion of an option's premium that reflects the value between today and expiration; time value will evaporate as expiration date approaches.
total capitalization The combination of bonds and other long-term obligations such as preferred stock, and the combination of common stock and retained earnings.
total return The return on an investment taking into account not only growth in value, but dividends or interest earned as well.
trading symbol A company's abbreviated alphabetical symbol, used for stock listings, to report transactions, and for placing orders.
treasury stock Stock that is purchased by the issuing corporation and retired. Treasury stock has no voting rights. No dividends are paid unless it is subse-quently reissued.
trend The direction or orientation of financial results; the line on a graph showing how financial relationships are evolving or changing over time.
uncovered call Alternative name for naked call.
underlying stock The stock on which an option is written.
volatility A measurement of a stock's price movement history and market risk, measured by a comparison between current price and annual price range.
volume The number of shares traded during a specified period, either on an exchange as a whole or in an individual stock. Volume is a technical indicator.
weighted moving average A variation of moving average in which greater weight is given to the latest information, and less weight is given to older information.
working capital The difference between current assets and current liabilities. The availability of cash and assets convertible to cash in the short term to fund operations.
working capital turnover A ratio showing how often working capital is used in and replaced by the generation of sales; to compute, divide sales by working capital.