Financial Terms Defined A B C D E F G I J K L M N O P Q R S T U V W X Y Z A Accumulate A recommendation which could mean slightly different things depending on the advisor. In general, it means to increase the number of shares of a particular security over the short term – but not to liquidate other parts of your portfolio to buy a security that might skyrocket. So, it is a buy recommendation – but not strong buy. Acquisition When one firm buys another firm. Analyst Employee of a brokerage or fund management house who studies and researches companies to make buy-and-sell recommendations on stocks of these companies. Most analysts specialize in a specific industry. Annual Percentage Yield The effective, or true, annual rate of return. The A.P.Y. is the rate actually earned or paid in one year, taking into account the affect of compounding. The A.P.Y. is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an A.P.Y. of 12.68% (1.01^12 -1). Annual Rate of Return There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, we sometimes multiply this by 12 to express an annual rate of return. This is often called the annual percentage rate (A.P.R.). The annual percentage yield (A.P.Y.), described above, is used to include the affect of compounding interest. Annual Report Yearly record of a publicly held company’s financial condition. It includes a description of the firm’s operations, as well as balance sheet, income statement and cash flow statement information. Most security commissions have rules that require this report be distributed to all shareholders. Ask This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted offer at which an investor can buy shares of stock; also called the offer price. Assets A firm’s productive resources. Average An arithmetic mean return of selected stocks intended to represent the behavior of the market or some component of it. B Back-End Load Fund A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated time, such as one year. The commission decreases the longer the investor holds the shares. The formal name for the back-end load is the contingent deferred sales charge, or C.D.S.C. The ABC Funds are no-load funds. 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. The ABC Funds have RBC Investor Services as their back office. Balance Sheet Also called the statement of financial condition, it is a summary of a company’s assets, liabilities, and owners’ equity. Balanced (Mutual) Fund An investment company that buys common stock, preferred stock and bonds. The ABC Fully-Managed is our Balanced Fund. Bear Market Any market in which prices are in a declining trend. For a prolonged period, usually falling by 20% or more. Bearish Used to describe investor attitudes. Refers to a pessimistic outlook Benchmark The performance of a predetermined set of securities, used for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy. Our three funds each have their own appropriate benchmark. Bid (Price) This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Essentially, this is the available price at which an investor can sell shares of stock. Block Large quantity of stock or large dollar amount of bonds held or traded. As a rule of thumb, 10,000 shares or more of stock and $200,000 or more worth of bonds would be described as a block. Blue-Chip Company Used in the context of general equities. Large and creditworthy company. A company renowned for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Bond Bonds are debt and are issued for a period of more than one year. Governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically. Book Value A company’s book value is its total assets minus intangible assets and liabilities, such as debt. A company’s book value might be more or less than its market value Book Value Per Share The ratio of stockholder equity to the average number of common shares. Book value per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation (and not necessarily market valuation). Bottom-Up Equity Management Style A management style that de-emphasizes the significance of economic and market cycles, focusing instead on the analysis of individual stocks. Broker An individual who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders. Person who acts as an intermediary between a buyer and seller, usually charging a commission. A “broker” who specializes in stocks, bonds, commodities, or options acts as agent and must be registered with the exchange where the securities are traded. Antithesis of dealer. Bubble Theory Security prices sometimes move wildly above their true values until the “bubble bursts”. Bull Market Any market in which prices are in an upward trend. Bullish Used to describe investor attitudes. Refers to an optimistic outlook. Business Cycle Repetitive cycles of economic expansion and recession. Buy To purchase an asset; taking a long position. Buying the Index Purchasing the stocks of an index in the same proportion as the index to achieve the same return. C Capital Gain When a stock is sold for a profit, it’s the difference between the net sales price of securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss. Cash Dividend A dividend paid in cash to a company’s shareholders. The amount is normally based on profitability and is taxable as income. A cash distribution may include capital gains and return of capital in addition to the dividend. Commodity A commodity is food, metal, or another physical substance that investors buy or sell, usually via futures contracts. Contrarian An investment style that leads one to buy assets that have performed poorly and sell assets that have performed well. There are two possible reasons why this strategy might work. The first is a mean-reversion argument, that is, if the asset has deviated from is usual level, then it should eventually return to that usual level. The second reason has to do with overreaction. Investors might have overreacted to bad news sending the asset price lower than it should be. Custodian See ‘Back Office’ D Distributions Payments from fund or corporate cash flow. May include dividends from earnings, capital gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least once per year. Some corporations offer Dividend Reinvestment Plans (D.R.P.). Dividend A dividend is a portion of a company’s profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%. Dutch Auction Auction in which the lowest price necessary to sell the entire offering becomes the price at which all securities offered are sold. This technique has been used in Treasury auctions. Often used in risk arbitrage. Auction system in which the price of an item (stock) is gradually lowered until it meets a responsive bid (government T-bills) or offer (corporate repurchase) and is sold. E Earnings Net income for the company during the period. Earnings Per Share (EPS) EPS, as it is called, is a company’s profit divided by its number of outstanding shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would be $1 per share. In calculating EPS, the company often uses a weighted average of shares outstanding over the reporting term. Earnings Surprises Positive or negative differences from the consensus forecast of earnings by certain institutions. Negative earnings surprises generally have a greater adverse affect on stock prices than the reciprocal positive earnings surprise on stock prices. Exchange The marketplace in which shares, options and futures on stocks, bonds, commodities and indices are traded. Exchange Rate The price of one country’s currency expressed in another country’s currency. Ex-Dividend This literally means “without dividend.” The buyer of shares when they are quoted ex-dividend is not entitled to receive a declared dividend. Used in the context of general equities. It is the interval between the record date and the payment date during which the stock trades without its dividend — the buyer of a stock selling ex-dividend does not receive the recently declared dividend. Ex-Dividend Date The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment. This date set by the US exchanges and is generally two business days before the record date. A stock that has gone ex-dividend is marked with an x in newspaper listings on that date. F Financial Analysts Also called securities analysts and investment analysts, professionals who analyze financial statements, interview corporate executives, and attend trade shows, in order to write reports recommending either purchasing, selling, or holding various stocks. Financial Planning The process of evaluating the investing and financing options available to a firm. It includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against that plan. Forward Contract A cash market transaction in which delivery of the commodity is deferred until after the contract has been made. It is not standardized and is not traded on organized exchanges. Although the delivery is made in the future, the price is determined at the initial trade date. Fund Family Set of funds with different investment objectives offered by one management company. In many cases, investors may move their assets from one fund to another within the family at little or no cost. At ABC, their is no cost. Future(s) A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange. G Goodwill Excess of the purchase price over the fair market value of the net assets acquired under the purchase method of accounting. At ABC, we look down on goodwill. Growth Manager/Fund A money manager/fund who/which seeks to buy stocks that are typically selling at relatively high P/E ratios due to high earnings growth, with the expectation of continued high or higher earnings growth. I Index Often applies to derivative products. Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Most relevantly, indices measure the ups and downs of stock, bond , and some commodities markets, reflecting market prices and weighing of the companies on the index. Initial Public Offering (IPO) A company’s first sale of stock to the public. Securities offered in an I.P.O. are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in I.P.O.s generally must be prepared to accept very large risks for the possibility of large gains. I.P.O.’s by investment companies (closed-end funds) usually contain underwriting fees which represent a load to buyers. L LIBOR The London Interbank Offered Rate (or LIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits. T TED SPREAD Initially, the TED spread was the difference between the interest rate for the three month U.S. Treasuries contract and three month Eurodollars contract as represented by the London Inter Bank Offered Rate (LIBOR). However, since the Chicago Mercantile exchange dropped the T-bill futures, the TED spread is now calculated as the difference between the T-bill interest rate and LIBOR. The TED spread is a measure of liquidity and shows the flow of dollars into and out of the United States.The TED spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar is thought to reflect the credit risk of corporate borrowers. As the TED spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the risk of default is considered to be decreasing. W Wall of Worry When stock prices are rising regardless of market uncertainties, the stock market is said to be climbing a wall of worry. These worries may include political or economic risks. Once the perceived risks have been resolved or have past, average market share prices tend to decline.