12(b)-1 Fee
Fee charged to mutual fund shareholders for marketing and promotional expenses. A 12b-1 fee must be registered with the Securities and Exchange Commission and the charges must be disclosed in periodic reports.

A

A
Actual Abbreviation often used in analyst research reports, particularly tables, to identify results that have been reported by the company, as distinct from those that are estimates by the analyst (indicated by E).

AAA
When applied to a bond as a rating from a bond rating agency, indicates that the bond is very safe.

AAII
American Association of Individual Investors. A not-for-profit organization of dues- paying members dedicated to assisting individual investors. Publishes several newsletters, conducts seminars, operates a web site. Aims at a fairly basic level of sophistication. The web address is http://www.aaii.org/ . The site includes some valuable features for non-members, as well as much more content for dues-paying members.

Accountant's Opinion
The letter preceding an audited financial report, written and signed by an independent accountant, describing the scope of the statement and presenting an opinion on the quality of the data presented. The wording on most reports will be "boiler-plate" language that is the same for all companies. The key wording an investor should look for is "presents fairly". Any deviations from this standard wording are important. Things to watch for include "except as noted in footnote x" which signals an important footnote that could involve a change in accounting method, or other unusual item. If the accountant has doubts about the viability of the company, the opinion will include a "going concern" qualification, such as "the Company has experienced significant losses since its inception and has a capital deficiency that raises substantial doubt about its ability to continue as a going concern."

Account Executive
Term commonly used for registered representative, an employee of a broker who has passed a qualification examination (known as the Series 7). 

Accounts Payable
Money that a company owes to suppliers of goods and services.  Listed as a current liability on the balance sheet.

Accounts Receivable
Money which is owed to a company by a customer for products and services provided on credit. Treated as a current asset on a balance sheet. 

Accredited Investor
An investor who meets certain net worth and income tests as detailed by the SEC's Regulation D, Section 501. Accredited investors are eligible to purchase private placement offerings under Regulation D, Rule 505 and Rule 506. These offerings are exempt from the registration and reporting requirements the SEC imposes on public companies.

Here is a brief version of the legal definitions. The term "natural person" is used to refer to a real person, since legally a "person" may be a corporation.
Natural persons who individually or jointly with their spouse have a net worth in excess of $ 1 million.

Natural persons who have an income in excess of $200,000 for the two most recent years with an expectation of such income in the current year, or those natural persons who have joint income with their spouse for such periods in excess of $300,000.

Certain banks, insurance companies, investment companies, small business investment companies, certain employee benefit plans, savings & loan associations, building & loan associations, cooperative bank, homestead association, or similar institution supervised and examined by state or federal authority, with respect to purchases for their own account and in fiduciary capacity. Also a broker/dealer registered with the Commission under the Exchange Act purchasing for its own account as an investment is included.

Nonprofit tax-exempt organizations, corporations, partnerships, or business trusts with total assets of $5 million or more, provided that such entities have not been formed solely for the purpose of purchasing securities offered pursuant to Regulation D.

Trusts (non-business) with assets in excess of $5 million, not having been formed for the sole purpose of purchasing securities offered, and are directed by a sophisticated person per Rule 506.

Accrual
An accounting term for recording or recognizing revenue or expense at the time the income or liability event occurs, rather than when the cash is paid.

Accumulated Dividend
A dividend that a company owes to the investor, but that is not paid. Companies that need cash to grow their businesses sometimes issue securities with accumulated dividends where the dividends accumulate for a fixed period (e.g. two years) before being paid out. The accumulated dividend is recorded on the company's balance sheet as a liability. Sometimes the dividend accumulates until a liquidity event such as sale of the company, an IPO, or redemption of the security.

Adjusted Basis
The cost of an asset or security that reflects any deductions taken on or improvements to the asset or security. It is used to compute the gain or loss for tax purposes when the asset or security is sold.

Adjusted Book Value
The book value on a company's balance sheet after assets and liabilities are adjusted to market value.

ADV Form
Refers to the form filed with the SEC by a Registered Investment Advisor. Registration requirements were set in the Investment Advisors Act of 1940.

Advisor
A person or organization that manages assets or provides investment advice. The more common spelling is adviser, but the advisor spelling corresponds to the spelling used in the 1940 Act that established the regulations.

Aftermarket
The "aftermarket", which refers to trading in the shares after the IPO, is characterized by very high levels of trading initially. Some of the institutional investors who requested shares may have been cut back to so few shares that it would not be worth their time to continue to monitor the position, and so they sell. Others who were cut back to less than they need for a minimum-size position elect to buy more shares. Some institutional investors are dedicated "flippers". The underwriters may actually encourage them to "flip" as a way to assure that a market will develop, but in turn the underwriters may expect them to take shares of less popular deals. In the last few years, the aftermarket for Internet IPOs has been characterized by much larger initial jumps than has historically been the case. Prior to this phenomenon, the typical aftermarket gain was around 12% to 15%.

Aftermarket performance
The performance of a newly issued stock in the period shortly after the IPO. Depending on the context, can refer to a period of about 30 days, up to a year or so.

All or None (AON)
An order type instructing the broker to execute the complete order, or else do nothing. If an order is not designated All or None, then a "partial fill" may result in which some of the shares are bought or sold. See also "Fill or Kill"

Allocation
As used in the securities industry, allocation usually refers to the process of distributing shares in an offering when demand exceeds supply, or to the number of shares that an investor receives as a result of that process. (See Initial Public Offering)

Alpha
The measure of a mutual fund’s residual risk relative to the market. An alpha of 0.5 means the fund outperformed the market-based return estimate by 0.5%, while an alpha of –0.7 means a fund's monthly return was 0.7% less than the predicted change in the market.

American Depositary Receipts (ADRs)
Certificates issued by a U.S. Depositary Bank that represent foreign shares held by the bank. A single ADR may represent a portion of a foreign share, one share or a bundle of shares. Sponsored ADRs are so-called because the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR's. Unsponsored ADR's do not receive that kind of assistance. ADR's carry the same risks as the underlying foreign share and the prices of the two are kept identical by arbitrage.

American Depositary Share (ADS)
The share issued under an American Depositary Receipt agreement which is actually traded.

American Style Option
An option which can be exercised at any time prior to its expiration date, as distinct from a European style option which can only be exercised on the expiration date.

Annual Meeting
The official meeting at which shareholders vote to elect the board of directors, approve the auditors, and approve other business requiring a shareholder vote. These meetings are required by law and are in many cases only a formality. Some companies elect to use their annual meetings to provide substantive presentations, however. For individual investors, whose access to management may be more limited than for professional investors, these meetings can be a valuable resource for getting to know the company and management better. 

Annual Report
Report published primarily for the stockholders and potential stockholders of a company. Customers, suppliers, current and prospective employees, and the general public are also part of the target audience. The report has two main parts: the audited financial statements, and other material. The audited financial statements include the four financial statements (balance sheet, income statement, cash flow statement, shareholders equity), the Management's Discussion and Analysis section, the footnotes to the financial statements, and the Report of Independent Accountants. The other material (not audited by the independent accountants) includes a letter to shareholders from the CEO, a corporate profile, table and charts of financial highlights that usually extends back further in time than the audited financial statements, articles and pictures describing the company' s products, services, and markets, a listing of key management, and a listing of principal company facilities. The information in the audited financial statements (usually printed on paper of a different color from the rest of the report) is more objective. The other material tends to be more promotional.

Annualizing
Converting an amount that applies to a period of less than a year into the amount that would correspond to the full year. For example, if a company has reported revenues for 8 months, the calculation is to multiply the results by (12/8).

Antidilutive
Having the effect of increasing the earnings per share. (See dilutive)

Arbitrage
Seeking a profit where a set of assets or cash flows has different prices in different markets, by buying the relatively undervalued asset and selling the relatively overvalued one.

Arithmetic Mean Return
The arithmetic mean return is an average return for a period computed by summing the return in each subperiod and dividing by the number of subperiods. For example, the annual returns during a five year period were +80%, -20%, -50%, +15%, +5%. The sum of these five returns is 30%. The arithmetic average is 30% divided by 5 or +6%. For most purposes, a more correct method to compute the average return is the geometric mean return. The geometric mean return multiplies all the subperiod returns, expressed as (1+r), where r is the percentage return, and takes the root corresponding to the number of subperiods. In the example, 1.8 x 0.8 x 0.5 x 1.15 x 1.05 equals 0.8694. The fifth root of 0.8694 is 0.9724. This corresponds to a decline of 2.76%. If an investor started with $100, and the investment experienced the series of returns shown (the result would be the same regardless of the order), at the end of the 5 years the investment would be worth $86.94. This end result is the same as an investment returning a constant -2.76% each year for 5 years. As this example shows, the geometric mean and the arithmetic mean are different, with the geometric mean providing a more meaningful description of how an investment would fare over multiple periods.

Arms Index
Also known as Trading Index or TRIN, it measures the advance ort decline of the market. The TRIN is a measurement of the number of advancing issues over the number of declining issues, or total up volume over total down volume. As a rule, a TRIN of less than 1.0 indicates bullish demand, while above 1.0 is bearish.

Ask Price
The lowest price a seller is willing to accept. And therefore the price a buyer will pay assuming no change in the bid and ask prices.

Assets
Anything a company owns, including buildings, land, trucks, inventories, equipment, cash, trademarks, patents, and goodwill. They may be tangible, as in the case of buildings or equipment; or intangible, such as patents or goodwill.

Assignment
An instruction given to an options writer ordering her or him to sell (in the case of a call) or purchase (in the case of a put) the security underlying the option at the specified strike price.

At The Money
If an option is "at the money," its strike price is equal to the market price of the underlying security. For example, if a stock is trading at 54, then the stock's 54 option is at the money.

Audit and Audited Statement
An audit is a review of a company's financial statements by an outside accounting firm. The accountants examine evidence supporting the amounts and disclosures in the statements, assess the accounting principles used and significant estimates made by management, and evaluate the overall financial statement presentation. The examiners usually issue an opinion letter about the financial statements following the audit. Audits follow "generally accepted auditing standards" and are designed to establish that the financial statements are not misleading. An audited statement represents a higher level of accountant involvement than a review statement or a compilation statement. Outside investors and banks frequently require companies to submit audited statements as a condition of an investment or a loan. Public companies have to file audited statements annually, but the three interim quarterly statements are usually not audited. The auditors are investors' main protection against fraud. Even though the company hires and pays the accounting firm, the auditors' reputation is at stake, compelling it to remain objective. Disclosure of a fraud, which the auditors should have detected, is very damaging to the auditor's reputation. Investors prefer to see an audit by one of the major accounting firms.

Auditor
A firm of certified public accountants that is hired by the company to perform an independent review of the financial statements and make sure that the statements present fairly the company's condition, according to GAAP.

Autoregressive
Using old data to predict future data.

Average
A mean of selected stocks that is compiled to represent the actions of the market or some part of it. For example, the Dow Jones Industrial Average adds the current prices of 30 selected stocks and divides the results by a divisor, or predetermined number.

Average Maturity
The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.

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B

Balance Sheet
A financial statement lists the company's assets (the "left-side" ) and all the claims against them ( "the right-side" ) as of a certain date. Also called the statement of financial position. The "right-side" includes the liabilities (amounts owed to all parties other than the shareholders) and the shareholders equity. The total assets must equal the total liabilities and shareholders equity.

Basis Point
One-hundredth of one percentage point, or 0.01%. 100 basis points equals 1%. Used in discussing yields on bonds.

Bear Market
Market in which prices are trending downward, as distinct from a bull market, in which prices are trending upward.

Best Efforts
A type of offering in which underwriters or the company only undertake to "do their best" in selling the shares to the public. There is no obligation to sell all the allotted shares. Ironically, a "best efforts" offering indicates less of an effort than a "firm commitment" offering.

Beta
Statistical measure of the sensitivity of a stock price to changes in the market index (usually the S&P 500 for US stocks). To calculate beta from a stock's historical stock prices, create a scatter chart of paired data points. Each data point represents the return on the stock for a given period (usually monthly) and the return on the market for the same period. Five years of monthly returns for the stock and the market would yield 60 data points, for example. When these data points are plotted on a chart where the x axis is the market return in excess of the risk-free rate and the y axis is the stock return, they will tend to fall around an upward sloping line. Beta is defined as the slope of the least-squares regression line fitted through these points. The equation behind the line is S = a + (b times M), where S is the stock return, b is the beta, M is the market return, and a is the alpha. (See alpha definition.) If the stock tended to move up and down about the same amount as the market, the line would be a 45-degree angle, and the beta would be 1.0. Stocks that tended to move and down more than the market would have beta greater than 1.0, while those moving up and down less than the market would have beta less than 1.0. Rarely, a stock may show a beta of less than 0, meaning it tends to go up when the market goes down and vice versa. Beta is related to volatility, but is not the same thing. (See volatility.) Also, the historical beta is not necessarily a good predictor of future beta. Some practitioners start with the historical beta and then try to improve the beta measure by incorporating accounting-based adjustments.

Bid Price
Highest price a buyer is willing to pay, and therefore the price one would receive for selling, assuming no change in the bid and ask prices.

Blank Check Preferred Stock
Shares of preferred stock that have been authorized by a company, but which have not yet been issued, or had their specific rights and preferences fixed. The board of directors can establish the specific rights and preferences, including liquidation preferences, dividend rates, and voting rights, without receiving additional stockholder approval, provided that they adhere to the company's certificate of incorporation. Blank check preferred stock lets a company structure, offer, and sell a financing quickly and privately because the board can negotiate terms directly with the purchaser without additional stockholder authorization. This kind of stock is often created by a public company as a takeover defense in the event of a hostile bid for the company.

Blue Chip Stock
Stock of a high-quality, large, well-known company. The term arose from the color of the highest value poker chip. There is no official listing of stocks that designates them as blue chips or not. The designation is rather a matter of common usage.

Blue Sky Laws
State securities laws governing the sale of securities, intended to protect investors. A company selling securities must comply with the securities laws of all states in which the company offers or sells securities.

Board of Directors
The individuals who have the ultimate legal responsibility for a company. Most boards of directors leave the day-today operations and strategic direction of the company to the management, and only intervene when problems arise. The certificate of incorporation and bylaws establish the number of directors for a company, either a fixed number (usually an odd number to avoid voting deadlocks) or a range (determined by the stockholders). The board of directors is supposed to represent the interests of the shareholders and investors should look at the membership of the board when deciding whether to invest. Some boards take a relatively active role, while others do not.

Bond
A certificate of indebtedness. The issuer or borrower promises to pay the bondholder (creditor or lender) a specified amount of interest for a specified time period and to repay the debt (or principal) at the end of a specified period (the maturity of the bond). A bond has a maturity of more than a year. Obligations originally due in less than a year are called "notes". A secured bond is one that is backed by collateral that may be sold if the issuer fails to pay interest and principal when they are due. An unsecured bond (also called a debenture) is only backed by the full faith and credit of the issuer. A convertible bond gives the holders rights to convert the bond to another security (usually common stock) under certain conditions. An exchangeable bond can be turned in for another security (e.g. for preferred stock, or for a bond issued by another company.)

Book Value
The value of a company's shareholder equity, as recorded on its balance sheet. It is usually expressed on a per share basis (i.e. shareholder equity in millions of dollars divided by the number of shares outstanding in millions). The equity value equals total assets minus total liabilities. Accounting rules are not designed to produce a book value that measures the value of the company, and so the book value is not necessarily correlated with the company's market value per share.

Bridge Financing
Financing that is intended to be temporary, and to be repaid from the proceeds of an expected offering or other financing. Sometimes a firm that is planning an IPO or a public company that has completed a merger and has not yet completed the financing for it will obtain such financing to "bridge" the period until more permanent financing is arranged.

Broker-dealer
A broker is a firm or individual who executes an order for a customer, and receives a commission. A dealer is a firm or individual who trades for its own account. A broker-dealer does both.

Bubble
A market condition in which prices have moved wildly above their true values. Buyers keep bidding up prices because they expect other buyers to pay even higher prices later.

Bull Market
A market in which prices are trending higher, as distinct from a bear market, in which prices are trending lower.

Buy on margin
To buy a security with money borrowed from a broker. The loan is collateralized by the security, which is held in a margin account. If the security declines in price, the broker may issue a "margin call" requiring the investor to put up more cash, or else the security will be sold. The Federal Reserve Board regulates the amount of lending on margin.

Buy to Close
A type of trade in which you buy back stock that you previously sold short, or you buy back an option you previously sold.

Buy to Open
A type of trade in which you buy an option (could be a put option or a call option) to start a position.

Buyer's market
A market in which the buyer has the advantage over the seller because supply exceeds demand, and prices are declining or low. The opposite of a seller's market.

Buy-side analyst
A financial analyst employed by a firm that invests, such as a mutual fund, an insurance company, a hedge fund, or a pension fund. (An analyst employed by a brokerage firm is a sell-side analyst.) "Buy-side" firms are those that buy new issues of securities, as distinct from the broker/dealer firms that "sell" such new issues. Generally, the ratings, estimates, and opinions of the buy side analysts are not available outside of their own firms.

Bylaws
A company's charter document. The bylaws govern basic corporate activities, internal procedures, and certain of the substantive (as opposed to procedural) stockholders rights . They also cover meetings of the board of directors and their authority, the election and duties of officers, indemnification, and other matters.

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C

C corporation
A corporation that pays income taxes itself, rather than passing items of income, loss, or gain, through to investors, as an S corporation does.

Calendar
In the securities industry, the "calendar" refers to list of new securities offerings (stocks, bonds, and other securities) that will be offered for sale in the near future.

Callable
A callable security (e.g. a bond) can be redeemed by the issuer at the issuer's option. Most corporate bonds are callable, but US government bonds usually are not.

Capital Asset Pricing Model (CAPM)
An equilibrium based asset pricing model developed independently by Sharpe, Lintner and Mossin. The simplest version states that assets are priced according to their relationship to the Market Portfolio of all risky assets determined by the securities' beta. The CAPM provides a very good first approximation to the working of security markets, but researchers are working on more advanced models that can handle the anomalies that are not explained by the CAPM.

Capital Gains Distribution
Payments to mutual fund shareholders of profits from the sale of securities in a fund's portfolio. Capital gains distributions (if any) are usually made annually.

Cash Flow
No widely accepted definition exists. Alternatives include: Net income plus depreciation, net income plus depreciation plus other non-cash charges, cash from operations shown on the cash flow statement, and EBITDA. Because of these differences, it is necessary to check which definition is being used whenever an investor comes across the term.

Cash Flow Statement
One of the four main financial statements. Reports inflows and outflows of cash. Usually includes at least three year for annual statements. For interim statements, usually presented for the year-to-date period in the current and previous year. Cash flows are categorized into the three main activities of Operations, Investing, and Financing. Operations section begins with Net income then adds back non-cash charges like depreciation, and deducts non-cash gains. Then changes in working capital are added or deducted to arrive at cash from operations. Investing activities include capital spending, acquisitions and divestitures. Financing activity includes dividends paid, debt repaid, new borrowings, stock repurchases, and stock issuances. The cash flow statement is the most important of the main financial statements for purposes of making forecasts because it is the only one that must be internally consistent from year-to-year. In other words, last year's ending cash balance equals this year's beginning cash balance.

Certificate of Incorporation
A company's basic organizational document, filed with the Secretary of State in the state of incorporation. It includes the name, location, and purpose of a company; the number, classification, rights, and preferences of a company's capital stock; and voting authority of the directors with respect to related party transactions and redemptions. Also known as the articles of incorporation.

Cold Comfort Letter
A letter provided by a company's independent accountants. It confirms financial information in an offering memorandum and details the procedures followed by the accountants.

Common Stock
The most junior security. Common stock represents the residual economic and ownership interest in a firm after all superior claims have been settled. Holders of preferred stock, subordinated debt, secured debt, and general trade obligations (i.e., trade payables) all get paid before common stockholders There can be different classes or series of common stock with different rights, including voting or dividend differences.

Compilation Statement
The minimum level of financial statement preparation by an outside accountant. A compilation statement verifies only the mathematical accuracy of the information in a financial statement. A compilation financial statement involves no testing of receivables, inventory, or other assets or verification by the accountant. Compilation statements lack footnotes and other disclosures found in an audited statement or review statement.

Complexity Theory
The theory that processes with a large number of seemingly independent agents can spontaneously organize themselves into a coherent system.

Consent
Permission from different individuals or entities. If it wants to take certain actions otherwise restricted by covenant, a company must obtain consent (or a waiver) from a specified percentage of stockholders or bondholders contractually protected by the covenant.

Consolidated Statements
Financial statements of a company that presents the information as if all of its separate subsidiaries were a single company.

Conversion Price
The price at which a convertible security can be exchanged into another security. If a $100 convertible note, convertible to common shares, has a conversion price of $5, then the holder of the convertible note can exchange the note for 20 shares of common stock (the amount of the debt divided by the conversion price). Conversion prices are subject to change to protect an investor based on the application of antidilution clauses.

Convertible Debt
Debt that can be converted from debt to equity, usually at the option of the debt holder. Convertible debt holders do have preferred protection, but they can convert the debt to common stock if the value of the stock on conversion exceeds the principal and interest on the debt. Convertible debt is similar to convertible preferred stock, but it would outrank preferred stock if the company was sold or liquidated.

Convertible Preferred Stock
A form of preferred stock that grants the holder the right (but not the obligation) to convert the preferred stock into common stock. Convertible preferred stock generally has a liquidation preference in an amount equal to the original purchase price plus any accumulated dividends. Dividends on convertible preferred stock, if any, may be paid currently or accumulated. Convertible preferred stock issued by a private company usually automatically converts to common stock in the event of an IPO. IPO underwriters prefer companies to have only one class of stock so that all of the company's stockholders are on equal standing. When a company goes public, the preferred stockholder has met an important private equity investment goal by achieving liquidity and no longer needs the economic and contractual protection provided by preferred stock.

Convertible Security
Securities that permit the holder to acquire an equity interest by exchanging the original security into common stock. Common examples of convertible securities are options, warrants, convertible preferred stock, and convertible debt. Most convertible securities are convertible at the holder's discretion.

Co-Sale Right
An investor's right to sell his or her own securities at the same time, at the same price, and on the same terms and conditions as another stockholder (generally the controlling stockholder or key management). These rights are also referred to as "tag along rights" or "come along rights" and are usually eliminated when a company makes its IPO.

Covenants
Agreements made by a company in favor of specified investors. Affirmative covenants detail positive actions that a company intends to perform, including obeying all laws, maintaining corporate existence, and providing specific financial information to investors. Negative covenants specify actions that a company will not take without consent. Examples include making an acquisition, incurring additional funded debt, and spending more than an agreed annual amount on capital expenditures. If a company breaches a covenant, it is considered to be in default, giving default rights to investors. A company that violates its covenants or wants to take an action prohibited by a covenant can do so if it obtains a waiver from the percentage of its investors specified in its agreement.

CPA
A certified public accountant.

Cumulative Voting
The right of a stockholder to vote jointly in the election of directors and to cast all the stockholder's aggregate votes for one or more directors, rather than casting the same number of votes for each director. For example, if a stockholder owns 10 shares, and three directors are being elected, the stockholder has an aggregate of 30 votes. The stockholder can cumulate votes and cast all 30 votes in favor of one director, or split the 30 votes among the three directors at the stockholder's discretion. The right to cumulative voting is frequently eliminated in a company's certificate of incorporation. In a company without cumulative voting, the same stockholder would only have the right to cast 10 votes for or against the election of each director. Cumulative voting increases the ability of a minority investor to obtain representation on the board of directors.

Current Assets
Assets that are likely to be converted into cash, sold, exchanged, or expensed in the normal course of business, usually within one year, are included on the balance sheet under the category Current Assets. The main types are cash, short-term investments, accounts receivable, inventories, and prepaid expenses.

Current Ratio
Current assets divided by current liabilities, both of which are found on the balance sheet. Assets which can be turned into cash in less than a year are current, and liabilities that are due within a year are current.

CUSIP
A number assigned to a security for the purposes of information processing. For example, a company might issue several types of equity securities (common and preferred stocks) and several different bond issues. Each would have a unique CUSIP number. Developed by the Committee for Uniform Security Information Processing. The CUSIP number of a common stock issue appears on a paper certificate representing ownership.

Cyclical Stocks
Companies whose earnings tend to fall more than average in a recession or other economic downturn, and to rebound more than average in an upturn. (The stock prices do not necessarily follow the same pattern as the earnings.)

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D

Date of Record
The date on which a shareholder must officially own shares in order to be entitled to a dividend.

Day (Only)
An order condition that causes your order to be canceled at the end of the current day's trading if the specified limits can't be met. The other kind of order is called Good 'Till Cancelled (GTC)

Days to Cover
The number of days required to buy back all the shares shorted, assuming no change in trading activity and that each trade is a buy-back. Calculated as the aggregate short interest (calculated monthly) divided by the average daily share volume traded for the period between short interest calculation dates.

Debenture
A type of bond that is not backed by specific collateral. The backing is the integrity of the issuer or borrower. An indenture agreement sets forth the terms of the bond.

Debt/Equity Ratio 
Debt outstanding divided by shareholders equity, both of which are taken from the balance sheet. Although it is used to measure the company's risk of not being able to service its debt, the ratio is only meaningful if the equity is somewhat representative of the market value of the company's equity.

Deflator
An index used to convert values in the national income and product accounts from current dollars to constant or "real" dollars.

Delivery Versus Payment (DVP)
Securities industry procedure, common with institutional accounts, whereby delivery of securities sold is made to the buying customer's bank in exchange for payment, usually in the form of cash. (Institutions are required by law to require "assets of equal value" in exchange for delivery.) Also called Cash on Delivery, Delivery Against Cash, or, from the sell side, Receive versus Payment.

Demand Registration Rights
An investor's contractual right to demand that the issuer register specified restricted securities with the SEC and the state securities agencies so that they become registered and freely tradable. Typically, registration costs are paid by the company. Demand registration rights force a company to file a registration statement permitting the holder to conduct a public offering of the holder's securities. These rights are usually available only after a company's IPO to enable the sale of restricted securities that cannot otherwise be sold without registration.

Depreciation
The allocation of a portion of an asset value to the current accounting period. For example, if a company purchases or builds an asset for $100 million, and it has a value extending beyond the current period, then the asset value must be "written off" or "depreciated" over its estimated useful life. In the example, the asset value might be 20 years, and the depreciation method might be "straight-line" depreciation, in which case the annual depreciation expense would be $100 million divided by 20 years, or $5 million per year. Depreciation expense is an example of a "noncash" expense, since there is no cash paid in the current period. Note that the annual depreciation charge is not necessarily the same thing as the amount of capital spending the company should be spending each year to maintain its plant and equipment. The depreciation charge is simply a function of the original cost, the depreciation method, and the useful life for accounting purposes.

Dilutive
Having the effect of reducing the earnings per share. Whenever a company undertakes a key transaction, such as an acquisition or a refinancing, investors want to know whether the transaction is dilutive (reducing the earnings per share) or antidilutive (increasing the earnings per share). Often, the company's announcement will state what the effect is. The effect usually varies depending upon what period of time is assumed in the calculation. The most common meaning is the effect on the results for the trailing 12 months. Often, however, managements will refer to the anticipated effect on earnings per share in the year ahead. If a company acquires another company with a rapid growth rate, the effect on earnings per share will typically be dilutive on historic earnings per share or the current year earnings per share, and antidilutive for a period in the future.

Direct Public Offering (DPO)
The sale of securities by a company directly to the public, not involving an underwriter. Also called a self-underwritten offering. A DPO may be any of several types of offerings in terms of the securities regulations. At the broadest level, it can be either registered (such as an S-1, SB-1, or SB-2) or it can be exempt (such as a Regulation A or Regulation D offering). The distinguishing characteristic is simply that the offering does not involve an underwriter. In practice, most DPOs take the form of a SCOR offering at the state level (under $1million), corresponding to the Rule 504, Regulation D exemption under the Federal rules.

Dividend Discount Model
A model of asset pricing, based on discounting the future expected dividends and, if the dividends are not projected out indefinitely, a terminal value representing the expected asset price at the end of the projection period. Primarily applicable to the valuation of common stocks.

Dividend Discount Return
The rate of return, which equates the present value of future expected dividends (and a terminal value) with the current market price of a security.

Dividends
Payments from a company's profits to stockholders, with equal amounts for each share of stock. A "stock dividend" does not involve a cash payment, but rather is equivalent to a stock split. Cash dividends are usually taxed as ordinary income to the recipient and are not deductible by the company for tax purposes.

Dow Jones Averages and Indexes
Here is a link to the home page for the Dow Jones Averages. The most popular one, "The Dow," is composed of 30 major stocks, and is one of the most closely watched indicators of the market. The indicator is "price–weighted, " a rare method, meaning that it is simply the sum of 30 prices divided by a divisor to maintain consistency with the index through time. (The very first average price of the 12 stocks in the initial index, on May 26, 1896, was 40.94.) The continuing prominence of the Dow 30 – the oldest continuing US market index – is a good example of the power of "first mover advantage." Because of the price-weighting (in contrast to the more widely used weighting by market capitalization), high-priced stocks have proportionately more effect than low-priced stocks. The divisor is currently around 0.20, so that a $1 change in a component stock shows up as a 5 point change in the index.

This link goes to the home page for the Dow Jones indexes. These indexes are calculated using the more common "market-capitalization" weighting method. These are very extensive indexes, and are organized by industry and by country. They are shown in the Wall Street Journal each day, but the web site contains useful background information for anyone using them.

Drag Along Rights
The right of a security holder to force another security holder to sell her or his stock The stock holder doing the dragging has to give the person being dragged the same price, terms, and conditions for the security being sold as any other seller. Drag along rights help to sell 100% of a company's securities to a buyer, by eliminating any minority investors. Many buyers are only willing to buy companies that they can own completely. Drag along rights are eliminated in connection with an IPO.

DRIP or Dividend Reinvestment Plan
An arrangement in which dividends on a stock are automatically reinvested in additional shares of the same stock, usually without a fee and sometimes at a discount from the market price.

Due Diligence
The process of establishing that information provided a by company is true and complete.
Although the term originally applied to the activities of lawyers and investment bankers, working on behalf of their clients, it is also used to refer to the work an investor does to research an investment.

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E

E
Estimate. Abbreviation often used in analyst research reports, particularly tables, to identify estimates of historical quantities not reported by the company, or projections made by the analyst.

EAFE
The Europe Australia Far East Index of International equity security performance compiled by Morgan Stanley Capital International.

Earnings Per Share
For a company with a simple capital structure, net income available for common shareholders (that is, after any preferred dividends) divided by the weighted average number of common shares outstanding during the period. (Note that in cases where the number of shares outstanding during the period changes, the number of shares outstanding at the end of the period may be different from the average outstanding during the period.) For a company with a complex capital structure (one including securities that can convert to common shares), two numbers are calculated. Currently the two numbers are called "basic earnings per share" and "diluted earnings per share." Before the accounting rules were revised, the two numbers, which were defined slightly differently, were called "primary earnings per share" and "fully diluted earnings per share." The basic earnings per share is net income available for common shareholders divided by weighted average shares outstanding during the period. Diluted earnings per share is calculated by assuming that all convertible securities, options, and warrants that would be dilutive are converted. The calculation requires adding back to net income the after-tax interest expense on convertible securities, and increasing the number of shares outstanding. If the diluted earnings per share are greater than the basic earnings per share, they are not shown.
Calculating the earnings per share from the company's income statement data is a useful exercise because it can help the investor identify the existence of preferred stock, convertible securities, and options that might not be readily apparent.
For the FASB Statement No. 128, issued February 1997 explaining the new methods, see this link:
http://www.rutgers.edu/Accounting/raw/fasb/public

Earnings Yield
Earnings per share divided by price, or the inverse of the P/E ratio.

EBIT
Earnings before net interest expense and taxes.

EBITDA
Earnings before interest, taxes, depreciation, and amortization. As the name implies, this figure can be calculated by starting with income before taxes, and adding back net interest expense, depreciation charges, and amortization charges.

Economies of Scale
An economics term referring to the tendency of the cost per unit to decline as the size of the economic entity or activity increases

EDGAR
Electronic Data Gathering, Analysis and Retrieval. The SEC system for handling documents from reporting companies. Some of the more commonly used filings are as follows:

• Form 10-K (an annual report due 90 days after the end of the fiscal year) for small business, the equivalent is form 10KSB.
• Form 10-Q (a quarterly report due 45 days after the end of the first three fiscal quarters).
• Form 20-F: Annual report of foreign private issuers.
• Schedule 13D- Change in ownership by certain purchasers, e.g. if an entity buys more than 5% of the outstanding shares. The filing of a 13D may be the first time a takeover target learns that a hostile acquirer is planning a bid.
• Form 8-K: A report of unscheduled material events or corporate changes which could be of importance to the shareholders or to the SEC. Examples include acquisition, bankruptcy, resignation of directors, or a change in the fiscal year.
• DEF 14A: This form is commonly referred to as a "Proxy". It provides official notification to designated classes of shareholders of matters to be brought to a vote at a shareholders meeting. The proxy includes information about directors and shareholdings of management that are not contained elsewhere.

Efficient Frontier
In mean/variance analysis, the curve where the set of efficient portfolios lie. That is, those portfolios of risky assets that have the highest level of expected return for their level of risk.

Efficient Market
An efficient market is one in which prices always fully reflect all available, relevant information. Adjustment to new information is virtually instantaneous. Finance theory envisions three versions of the efficient market hypothesis. Hypothesis in its STRONG FORM says all information includes public and non-public information. In its semi-strong form, it says all public information, but not all private information, is reflected in prices. The weak form says all information about past stock prices (i.e. technical information) is immediately and fully reflected in stock prices. As more exceptions to all three forms of the hypothesis have been discovered in recent years, the hypothesis has been undermined. Nonetheless, the evidence shows a high degree of efficiency. In other words, it may not be impossible for an investor to beat the market consistently, but it is very difficult.

EPS
See Earnings per Share

Equity risk premium
The annual rate of return investors expect to receive from the stock market overall, over and above the rate of return expected on risk-free bonds or bills. For the period 1962 through 1998, stocks returned 5.29% more than thirty-year Treasury bonds, for example. The historic equity risk premium realized is usually the starting point for making estimates of the equity risk premium that is implicit in current prices, or that is expected to be realized. The equity risk premium is an "ex ante" concept, rather than an "ex post" concept. It is not directly observable.

European Style Option
An option contract that can only be exercised on the expiration date, as distinct from an American style option, which can be exercised at any time prior to its expiration date.

EV
Enterprise Value. This concept goes by various names. Others are Firm Value, Total Market Capitalization, and Debt-Adjusted Market Capitalization. It is the market capitalization plus the net debt of the company.

Event of Default
A company's failure to satisfy its covenants in loan agreements and mezzanine securities documents. Examples include failure to pay principal, interest, or dividends when due; violation of the company's representations, warranties, or covenants; or becoming insolvent. Securities documents say when a company defaults, investors can increase interest rates or dividends, take possession of collateral, or, in extreme cases, control the company through electing a majority of the board of directors. Certain events of default can be fixed by payment of money or otherwise, and companies sometimes have contractual rights to fix the default within a specified "cure period" or grace period. If the default is cured within the grace period, then the company is no longer in default and the investors' remedies are no longer available. Some events of default constitute breaches of trust that cannot be restored, such as the intentional violation of a covenant by a company. For these kinds of defaults, there are usually no cure periods or methods for the company to get back in compliance so that all of the investors' remedies are exercisable.

Event Risk
Risk that a bond will suddenly decline in price because an event changes the ability of the issuer to pay interest and principal. Examples of events are a takeover, an industrial accident, or an adverse regulatory change.

Exchangeable security
A security that gives the holder the right to exchange it for securities of a firm other than the issuer of the security.

Ex-Dividend Date
Stock exchanges have established procedures to determine who gets the dividend when a stock is sold around the time of a dividend record date. The ex-dividend date is usually four business days before the record date. After and on the ex-dividend date, the buyer or new owner gets the dividend. Before the ex-dividend date, the seller or previous owner gets the dividend. Other things being equal, the stock's price will trade down by the amount of the dividend on the "ex-date".

Ex-Dividend Date
Stock exchanges have established procedures to determine who gets the dividend when a stock is sold around the time of a dividend record date. The ex-dividend date is usually four business days before the record date. After and on the ex-dividend date, the buyer or new owner gets the dividend. Before the ex-dividend date, the seller or previous owner gets the dividend. Other things being equal, the stock's price will trade down by the amount of the dividend on the "ex-date".

Execution
The process of completing an order to buy or sell securities. Once a trade is executed, it is reported by a Confirmation Report. Settlement (payment and transfer of ownership) for exchange listed stocks in the US occurs three business days after the trade is executed (the trade date).

Exercise
To implement the right of an option holder to buy (a call) or sell (a put). This means buying the underlying security in the case of a call, or selling the underlying security in the case of a put.

Exit Strategies
The way the holder of a security in a private company achieves liquidity. Unlike public companies, private companies have no trading market for the resale of securities. The normal exit strategies for an investor in a private company are a sale, IPO, redemption, or sale of the individual security to another stockholder. Registration rights are designed to help investors achieve liquidity by facilitating the sale of restricted securities after a private company goes public. Put rights are designed to permit investors to cause an issuer to effect a redemption of the investor's securities while the company is still private, by "putting" the securities back to the issuer.

Expected Return
The return (usually expressed as an annual rate of return) expected on a risky asset based on a probability distribution for the possible rates of return. Expected return is often expressed as the sum of a risk-free rate plus a risk premium. The risk free rate for dollar-denominated investments is typically the rate of return on U.S. Treasury notes or bonds. The risk premium, according to the Capital Asset Pricing Model (CAPM) is the risk premium for the market times the expected beta of the asset. In practice, since the expected market risk premium cannot be observed directly, the risk premium is usually measured by the difference in long-term historic returns between a stock market index and risk-free securities.

Expensed
Charged to an expense account. Reduces income before taxes, and impacts the balance sheet as a decrease in assets or an increase in liabilities.

Expiration
The time when an option ceases to exist or expires. This is the last day when the option may be exercised. For U.S. exchange traded options, this date is the Saturday immediately following the 3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday.

Extraordinary item
Income or expense that is shown separately on the income statement, below the net income from ordinary operations.

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F

FASB
Financial Accounting Standards Board. The web site is found at: http://www.rutgers.edu/Accounting/raw/fasb/index.html

F.O.B.
Abbreviation for "free on board", as in on board the ship before it sails to the customer's location. Means the buyer is paying delivery costs.

Filing range
In the case of an IPO, the "filing range" refers to the estimated price per share included in the S-1 filing with the SEC. An IPO might have a filing range of $10 - $12 per share, for example. The final pricing might be in the range at $11, or above the range at $14, or below the range at $8. The lead underwriter will usually include a filing range based on its judgment of the demand for the issue, although sometimes a price range is not included in the initial filing.

Fill or Kill (FOK)
An order type that means the order is to be cancelled if it cannot be executed in its entirety immediately.

First Call
Service from Thompson Financial that compiles analyst estimates

Fiscal Year (FY)
The 12-month accounting period of a business. The majority of firms use the calendar year, but some do not. Retailers, for example, often end the fiscal year at the end of January so that all the impact of the seasonally strong Christmas season can be included in the same accounting period. The fiscal year is usually described by the year in which the final month falls. If the year ends in March of 2000, it would be called fiscal 2000, even though a majority of the months fall in 1999.

Flipping
The practice of buying shares in an IPO and then selling them very soon after the issue begins trading. Underwriters try to discourage the practice, but without some "flipping" , there would be no market in the stock.

Float
The number of shares, or the market value of the number of shares, that are available for trading. Shares held by company insiders or affiliated companies are not included in the float. Holdings by individual investors and by institutional investors are included. The float is relevant to understanding how "liquid" the market in a stock is likely to be. The share price of a company with a large market cap may behave differently than if the float were larger.

Follow-On Offering
As distinct from an Initial Public Offering, the Follow-On Offering is the sale of shares to the public after the company is already public. (Sometimes the follow-on offering is called a secondary offering, but that is technically not correct. See secondary offering.)

Free Cash Flow
Amazingly, given the frequency with which this term is used, it has no set meaning. It is not an "official" accounting term. The usual meaning is the cash flow that a company has available for discretionary purposes, after making all of its required cash payments. Almost all users will start with net income and add back depreciation and deferred taxes, and subtract out either all capital spending or a portion of capital spending deemed necessary to maintain the company's earnings power. Some users subtract dividends paid, others do not. Some users subtract changes in working capital, others do not. Some users subtract acquisitions, others do not. Some users subtract cash used to repay debt, some users add the cash received from new borrowings, and still others estimate the net change in debt that would have resulted from keeping debt at some constant ratio of revenues or equity. Investors should always approach references to "free cash flow" with the question "what is the definition?"

Fundamental Analysis
"Fundamentals" are the "real world" events like earnings, management changes, market shares, mergers and acquisitions, lawsuits, and so on that drive stock prices in the long-term. Fundamental analysis is the work of understanding what these factors are and predicting how they may affect the stock in the future.

Fundamental beta
Beta is normally the result of a regression analysis using historic stock price data. If other data, such as accounting data, has been used to estimate or measure the beta, then it is referred to as a fundamental beta.

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G

GAAP
Abbreviation for "Generally Accepted Accounting Principles." The FASB is the body that determines what accounting procedures are generally accepted.

Geometric Mean Return
The geometric mean return is the compounded rate of growth or decline from the initial value to the ending value. Stated another way, it is the constant rate of return that would produce the same ending value as a series of unequal rates of return for which an average is being sought. The calculation multiplies all the subperiod returns, expressed as (1+r), where r is the percentage return, and takes the root corresponding to the number of subperiods. See the definition of arithmetic mean return for an example of the difference between the arithmetic mean return and the geometric mean return.

Good Till Cancelled (GTC)
An order condition that means, if the order is not executed because of other conditions, then it will not be cancelled at the end of the day, but will remain open for 60 days. You may also cancel the order at any time if you wish, if it has not already been executed.

Goodwill
The amount by which the purchase price of an asset exceeds the fair market value of the net assets acquired under purchase accounting methods. Some of the factors that could give rise to goodwill are a brand name, customer loyalty, or simply a buyer paying more than the amount an outside appraiser assigns to the assets. Goodwill must be written off, giving rise to non-cash charges to income.

Greenshoe
The overallotment option in an IPO. Almost always an additional 15% of the number of shares offered. The underwriters have the option of increasing the offering size by this number of shares to accommodate demand that was not met by the initial amount of shares. The shares may be primary shares (proceeds to the company) or secondary (proceeds to a selling shareholder), as specified in the prospectus.

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H

Hedge or Hedging
In investing, refers to a strategy designed to reduce the variability of future returns. A perfect hedge is one that eliminates the possibility of future gain or loss. A partial hedge reduces the range of future gain or loss. For example, an owner of a stock could buy a put option. If the stock fell in price, the loss on the stock would be partially or fully offset by the gain on the put option, depending on the terms of the option. If the stock rose in price, the put option might expire worthless, in which case the gain would be reduced the investor's cost to buy the put option. As another example, a gold mining company might hedge against the possibility of a decline in the price of gold by selling gold in a futures market. A jewelry manufacturer might hedge against a rise in the price of gold by buying gold in a futures market.

Hedge fund
Hedge funds are partnerships of pooled investments by a number of investors, somewhat like mutual funds. Unlike mutual funds, they are exempt from the regulations governing mutual funds. Hedge funds are subject to restrictions on the number and type of investors. Hedge funds may engage in hedging activity, but do not necessarily do so.

Historical cost
The original cost to acquire an asset, with no adjustment for any subsequent changes in the value of the currency. Under generally accepted accounting principles, historical cost is used in accounting for transactions, except for assets in countries experiencing hyperinflation. Generally, subsequent increases in the value of the asset are not recognized unless there is a transaction. For example, if a company owns land with a market value well above its historical cost, the land would be shown on the balance sheet at its historical cost. If the land were sold, the company would include the gain, net of taxes, as part of net income. Decreases in the value of an asset below historic cost may be recognized via an asset write-down if they are material.

Hit the bid
To accept the highest price offered for an asset when selling that asset. For example, if a stock is trading with a bid price of $25 and an asked price of $25 1/8, a seller is said to "hit the bid" if he or she accepts $25 a share.

Hot issue
Newly issued stock for which the demand exceeds the supply, and the price is expected to increase. The significance of the term is that special rules apply to the distribution of hot issues by an investment banking syndicate. The rules are administered by the National Association of Securities Dealers (NASD). The NASD hot issue rules restrict purchases of "hot issue" stock by specified affiliates of broker-dealers or money managers in which such a person or firm is an investor. The rules are intended to ensure that a bona fide public offering occurs and to prevent underwriters from steering such deals to associates and friends

Hurdle Rate
Term used in corporate finance or capital budgeting to refer to the minimum required expected rate of return necessary for an investment.

Hypothecation
In a securities context, pledging of securities to a broker as collateral for loans made to purchase securities or to cover short sales. The loans are called margin loans.

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I

In-the-money
Condition that applies to an option, in which the option would be valuable if exercised at the time. A call option with a strike price of $55 would be "in the money" if the underlying security traded above $55. A put option with a strike price of $55 per share would be "in the money" if the underlying security traded below $55. The opposite of Out of the Money.

Income Statement
A financial statement that shows the results of operating activities. Also called the statement of profit and loss, the statement of earnings. Includes revenues and expenses. Does not include payments such as investments and borrowings.

Index
As applied to stocks, an index is a benchmark composed of a number of stocks. Indexes vary in how often the index is rebalanced, and how the components are weighted. The three principal methods for weighting are equal-weighted, capitalization weighted, and price-weighted.

Indication of Interest
After reviewing a preliminary prospectus for a public offering, an investor submits a non-binding indication of the number of shares he is interested in buying. This indication is non-binding because legally a security cannot be sold until the registration statement is declared effective. After the SEC declares the registration statement effective, the investor will be asked to reconfirm the indication, which then becomes a firm order.

Information Coefficient
The correlation of forecast returns with their subsequent realizations. A measure of active portfolio management skill or forecasting skill. Varies from -1 to 1.

Initial Public Offering (IPO)
The first time a company sells its shares to the public, also known as "going public" , or a "new issue" . The securities are described in a legal document called the prospectus. Usually, the IPO process includes a "road show" during which the company travels around to meet with investors to explain the information in its prospectus. The prospectus will indicate the expected range of prices at which the shares will be sold. Investors submit indications of interest (IOI) to the underwriters. Having received indications for more than the total number of shares, the underwriters "price" the issue. The underwriters usually seek a price that will be modestly below where the stock is expected to trade. The initial "pop" in the stock price provides an incentive for investors to get to know the company. It also provides the underwriters with a "currency" to reward its more loyal clients.

Studies have shown that, measured from the price at which they close on the first day of trading, IPOs generally underperform the market for as long as five years. They are also considerably more volatile than the average stock for up to five years.

Technically, an IPO does not have to involve an underwriting. A DPO, or direct public offering, is another form of IPO.

Inside Market
The highest bid and the lowest offer prices among all competing Market Makers in a Nasdaq security, i.e., the best bid and offer prices.

Insider Trading
There are both legal and illegal versions of insider trading. They are very different even though the same term is used for both. The legal version is buying or selling for their personal accounts by officers, directors, or others who do not at the time have material non-public information. Such trading is reported to the SEC, and most companies have policies restricting the trading to periods of time when earnings have recently been reported, and no major nonpublic news that could affect the stock is known to company insiders. The illegal version refers to anyone, including both company insiders and others who are not employees but may have a special fiduciary relationship to the company, buying or selling shares based on information that is material and nonpublic and which was obtained through a violation of a fiduciary duty. The laws on what constitutes illegal insider trading are somewhat vague, in part because of the difficulty of defining it precisely, and in part because the SEC prefers to keep it vague as an additional deterrent.

Inventory
For non-financial companies, inventory is items available for sale or being prepared for sale. Can be further classified as finished goods, work in process, and raw materials. Methods to value inventory for accounting purposes include First-in-first-out (FIFO), Last-in-first-out (LIFO), Lower-of-cost-or-market (LCM). Inventory accounting can be important in affecting reported earnings. For securities firms, inventory may refer to securities bought and held by a broker or dealer for resale.

Inventory value as of a balance sheet date is reported in the current assets section.

Investment Banking
There are both legal and illegal versions of insider trading. They are very different even though the same term is used for both. The legal version is buying or selling for their personal accounts by officers, directors, or others who do not at the time have material non-public information. Such trading is reported to the SEC, and most companies have policies restricting the trading to periods of time when earnings have recently been reported, and no major nonpublic news that could affect the stock is known to company insiders. The illegal version refers to anyone, including both company insiders and others who are not employees but may have a special fiduciary relationship to the company, buying or selling shares based on information that is material and nonpublic and which was obtained through a violation of a fiduciary duty. The laws on what constitutes illegal insider trading are somewhat vague, in part because of the difficulty of defining it precisely, and in part because the SEC prefers to keep it vague as an additional deterrent.

The investment bank must manage the potentially conflicting interests of the issuers, who usually want to issue securities at the highest possible price, and the investors, who want to buy at the lowest possible price.

The major functions of an investment bank include underwriting, distribution