Chapter 14

speculative-grade bonds

Long-term, high-risk, high-interest-rate corporate (or municipal) IOUs issued by companies (or municipalities) with poor or no credit ratings. Also called junk bonds or high-yield bonds.

Portfolio tracking

automatically updates the value of your portfolio after you enter the symbols of the stock you own and the number of shares held

Potential rate of return

A calculation of the approximate compound yield of an investment that sums up projected income and price appreciation, and the resulting figure may then be compared with returns on other investments.

Estimate of the required rate of return on an investment

A calculation that multiplies the beta value of an investment by the estimated market risk and adds the risk-free T-bill rate that suggests to investors the return required to put heir money.

electronic communications network (ECN)

A computer system that matches desired sellers and buyers of stocks outside of stock exchanges.

Earnings per share (EPS)

A firm's profit divided by the number of outstanding shares.

Approximate compound yield (ACY)

A measure of the annualized compound growth of any long-term investment stated as a percentage.

countercyclical (or defensive) stock

A stock that exhibits price changes contrary to movements in the business cycle.

income stock

A stock that may not grow too quickly, but year after year it pays a cash dividend higher than that offered by most companies.

Premium

A sum of money paid in addition to a regular price

Margin account

Account at a brokerage firm that requires a substantial deposit of cash or securities and permits the purchase of other securities using credit granted by the brokerage firm.

Organized exchanges

Actual physical location for a market, at which some securities prices are set by open outcry.

Serial Bonds

Bonds that are retired serially; that is, each bond is numbered consecutively and matures according to a prenumbered schedule at stated intervals

Agency Bonds

Bonds, notes, and certificates of debt issued by various federal agencies that are government-sponsored enterprises but stockholder owned such as the FEderal National Mortgage Association

buying long

Buying a security (especially on margin) with the hope that the stock price will rise.

Convertible preferred stock

Can be exchanged at the option of the stockholder for a specified number of shares of common stock.

Securities exchange/stock market

Market where agents of buyers and sellers can find each other easily by providing an orderly, open plan to trade securities.

Treasury Inflation-Protected Securities

Marketable Treasury bonds whose value increases with inflation. These inflation-indexed $1000 bonds are the only investment that guarantees that the investor's return will outpace inflation

Securities market index

Measures the average value of a number of securities chosen as a sample to reflect the behavior of a more general market.

Technical analysis

Method of evaluating securities that uses statistics generated by market activity, such as past prices and volume, over time to determine when to buy or sell a stock

after-tax profit

Money left over after a firm has paid expenses, bondholder interest, and taxes

retained earning

Money left over after a firm has paid expenses, bondholder interest, and taxes, preferred stockholder dividends, and common stockholder dividends

profit

Money left over after a firm pays all expenses and interest to bondholders

common stock

Most basic form of ownership of a corporation

Zero-coupon bonds

Municipal, corporate, and treasury bonds that are issued at a sharp discount from face value and pay no annual interest but are redeemed at full face value upon maturity

securities

Negotiable instruments of ownership or debt, including common stock, preferred stock, and bonds

Book value/shareholder's equity

Net worth of a company, determined by subtracting total liabilities from assets.

Discount brokers

charge commissions to execute trades that are often 30 to 80% less than the fees charged by full-service brokers, but also offer fewer services

Bid price

declared highest price anyone wants to pay for a security

Ask price

declared lowest price that anyone is willing to accept to sell a security

Potential return

determined by adding anticipated income to the future value of investment and then subtracting the investment's original cost

Cash dividends

distributions made in cash to holders of common and preferred stock typically paid 4 times a year.

Dividend payout ratio

dividends per share divided by EPS; helps judge the likelihood of future dividends

Market order

instructs the stockbroker to execute an order at the prevailing market price-that is, the current selling price of the stock

selling short

investors selling what they don't own (borrowing from broker) & later buying the same # of shares at lower price (returning them to the broker)

Annual report

legally required yearly report about financial performance, activities, and prospects sent to major stockholders and made available to the general public

general (full-service) brokerage firms

offer full range of services to customers, including investment advice and research

Stockbroker/account executive

professional who is licensed to buy and sell securities on the behalf of the brokerage firm's clients

Pre-emptive right

right of common stockholders to purchase additional shares before a firm offers new shares to the public

Security's street name

securities certificates kept in the brokerage firm's name instead of the name of the individual investor

margin rate

set by Fed % of value in an investment thats not borrowed. recently 25-50%

speculative stock

stock of a company that has a potential for substantial earnings at some time in the future, although those earnings may never be realized

Earnings yield

the earnings per share of a stock divided by its price; an inversion of the price/earnings ratio; helps investors more clearly see investment expectations

Corporate earnings

the profits a company makes during a specific time period indicate to many analysts whether to buy or sell a stock.

Floor broker

brokerage firm's contact person at an exchange

voting rights

Proportionate authority to express an opinion or choice in matters affecting the company.

Trailing P/E ratio

calculated using recently reported earnings, usually from the previous four quarters.

Registered bond

Bondholder's name is recorded so that checks or electronic funds transfers for payment of interest and principal can be safely forwarded when due.

limit order

Instructs the stockbroker to buy or sell a stock at a specific price

U.S. government savings bonds

Nonmarketable, interest-bearing bonds issued by the U.S. Treasury

odd lot

An amount of a security that is less than the normal unit of trading for that particular security; for stocks, any transaction less than 100 shares is usually considered to be an odd lot

Over-the-counter (OTC) marketplace

An electronic telecommunications network that facilities the buying and selling of securities that usually are not listed on the major exchanges through market makers.

bond rating

An impartial outsider's opinion of the quality—or creditworthiness—of the issuing organization.

variable value

Because interest rates change, bonds may trade at a premium (more than face value) or at a discount (less than par) so that the yield equals the current yield for bonds with similar maturities and risk levels.

Projected P/E ratio

Because investors need to look to the future rather than the past, this measure divides price by projected earnings over the coming four quarters. Also known as forward P/E ratio.

Book-entry form

Bond certificates aren't issued; rather, account is set up in name of the issuing organization or the brokerage firm that sold the bond, and interest is paid into this account when due.

Sinking Fund

Bond feature through which money is set aside with a trustee each year for repayment of the principal portion of the debt at maturity.

Dividend yield

Cash dividend to an investor expressed as a percentage of the current market price of a security

Cash dividend

Cash profits that a firm distributes to stockholders

Residual claim

Common stockholders have a right to share in the income and assets of a corporation after higher-priority claims are satisfied.

Market interest rates

Current long- and short-term interest rates paid on various types of corporate and government debts that carry similar levels of risk.

Price-to-book ratio (P/B ratio)

Current stock price divided by the per-share net value of a firm's plant, equipment, and other assets (book value).

Maturity date

Date upon which the principal is returned to the bondholder

Discount yield

Difference between the original purchase price of a T-bill and what the Treasury pays you at maturity—the gain, or "par," is interest.

Unsecured bond/ Debenture

Does not name collateral as security for debt; backed only by the good faith and reputation of the issuing agency.

Stockholder/Shareholder

Each person who owns a share of a corporation's stock hold a proportionate interest in owenship, and therefore, the assets and income of the corporation.

Stock-screening tools

Enable you to quickly sift through vast databases of hundreds of companies to find those that best suit your investment objectives.

Current yield

Equals the bond's fixed annual interest payment divided by its bond price

principal

Face amount of a bond, or price originally paid for a bond

Treasury note/Treasury bond

Fixed-principal, fixed-interest-rate government security issued for an intermediate term or long term. Notes mature in ten years or less; bonds mature in more than ten years.

Start-up capital

Funds initially invested in a business enterprise.

Prospectus

Highly legalistic information presented by a firm to the SEC and to the public with any new issue of stock

margin call

If a stock price declines to the point that the investor's equity is less than the required percentage, a representative of the brokerage firm makes a phone call and tells the investor to either put up more money or securities or face having the position brought on margin (liquidated)

cyclical stock

The stock of a company whose profits are greatly influenced by changes in the economic business cycle.

Stop order

Instructs a stockbroker to sell your shares of stock at the market price if a stock declines to or goes below a specified price

Fixed yield

Interest income payment remains same regardless of the bond's price

Coupon rate/coupon/ coupon yields/ stated interest rate

Interest rate printed on the certificate when the bond is issued.

corporate bonds

Interest-bearing certificates of long-term debt issued by a corporation

Treasury bills

Known as T-bills, U.S. government securities with maturities of one year or less.

Treasury securities

Known as Treasuries, securities issued by the U.S. government, including bills, notes, and bonds.

Municipal Government bonds

Long-term debts (bonds) issued by local governments (cities, states, and various districts and political subdivisions) and their agencies

I bonds

Nonmarketable savings bonds backed by the U.S. government that pay an earnings rate that combines two rates: a fixed interest rate set when the investor buys the bond and a semiannual variable interest rate tied to inflation that protects the investor's purchasing power.

Series EE savings bonds

Nonmarketable, interest-bearing bonds issued by the federal government that are issued at a sharp [MLC5] discount from face value and pay no annual interest, an they may be redeemed at full value upon maturity.

day trading

Occurs when an investor buys and sells stocks quickly throughout a day with the hope that prices will move enough to cover transaction costs and earn some profits.

Investment-grade bonds

Offer investors a reasonable certainty of regularly receiving periodic income (interest) and retrieving the amount originally invested (principal).

Privately held corporation

One that issues stock purchased by a relatively small number of people and is not traded on a public stock exchange.

Specialist

Person on the floor of an exchange who handles trades of a particular stock in an effort to maintain a fair and orderly market

Secured bond

Pledges specific assets as collateral in indenture or has the principal and interest guaranteed by another corporation or government agency.

Cumulative preferred stock

Preferred stock for which dividends must be paid, including any skipped dividends, before dividends go to common stockholders

Alpha statistic

Quantifies the difference between an investment's expected return and its actual recent performance (outperforming or underperforming) given its risk; positive values indicate better-than-market performance.

Book value per share

Reflects the book value of a company divided by the number of shares of common stock outstanding

Spread

Represents difference between the bid price at which a broker/dealer will buy shares and the higher ask price at which the broker/dealer will sell shares

Interest rate risk

Risk that interest rates will rise and bond prices will fall, thereby lowering the prices on older bond issues

Fundamental analysis

School of thought in market analysis that assumes each stock has an intrinsic (or true) value based on its expected stream of future earnings.

stocks

Shares of ownership in a business corporation's assets and earnings

round lots

Standard units of trading of 100 shares of stock and $1000 or $5000 par value for bonds.

call option

Stipulation in an indenture that allows issuer to repurchase the bond at par value or by paying a premium, often one year's worth of interest. Bond are thus callable

tech stocks

Stocks in the technology sector that offer technology-based products and services, biotechnology, Internet services, network services, wireless communications, and more.

well-known growth stocks

Stocks of companies that are leaders in their fields, that dominate their markets, and that have several consecutive years of above-industry-average earnings.

blue-chip stocks

Stocks that have been around for a long time, have a well-regarded reputation, dominate its industry, and are known for being solid, relatively safe investments

Online discount brokers

Such brokers, also called internet or electronic discount brokers, have reduced the cost of executing a trade to perhaps $20 or even $10 because their primary business is online trading.

Price/sales ratio

Tells the number of dollars it takes to buy a dollar's worth of a company's annual revenues; calculated by dividing company's total market capitalization by its sales for the past four quarters.

Price/earnings (P/E) ratio

The current market price of a stock divided by earnings per share (EPS) over the past four quarters; used at the primary means of valuing a stock

market price

The current price of a share of stock that a buyer is willing to pay a willing seller

Dow Jones Industrial Average

The most widely reported of all stock market indexes that tracks prices of only 30 actively traded blue chip stocks, including well-known companies such as American Express and At&t

growth stock

The stock of a company that offers the promise of much higher profits tomorrow and has a consistent record of relatively rapid growth in earnings in all economic conditions.

large-cap stocks

Those public corporations that are capitalized by issuing $3 billion to $4 billion (or more) of stocks; most are considered blue-chip companies.

Yield to maturity

Total annual effective rate of return earned by a bondholder on a bond if the security is held to maturity-takes into consideration both the price at which the bond sold and the coupon interest rate to arrive at effective rate of return

dividends per share

Translates the total cash dividends paid out by a company to common stockholders into a per-share figure.

preferred stock

Type of fixed-income ownership security in a corporation that pays fixed dividends

default risk/credit risk

Uncertainty associated with not receiving the promised periodic interest payments and the principal amount when it becomes due at maturity.

margin buying

Using a margin account to buy securities; allows the investor to apply leverage that magnifies returns-or losses

Covering a position

When an investor using a margin account buys back securities sold short or sells securities bought long.

Indenture

Written, legal agreement between bondholders and debtor that describes terms of the debt by setting forth the maturity date, interest rate, and other details

Market making

a broker/dealer who both buys and sells securities by maintaining an inventory of specific securities to sell to other brokerage firms and stands ready to buy reasonable quantities of the same securities at market prices.

Cash account

a brokerage account that requires an initial deposit (perhaps as little as $1000) and specifies that the full settlement is due to the brokerage firm within 3 business days after a buy or sell order has been given

broker/dealer

a brokerage firm representing a buyer that communicates w/ another brokerage firm that has the desired securities, thus in effect "making a market" for one or more securities

beta value/beta coefficient

a measure of stock volatility; that is how much the stock price varies relative to the rest of the market.

10-Q report

a report required by the SEC prepared by the company showing its financial results for the quarter, a discussion from management, a list of material events and other risk factors that have occurred, forecasts of the company's future, and notes of any significant changes or events in the quarter

value stock

a stock that tends to trade at a low price relative to its company fundamentals (dividends, earnings, sales, etc.) and thus is considered undervalued by a value investor