Business Exam 3 Review
Short term loan
A loan lasting 1 year or less.
Store of Value
A means of retaining and accumulating wealth.
Measure of Value
A single standard or "yardstick" used to assign values to compare the values of money.
Barter System
A system of exchange in which goods or services are traded directly for other goods or services. downside for government-no sales taxes
Check
A written order for a bank to pay a stated dollar amount to a business or person indicated on the check.
How Investments are Bought and Sold
1) Purchasing Stocks and Bonds - to purchase stocks and bonds, you work through a brokerage firm. In turn, an employee of the brokerage firm buys or sells securities for you a) Brokerage Firms and Account Executives *Account Executive (stockbroker or registered representative) = an individual sometimes called a stockbroker or registered representative, who buys and sells securities for clients - you must've already determined your investment goal - careful communication of these goals to the account executive - full-service broker (charges higher commissions; professionals help you make decisions) or a discount broker (have both personnel and research materials to help you become a better investor; make your own decisions)? b) The Mechanics of a Transaction *Market Order = a request that a security be purchased or sold at the current market price - payment of stocks, bonds, and many other financial securities generally requires within three business days of the transaction *Limit Order = a request that a security be brought or sold at a price that is equal to or better than some specified price - sells stock only if price per share is higher than what it was when you bought it - usually good for one day, one week, one month or good until canceled c) Commissions - min. commission ranging from $7 to $25 for buying and selling stock - typical commission fees are charged by online brokerage firms - online transactions are less expensive when compared with the costs of trading securities through a full-service brokerage firm 2) Purchasing Mutual Funds, Real Estate, and Other Investments - method used to buy or sell mutual funds depends on a) the type of fund you choose (1) Open-End Funds = purchased or sold directly from the investment company that sponsors the fund on any business day (2) Close-End Funds and Exchange Traded Funds = purchased or sold on any business day through a securities exchange or the over-the-counter market b) the type of fund you purchase (1) Load Funds = sales charge can be charged when you make a purchase or when you withdraw money from the fund (2) No-Load Fund = no sales charge BUY OR SELL NOT BUY AND SELL - a professional should provide you with advice on whether to buy or sell an investment - there is convincing evidence that the performance of load funds routinely outperforms the performance of no-load funds.. 3) Regulations of Securities Trading - Gov. regulations of securities was begun as a response to abusive and fraudulent practices in the sale of stocks, bonds, and other financial securities - concerns of both gov. officials and investors have grown *Full Disclosure = requirement that investors should have access to all important facts about stocks, bonds, and other securities so that they can make informed decisions (Securities Act of 1933) *Insider Trading = the practice of board members, corporate managers, and employees buying and selling a corporation's stock (must disclose their trading activities to the public) - Sarbanes-Oxley Act to improve corporate accountability and financial reporting - SEC created in 1934 = agency that enforces federal securities regulations; supervises all national exchanges, investment companies, OTC market, brokerage firms, and every organization involving trading securities - NYSE has published rules, policies, and standards of conduct; through examination of each member firm that does business with the public at least once a year
Sources of Financial Information
1) The Internet - in addition to using a search engine to locate information, you can also obtain information from a number of investment sites - these sites are easily accessible, all you have to do is type in the Web address or use a search engine to locate the sit - the info on these sites may be more up-to-date than printed material obtained from published sources 2) Professional Advisory Services - for a fee, various professional advisory services provide info about investments - Mood's, Standard & Poor's, and Fitch Ratings provide info that can be used to determine the quality and risk associated with bond issues 3) Financial Coverage of Securities Transactions - Wall Street Journal and Barron's are devoted almost entirely to financial and economic news (both include coverage of transactions on major securities exchanges) - report separately because transactions involving stocks, bonds, and mutual funds are reported differently a) Common and Preferred Stocks - reported in tables and are listed alphabetically b) Bonds - easier to obtain more detailed information on a greater number of bond issues by accessing the Internet - percentage of the face value ($1,000) c) Mutual Funds - purchases and sales of shares of mutual funds are reported in tables - first task is to move down the table to find the mutual fund you are interested in; read across the table to find mutual-fund price quotation 4) Other Sources of Financial Information a) Brokerage Firm Analysts' Reports - hire analysts to prepare detailed reports on individual corporations and their securities (reports are based on the corporation's sales, profits or losses, management, and planning, plus other info on the company, its industry, demand for its products, its efforts to develop new products, and current economic environment - free to clients of full-service brokerage firms b) Business Periodicals - Bloomberg Businessweek, Fortune, and Forbes provide general economic new and detailed financial info about individual corporations c) Corporate Reports - publicly held corporations must publish annual reports which include a description of the company's performance, info about firm's products or services, and detailed financial statements - corporation issuing a new security must prepare a prospectus and ensure that copies are distributed to potential investors *Prospectus = a detailed, written description of a new security, the issuing corporation, and the corporation's top management 5) Security Averages - investors measure the stock market through security averages *Security Average (or security index) = an average of the current market prices of selected securities
Money
Anything a society uses to purchase products, services or resources
Medium of Exchange
Anything accepted as payment for products, resources or services.
par value
Apparent worth or the nominal value shown on the principal ('face' or 'head') side of a bill of exchange, currency, security (stock/share, bond), or other type of financial instrument. The par value of a loan stock (bond, preferred stock/preference share) is the value at which it will be redeemed. Some jurisdictions allow shares to be issued with no par value (see no par value share). Par value is typically different from the market price. If the market price is higher than the par value, the difference is called a 'premium;' if it is lower, the difference is called a 'discount.' Also called face value, nominal value, or redemption value.
What are the 5 important characteristics of money?
Divisibility-able to make smaller and larger purchases Portability Stability-when money is unstable, people store jewels, gold, and real estate Durability Difficulty of counterfeiting
(CD) Certificate of Deposit
Guaranteed interest rate for a specific amount of time.
Conservative Investment Alternatives
Investors who are afraid of the risk associated with stocks, mutual funds, and other investment alternatives will often invest their money in bank accounts, government bonds, or corporate bonds 1) Bank Accounts - bank accounts that pay interest and therefore are investments include: passbook savings accounts, money-market accounts, CDs, and other interest-bearing accounts - investors often choose other investments because of the potential for larger returns 2) Corporate and Government Bonds - investors generally choose bonds because they provide a predictable source of income a) Government Bonds - most investors still consider the nation's government bonds to be risk-free - with the exception of savings bonds, the minimum purchase for each type of U.S. government security is $100 with additional increments of $100 above the minimum *Municipal Bond = sometimes called a muni, a debt security issued by a state or local government - interest income from municipal bonds may be tax exempt from federal taxes b) Corporate Bonds - they are a form of long-term debt financing that must be repaid, investment-grade corporate bonds are generally considered a more conservative investment than either stocks or mutual funds that invest in stocks - advantages: they are primarily long-term, income-producing investments c) Convertible Corporate Bonds - corporations prefer to issue convertible bonds because they carry a lower interest rate than nonconvertible bonds by about 1-2 percent -> owners of convertible bonds have the opportunity for increased investment growth
Important Factors in Personal Investment
Match potential investments with your investment goals in terms of safety, risk, income, growth, and liquidity 1) Safety and Risk - Safety = (in an investment) means minimal risk of loss - Risk = (in an investment) means a measure of uncertainty about the outcome - If you want a steady increase in value of an extended period of time, choose safe investments, such as certificates of deposit (CDs), highly rated government and corporate bonds, mutual funds, real estate, and the stocks of high regarded corporations sometimes called blue-chip stock *Blue-Chip Stock = a safe investment that generally attracts conservative investors - issued by corporations that are industry leaders and have provided their stockholders with stable earnings and dividends over a number of years - if you want higher dollar returns on investments, you must generally give up some safety (potential return = assumed risk) - investors often base their investment decision on projects for rate of return *Rate of Return = the total dollar amount of return you receive on an investment over a specific period of time divided by the amount invested Ex: invest $5,000 on home depot stock; receive $108 in dividends; stock is worth $5,300 at the end of the year -> rate of return = 8.2% ($5,300-$5,000 = $300 -> $108+$300 = $408 -> $408/$5,000 = 8.2%) 2) Investment Income - investors sometimes purchase certain investments because they want a predictable source of income - when purchasing investments for income, most investors are concerned about the issuer''s ability to continue making periodic interest or dividend payments 3) Investment Growth - Growth = investments will increase in value - growing companies usually pay a small dividend or no dividend at all - profits are reinvested in the business (as retained earnings) to finance additional expansions - value of the stock increases as the corporation expands - investments that may offer growth potential include selected mutual funds (referred to as growth funds) and real estate 4) Investment Liquidity *Liquidity = the ease with which an investment can be converted into cash - Investments range from cash or cash equivalents (such as investments in government securities or money-market accounts) to other extreme of frozen investments, which CANNOT be converted easily into cash
What are the 3 functions of money?
Medium of Exchange, Measure of Value, Store of Value
Credit Cards
Merchants get charged a small percentage for each transaction.
Debit Cards
Money is automatically withdrawn from your account.
Factors That Can Improve Your Investment Decisions
Portfolio management can reduce investment risk and factors that you should consider to choose "just the right" investments 1) Portfolio Management *Standard & Poor's 500 Stock Index = an index that contains 500 different stocks that reflect increases or decreases in value for the U.S. stock market as a whole - why not just invest all your money in stocks or mutual funds that invest in stocks? (largest potential return) -> there is more to investing than just picking a bunch of stocks or stock mutual funds 2) Asset Allocation, the Time Factor, and Your Age *Asset Allocation (often expressed in percentages) = the process of spreading your money among several different types of investments to lessen risk - asset allocation is a fancy way of saying to diversify and avoid the pitfall of putting all of your eggs in one basket a) The Time Factor - amount of time you have before you need your investment money is crucial - leaving your investments alone and let them work for five to ten years or more -> then you can invest in stocks, mutual funds, and real estate - Conservative Approach (with short-term investments goals) = reduce the possibility of having to sell your investments at a loss because of depressed market value or a staggering economy - Younger Approach (with long term investments goals) = could afford to hold their investments until the price of their securities recovered b) Your Age - tend to invest a larger percentage of their nest egg in growth-oriented investments because they have more time for an investment to recover its original value and even increase its value - older investors tend to choose more conservative investments - Suze Orman states to subtract your age from 110, and the difference is the percentage of your assets that should be invested in growth investments, the remaining should be kept in safer conservative investments 3) Your Role in the Investment Process - investors want large returns, yet they are often unwilling to invest the time required to become a good investor - suggestions that will help choose investments that will increase in value a) Evaluate Potential Investments b) Monitor the Value of your Investments c) Keep Accurate and Current Records
More Speculative Investments
Potential return should be directly related to the assumed risk 1) Common Stock - corporations issue common stock to finance their business start-up costs and help pay for expansion and their ongoing business activities - usually, a stockholder may sell her or his stock to another individual - Three Ways to Make Money by Buying Common Stock: a) Dividend Payments - corporation may pay stock dividends in place of or in addition to cash dividends *Stock Dividend = a dividend in the form of additional stock -> paid to shareholders just as cash dividends are paid in proportion to the number of shares owned b) Increase in Dollar Value *Capital Gain = the difference between a security's purchase price and its selling price - to earn capital gain, you must sell when the market value of the stock is higher than the original purchase price you paid for the stock *Market Value = the price of one share of a stock at a particular time (Table 20.4) c) Stock Splits = the diversion of each outstanding share of a corporation's stock into a greater number of shares - most common stock splits result in one, two, or three new shares for each original share - there are no guarantees that the stock will increase in value after a split; however, the stock may be more attractive to the investing public because of the potential for a rapid increase in dollar value 2) Preferred Stock - a firm's preferred stockholders must receive their dividends before common stockholders are paid any dividends - owners of preferred stock have first claim after bond owners and general creditors - owners of cumulative preferred stock are assured that omitted dividends will be paid to them before common stockholders receive any dividends - when value of a firm's common stock increases, the market value of its convertible preferred stock also increases 3) Mutual Funds and Exchange-Traded Funds - mutual funds are the investment of choice *Mutual Fund = pools the money of many investors - its shareholders - to invest in a variety of different securities - Major Advantages: (1) Professional Management - mutual funds are managed by professional fund managers who devote large amounts of time to picking just the "right" securities for their funds' portfolios (2) Diversification (wide variety of securities) a) Mutual-Fund Basics - Three Types of Mutual Funds: (1) open-end funds = issues and sells new shares to any investor who requests them; buys back shares from investors who wish to sell all or part of their holdings (2) closed-end funds (actively managed) = sells shares in the fund to investors only when the fund is originally organized (3) exchange-traded funds (ETFs) = a fund that generally invests in the stocks or other securities contained in a specific stock or securities index - like a close-end fund, shares are traded on a securities exchange or in the over-the-counter market at any time during the business day - (unlike close-end funds) normally invest in the stocks, bonds, or securities included in a specific index *Net Asset Value (NAV) = current market value of a mutual fund's portfolio minus the mutual fund's liabilities divided by the number of outstanding shares b) Mutual-Fund Sales Charges and Feeds - Two types of Mutual Funds (1) Load = pays a sales charge every time he or she purchases shares (may be has high as 8.5%; average: 3 and 5%) - some charge contingent deferred sales fee (1 to 5% of the amount withdrawn during the first five to seven years) (2) No-Load Funds = pays no sales charges at all - Some mutual funds charge a 12b-1 fee (sometimes referred to as a distribution fee) to defray the costs of advertising and marketing the mutual fund *Expense Ratio = all the different management feeds; 12b-1 feeds, if any; and additional operating costs for a specific fund - most prefer an expense ratio of 1% or less c) Managed Funds Versus Indexed Funds - most mutual funds are managed funds - professional fund manager who chooses the securities that are contained in the fund (also decides when to buy and sell securities in the fund) - some invest in index funds because they have outperformed managed funds d) Types of Mutual-Fund Investments (1) Stocks - the majority of mutual funds are stock funds that invest in stocks issued by small, medium size, and large corporations that provide investors with income, growth or a combination (2) Bonds - invest in corporate, government, or municipal bonds that provide investors with interest income (3) Other (Funds that Stress Allocation and Money-Market Investments or Strive for a Valance Between Stocks ad Bonds - typical fund names (pg.595) *Family of Feuds = a group of mutual funds managed by one investment company - most investment companies now allow shareholders to switch from one fund to another fund with the same family of funds 3) Real Estate - one of the best hedges against inflation - disadvantages: if you want to sell your property, you must find an interested buyer with the ability to obtain enough money to complete the transaction (may be difficult) - as a rule, real estate increases in value and eventually sells at a profit, but there are no guarantees 4) The Most Speculative Investment Techniques *High Risk Investment = an investment made in the uncertain hope of earning a relatively large profit in a short time (because of the methods used by investors to earn a quick profit) a) Selling Short *Buying Long = buying a stock with the expectation that it will increase in value and then can be sold at a profit *Selling Short = the process of selling stock that an investor does not actually own but has borrowed from a brokerage firm and will repay at a later date (the idea is to sell at today's higher price and then buy later at a lower price) (pg. 596) b) Buying Stock on Margin *Margin Requirement = the portion of the price of a stock that cannot be borrowed (requirement set by the Federal Reserve Board) (current margin requirement is 50%) -> you can borrow up to 50% of the cost of a stock purchase - by buying more shares on margin, you will earn more profit (less the interest you pay on the borrowed money and customary commission charge) Ex: purchase 200 shares of stock, but if you buy on margin, you can purchase an additional 200 shares for a total of 400 shares -> if price of stock increases by $8 per share, your profit will be $1,600 without margin, but $3,200 if you buy the stock using margin c) Other High-Risk Investments - Stock Options - Derivatives - Commodities - Gemstones - Coins - Antiques and Collectibles - although investments like these can lead to large dollars, must not be used if not fully understand all potential risks involved
What is the main function of the Federal Reserve System?
Regulating the nation's money supply.
Managing Your Personal Finances
We examine several steps for effective money management that will help you to prepare for an investment program Step 1: Tracking Your Income, Expenses, Assets, and Liabilities a) determining your current financial condition by constructing a personal income statement and balance sheet *Personal Income Statement = lists your income and your expenses for a specific period of time (usually a month) - determine if you have a surplus or deficit by subtracting expenses from income *Personal Balance Sheet = lists your assets and liabilities on a specific date - subtracting your total liabilities from your total assets, you can determine your net worth *Net Worth = the difference between the value of your total assets and your total liabilities - overall, the goal is to increase your assets and decrease liabilities Step 2: Developing a Budget that Works *Personal Budget = a specific plan for spending your income a) estimating your income for a specific period b) list expense for the same time period c) balance your budget so that your income is equal to the money you spend, save, or invest each month d) compare the amounts included in your budget with your actual income and expenses e) the goal is to have a surplus at the end of the budgeting period Step 3: Managing Credit Card Debt - five warning sings for using your credit cards (pg. 582) - eventually the amount of cash remaining after the bills are paid will increase and can be used to start a savings and investment program that will help you obtain your investment goals 4) Investment Goals *Personal Investment = the use of your personal funds to earn a financial return - the goal of investing is to earn money with money a) must be specific and measurable b) must be tailored to you so that it takes into account your particular financial needs c) it must be oriented toward the future (long-term undertaking) d) must be realistic in terms of current economic conditions and available investment opportunities - you must control spending and manage debt regardless of how much money you make 5) A Personal Investment Program - once you have formulated specific goals and have some money to invest, investment planning is similar to planning for a business - evaluation of different investment opportunities including potential return and risk involved in each *True Financial Planner = an individual who has had at least two years of training in investments, insurance, taxation, retirement planning, and estate planning and has passed a rigorous examination - most CFPs and ChFCs do not sell a particular investment product or receive commissions for their investment recommendations. Instead, they charge consulting fees that range fro $100 to $250 an hour - many financial planners suggest that you can accumulate an "emergency fund" = a certain amount of money that can be obtained quickly in case of immediate need before beginning an investment program (an amount equal to at least three months' living expenses is reasonable) 6) Monitoring the Value of Your Investment Program *Dow Jones Industrial Average = an average of 30 leading U.S. corporations that reflect the U.S. stock market as a whole - economic crisis had many causes, including a banking and financial crisis, a downturn in home sales, lower consumer spending, and high unemployment rates - recent economic crisis underscores the importance of managing your personal finances and your investment program - some individuals were forced to sell some or all of their investments at depressed prices just to pay for everyday necessities - you must monitor your investment program and, if necessary, modify it - circumstances and economic conditions are both subject to change
Debit card
a card that electronically subtracts the amount of a customer's purchase from her or his bank account at the moment the purchase is made
Prospectus
a detailed, written description of a new security, the issuing corporation, and the corporation's top management
Stock Dividend
a dividend in the form of additional stock
Exchange-Traded Fund (ETF)
a fund that generally invests in the stocks or other securities contained in a specific stock or securities index
Family of Funds
a group of mutual funds managed by one investment company
letter of credit
a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time
Limit Order
a request that a security be brought or sold at a price that is equal to or better than some specified price
Market Order
a request that a security be purchased or sold at the current market price
Blue-Chip Stock
a safe investment that generally attracts conservative investors
commercial paper
a short-term promissory note issued by a large corporation Promissory note (issued by financial institutions or large firms) with very-short to short maturity period (usually, 2 to 30 days, and not more than 270 days), and secured only by the reputation of the issuer. Rated, bought, sold, and traded like other negotiable instruments, commercial paper is a popular means of raising cash, and is offered generally at a discount instead of on interest bearing basis. Also called paper. See also government paper.
Personal Budget
a specific plan for spending your income
check
a written order for a bank or other financial institution to pay a stated dollar amount to the business or person indicated on the face of the check
banker's acceptance
a written order for a bank to pay a third party a stated amount of money on a specific date
financial management
all the activities concerned with obtaining money and using it effectively
Expense Ratio
all the different management feeds; 12b-1 feeds, if any; and additional operating costs for a specific fund
Dow Jones Industrial Average
an average of 30 leading U.S. corporations that reflect the U.S. stock market as a whole
Security Average (or Security Index)
an average of the current market prices of selected securities
Standard & Poor's 500 Stock Index
an index that contains 500 different stocks that reflect increases or decreases in value for the U.S. stock market as a whole
Account Executive
an individual sometimes called a stockbroker or registered representative, who buys and sells securities for clients
Financial Planner
an individual who has had at least two years of training in investments, insurance, taxation, retirement planning, and estate planning and has passed a rigorous examination
High-Risk Investment
an investment made in the uncertain hope of earning a relatively large profit in a short time
angel investor
an investor who provides financial backing for small business startups or entrepreneurs
debenture bond
bond backed only by the reputation of the issuing corporation
registered bond
bond registered in the owner's name by the issuing company
convertible bond
bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock
serial bonds
bonds of a single issue that mature on different dates
debt capital
borrowed money obtained through loans of various types That part of a firm's total capital which commonly comprises of loan-capital and short term bank loans such as overdraft.
zero-base budgeting
budgeting approach in which every expense in every budget must be justified Method for preparing cash flow budgets and operating plans which every year must start from scratch with no pre-authorized funds. Unlike the traditional (incremental) budgeting in which past sales and expenditure trends are assumed to continue, ZBB requires each activity to be justified on the basis of cost-benefit analysis, assumes that no present commitment exists, and that there is no balance to be carried forward. By forcing the activities to be ranked according to priority, ZBB provides a systematic basis for resource allocation.
Buying Long
buying a stock with the expectation that it will increase in value and then can be sold at a profit
mortgage bond
corporate bond secured by various assets of the issuing firm
corporate bond
corporation's written pledge that it will repay a specified amount of money with interest corporations sells bonds so they can borrow a lot of money from a lot of different bondholders
Net Asset Value (NAV)
current market value of a mutual fund's portfolio minus the mutual fund's liabilities divided by the number of outstanding shares
maturity date
date on which a corporation is to repay borrowed money
Certificate of deposit (CD)
document stating that the bank will pay the depositor a guaranteed interest rate on money left on deposit for a specified period of time Receipt issued by a depository institution (such as a bank, credit union, or a finance or insurance company) to a depositor who opens a certificate account or time deposit account. Issued in a negotiable or non-negotiable form, it states the (1) amount deposited, (2) rate of interest, and (3) minimum period for which the deposit should be maintained without incurring early withdrawal penalties.
capital budget
financial statement that estimates a firm's expenditures for major assets and its long-term financing needs Plan for raising large and long-term sums for investment in plant and machinery, over a period greater than the period considered under an operating budget. Techniques such as internal rate of return, net present value, and payback period are employed in creating capital budgets.
cash budget
financial statement that estimates cash receipts and cash expenditures over a specified period Financial plan that is a summary of estimated receipts (cash inflows) and payments (cash outflows) over a stated period. Two common methods of cash-budgeting are (1) Adjusted net income approach and (2) Cash receipts and disbursements approach.
budget
financial statement that projects income, expenditures, or both over a specified future period
unsecured financing
financing that is not backed by collateral; unsecured short-term financing offers several options unsecured bank loan- repayment of one year or less, a promissory note, a line of credit, or revolving credit agreement generally required
factor
firm that specializes in buying other firms' accounts receivable cost high, repayment period none, business uses this for firms that have large numbers of credit customers
chief financial officer
high-level corporate executive who manages a firm's finances and reports directly to the company's chief executive officer or president
trustee
individual or an independent firm that acts as a bond owner's representative
bond indenture
legal document that details all the conditions relating to a bond issue
prime interest rate
lowest rate charged by a bank for a short-term loan
secondary market
market for existing financial securities that are traded between investors
primary market
market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those activities
securities exchange
marketplace where member brokers meet to buy and sell securities
equity capital
money received from the owners or from the sale of shares of ownership in a business The common stockholders' required rate of return. The cost of equity capital can be calculated by using the following formula: (dividends per share / current market value) + dividend growth
long-term financing
money that will be used for longer than one year business start-up costs, mergers and acquisitions, new product development, long-term marketing activities, replacement of equipment, expansion of facilities
short-term financing
money that will be used for one year or less cash-flow problems, current inventory needs, speculative production, monthly expenses, short-term promotional needs, unexpected emergercies
cash flow
movement of money into and out of an organization
over-the-counter market
network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange
initial public offering
occurs when a corporation sells common stock to the general public for the first time
private placement
occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors
investment banking firm
organization that assists corporations in raising funds, usually by helping to sell new issues of stocks, bonds, or other financial securities
financial plan
plan for obtaining and using the money needed to implement an organization's goals and objectives
Mutual Fund
pools the money of many investors - its shareholders - to invest in a variety of different securities
retained earnings
portion of a corporation's profits not distributed to stockholders
term-loan agreement
promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments
risk-return ratio
ratio based on the principle that a high-risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns
Full Disclosure
requirement that investors should have access to all important facts about stocks, bonds, and other securities so that they can make informed decisions
Municipal Bond
sometimes called a muni, a debt security issued by a state or local government US term for tax-exempt bond issued by states and political subdivisions (such as cities and counties) to raise funds for certain public works, such as low income houses, bridges, and roads. Municipal bonds are redeemed with interest, and are either backed by the full taxing power of the government (as a general obligation bond) or their repayment is based on the specific revenue generated by the financed project (as a moral obligation bond). Often shortened to muni.
common stock
stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others
preferred stock
stock whose owners usually do not have voting rights but whose claims on dividends and assets are paid before those of common-stock owners Class of stock (shares) that pays fixed and regular interest income, instead of a dividend (whose payment and amount depends on factors beyond stockholder's control). Holders of preferred stock have claim over the firm's earnings (and assets in case of liquidation) ahead of (senior to) the claim of holders of common stock (ordinary shares) but behind (junior to) the claims of bondholders and all other creditors. Depending on the terms of the agreement under which preferred stock is issued, the degree of control of its holders over the firm's operations ranges from none to the same as that of the holders of common stock.
sinking fund
sum of money to which deposits are made each year for the purpose of redeeming a bond issue
Capital Gain
the difference between a security's purchase price and its selling price
Net Worth
the difference between the value of your total assets and your total liabilities
Stock Split
the diversion of each outstanding share of a corporation's stock into a greater number of shares
Liquidity
the ease with which an investment can be converted into cash
Margin Requirement
the portion of the price of a stock that cannot be borrowed
Insider Trading
the practice of board members, corporate managers, and employees buying and selling a corporation's stock
Market Value
the price of one share of a stock at a particular time
Selling Short
the process of selling stock that an investor does not actually own but has borrowed from a brokerage firm and will repay at a later date
Asset Allocation
the process of spreading your money among several different types of investments to lessen risk
Rate of Return
the total dollar amount of return you receive on an investment over a specific period of time divided by the amount invested
Personal Investment
the use of your personal funds to earn a financial return
speculative production
time lag between the actual production of goods and when the goods are sold
trade credit
type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise
financial leverage
use of borrowed funds to increase the return on owners' equity
promissory note
written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date repayment in a year or less
