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Literature

Glossary

Assets
Cash, property and investments along with anything else which are controlled by the entity and can be of value for an individual or business.

Analyst
A financial professional who analyzes securities to determine their investment merits, including possibly a "fair" or "intrinsic" value for them. The term is generally applied to almost any professional investor who does research of some kind. There are "sell-side" and "buy-side" analysts. "Sell-side" analysts typically work for investment banks and brokerages and sell or publish their analysis. "Buy-side" analysts typically work for the mutual fund companies or institutions that use the analysis to make investment decisions for the funds they manage.

Asset allocation
Dividing investment dollars among various asset classes, typically among cash investments, bonds, and stocks. Wall Street firms frequently change their "model asset allocation" portfolios -- ostensibly to show that they have recalculated the best method for balancing the risks involved in holding various investments. This also, however, results in additional commissions from clients who follow the "model portfolios" and sell various assets to rebalance their portfolios.

Bear market
When the overall market loses value over an extended period of time. There is no "official" definition of what makes a bear market, though many feel a drop of at least 10% is needed. A drop of something less than 10% is often called a "correction" (even though the term "correction" is never used when the market moves up 10%).

Beta
A measure of the relative volatility of a stock or other security as compared to the volatility of the entire market (usually measured by the S&P 500 index). A beta above 1.0 shows greater volatility than the overall market, and a beta below 1.0 is less volatile.

Blue-chip stocks
Really good, large companies -- often Dow components -- that have been around long enough to have a solid history of rewarding shareholders. Think Coca-Cola, IBM, General Electric, General Motors, and Johnson & Johnson.

Bonds
Are debt issued by governments, public or private companies, which bear the obligation of the emitter to repay the principal and interest over a fixed period. Bonds are traded like other securities.

Book value
A company's assets, minus any liabilities and intangible assets. Book value is literally the value of a company that can be found in the accounting ledger and is often represented as a per-share value by taking the company's shareholder equity and dividing by the current number of shares outstanding.

Broker
One who sells financial products. Whether in insurance, real estate, or stocks, most brokers work under compensation structures that are at direct odds with the best interests of their clients. When using a broker, you should always find out how he or she is compensated.

Bull market
A market that has been gaining value over a prolonged period.

Capital
"Fixed capital" refers to goods such as buildings, plant, machinery (or investment in those), whereas “circulating capital” means stockpiles of material, semi-finished goods and components that are usually used up rapidly in production.

Certified Financial Planner (CFP)
An investment professional who has passed the CFP Board of Standards series of exams on subjects such as taxes, securities, insurance, and estate planning.

CD
A CD (Certificate of Deposit) is a debt instrument, issued by a bank, which pays interest periodically (every month, every three months etc), or at the established maturity date (in this case, in addition to the principal amount).

Compound Interest
Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Check the ITI Compound Interest calculator to see why this is the most important effect in investing.

Consumer Price Index (CPI)
An inflation tracker, much followed by the mainstream media. It is the measure of the price change in consumer goods and services.

Current assets
Assets that are easily convertible to cash. Cash, short-term investments, and accounts receivable are asset categories that should result in cash within the next year.

Current liabilities
Debt or other obligations that are payable within a year.

Current ratio
The current ratio provides a speedy indication of a company's ability to meet short-term debt obligations. The higher the ratio, the more liquid the company is, and the better able it is to take care of any short-term debt. To determine the ratio, take current assets and divide by current liabilities.

Current yield
As applied to bonds, the annual interest rate divided by the current market price.

Cyclical stock
Stock of a company whose performance is generally related (or thought to be related) to the performance of the economy as a whole. Paper, steel, and the automotive stocks are thought to be cyclical because their earnings tend to be hurt when the economy slows and are strong when the economy turns up. Food and drug stocks, on the other hand, are not considered "cyclicals," as consumers pretty much need to eat and care for their health regardless of the performance of the economy.

Debt-to-equity ratio
Calculated by dividing long-term debt by shareholders' equity. A measure of a company's leverage, this ratio shows the relationship between long-term funds provided by creditors and funds provided by shareholders. A high ratio may indicate high risk, and a low ratio may indicate low risk.

Diversification
Investing in separate asset classes (stocks, bonds, cash) and/or stocks of different companies in an attempt to lower overall investment risk.

Dividend
A share of a company's earnings paid to each stockholder. Typically, dividends are paid on a quarterly basis and are determined by the company's board of directors.

Dividends
Profits that a company or mutual fund distributes to shareholders.

Dollar cost averaging
Investing equal amounts of money at regular intervals. The money deducted from your paycheck if you participate in your company's 401(k) program is an example of dollar cost averaging. Theoretically, you will buy more shares when the price of your investment has declined, and fewer shares when the price has risen. This may lead to an overall cost basis that is lower than the average price per share.

Efficient market theory
A theory stating that stock prices perfectly reflect all market information that is known by all investors. The theory also states that no investor can beat the market's returns through skill because it is impossible to determine future stock prices, and that luck explains why some investors beat the market. The theory is much debated.

Escrow Accounts
Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party.

Expense ratio
The percentage of a mutual fund that is taken out of the pockets of shareholders to pay expenses -- most of which go to the salesmen and managers of the mutual fund. If you are investing in mutual funds, look for funds with an expense ratio of less than one percent. See Mutual Funds: Expense Ratios.

Free cash flow
The cash that's left over after everything -- bills from suppliers, salaries, expenses for the annual holiday bash, new equipment to expand the business -- is said and done. Theoretically, free cash flow is the amount of cash a business could issue to shareholders in the form of a dividend check. See Cash Flow-Based Valuations.

Globalization
Development of extensive worldwide patterns of economic relationships between nations.

Gross Domestic Product (GDP)
Total market value of the goods and services produced by a nation's economy during a specific period of time.

Gross margin
A percentage of how much of each dollar of sales is left over after the costs to make the product are subtracted. It is calculated by dividing gross profits (sales minus cost of goods sold) for a period by the revenues for the same period.

Indices
Benchmark: Dow Jones (30 of the biggest companies) or S&P 500 (500 companies of all sizes and industries).

Interest
The cost of borrowing or lending money, usually a percentage of the amount borrowed or loaned.

Macroeconomics
Microeconomics studies how individuals and businesses make decisions and how these decisions affect the prices and output of goods and services. In contrast, macroeconomics is the study of aggregates of individuals, prices and output for whole markets.

Margin account
A brokerage account that permits the owner to borrow money to buy securities. Margin accounts should not be used by inexperienced investors, or those who are putting money at risk that they can't afford to lose. See The real, real risks of margin.

Market
A means by which the exchange of goods and services takes place as a result of buyers and sellers being in contact with one another, either directly or through mediating agents or institutions.

Maturity
The date when the principal amount of a security becomes due and payable. An issue can have multiples maturities.

Moore's Law
The observation made in 1965 by Gordon Moore, co-founder of Intel, that the number of transistors per square inch on integrated circuits had doubled every year since the integrated circuit was invented. Moore predicted that this trend would continue for the foreseeable future. In subsequent years, the pace slowed down a bit, but data density has doubled approximately every 18 months, and this is the current definition of Moore's Law, which Moore himself has blessed.

Mortgage Rates
in Anglo-American law, any of a number of related devices in which a debtor (mortgagor) conveys an interest in property to a creditor (mortgage ) as security for the payment of a money debt.

Net asset value (NAV)
The price of each share of a mutual fund. It is calculated by subtracting the fund's liabilities from its total assets, and dividing that figure by the number of shares outstanding. The NAV is the amount of money that an investor would receive for each share if the mutual fund sold all of its assets, paid off all of its outstanding debts, and distributed the proceeds to shareholders.

Over the counter (OTC)
A geographically decentralized market in which stock and other securities transactions are not conducted in person -- as on the much-televised floor of the New York Stock Exchange -- but through a telephone and computer network. The over-the-counter market is regulated by the National Association of Securities Dealers (NASD).

Premium
The price paid by the buyer to purchase an option. Prices are determined by “open outcry” in the pits.

Price-to-earnings ratio (P/E)
The share price of a stock, divided by its per-share earnings over the past year. See Fool's School: The P/E Ratio.

Principal
The basic element of the loan as distinguished from interest and mortgage insurance premium. In other words, principal is the amount upon which interest is paid. Principal can also be the original cash put into an investment.

Quick ratio
Current assets minus inventories divided by current liabilities. By taking inventories out of the equation, you can check and see if a company has sufficient liquid assets to meet short-term operating needs.

Recession
In economics, a downward trend in the business cycle characterized by a decline in production and employment, which in turn causes the incomes and spending of households to decline.

Return
Profit

Return on invested capital
Return on invested capital (ROIC) is a measure of financial performance and a financial performance forecasting tool.

Revenue
Money that a company collects from customers for the sale of a product or service. When you subtract out all costs from revenues, you get profits or earnings.

Risk
In economics and finance, an allowance for the hazard ( risk) or lack of risk in an investment or loan. Default risk refers to the chance of a borrower's not repaying a loan.

Risk aversion
This concept refers to the fact that individuals are willing to pay money (or not to receive a high return) to avoid playing a risky game, even when the expected value of the game is in their favor.

Risk tolerance
The measurement of an investor's willingness to suffer a decline (or repeated declines) in the value of investments while waiting and hoping for them to increase in value.

Security
An investment that is represented by a negotiable document by a corporation or governmental entity for the purpose of raising capital like bonds, stocks, mutual funds.

Securities and Exchange Commission (SEC)
The federal agency charged with ensuring that the U.S. stock market is a free and open market. All companies with stock registered in the United States must comply with SEC rules and regulations, which include filing quarterly reports on how the company is doing. The SEC, headed by five appointed members, was created under the Securities Exchange Act of 1934.

Short-term capital gain
A profit on the sale of a security that has been held for one year or less. Short-term capital gains are taxed as ordinary income.

Stock
An ownership share in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, and purchasing a stock should be thought of as owning a proportional share of the successes and failures of that business.

Stockbroker
An individual who has been licensed by the National Association of Securities Dealers to trade stocks and advise clients on various personal finance issues.

Transaction fee
A charge assessed by a broker for assisting in the trade of a stock or other security.

Treasury bill (T-bill)
A short-term discounted security issued by the U.S. government, with a maturity of one year or less.

Treasury bond (T-bond)
A long-term security issued by the U.S. government, with a maturity of 10 years or more.

Treasury note (T-note)
An intermediate-term security issued by the U.S. government, having a maturity of 1 to 10 years.

Wire Transfer
A wire transfer is an automated electronic transfer between two bank accounts in 2 banks that have an established agreement. The bank has to be part of the Federal Reserve System in the USA. Practically every bank in any country is part of this network, at least through a third party partner bank. For instance, Banco de Merida has a bank account with Chase Manhattan to send and to receive wire transfers.

"What makes the desert beautiful is that somewhere it hides a well."
Antoine de Saint-Exupery
 

 

 

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