Glossary

Learn & be a stock guru...

The financial world has developed a special investment-oriented language to help describe the stock market, investments, securities for the stock market, stock market analysis, and its conditions. At times you may be confronted with a term which is totally alien or has a completely different meaning from what you thought. Misunderstanding these terms can sometimes lead to the wrong conclusion, and that can cost you money!

What you don't know can hurt you.

Sale of Property, Plant, Equipment

Includes proceeds from selling any fixed assets such as property, plant, and equipment. Usually this section also includes any retirement of equipment.

Sale of Short-Term Investments

Includes profit received from selling short-term marketable securities.

Sales

This represents all net sales of the corporation plus any other revenues associated with the main operations of the business (or those labeled as operating revenues). It does not include dividends, interest income, or non-operating income. Sales are an important item in assessing the prospects of any public company. Although subject to some finagling, sales typically are not as iffy as net income, and tell you just how much of its goods and services the company is selling. Thus, the rate of sales increase is an important indicator of how fast a company is growing. Sales can be analyzed in different ways for different industries. In retailing, for instance, analysts like to look at the sales-per-square-foot ratio as well as ""same-store sales."" Investors are sometimes wary of firms that increase profits without increasing sales, as was the case with IBM for awhile during its turnaround, because cost-cutting cannot go on forever. In recent years, analysts have paid increasing attention to sales, particularly by calculating the Price/Sales ratio.

Sales/Share

The latest twelve months' sales divided by the latest shares outstanding. Net income is subject to various circumstances and accounting decisions, but sales are (generally) sales. Investment theorists have in recent years paid more attention to sales as an indicator of a company's prospects.

Sector

A sector is a part of the economy. Stocks in the same sector tend to be in the same industry, or one very closely related. Mutual funds focused on specific sectors, such as semiconductors, airlines, utilities, retailing, etc., make it relatively easy to invest in any given sector. Sector investing can pay big returns -- semiconductor stocks, for example, have roared ahead of the overall market during the past decade -- but they involve big risks as well. The main problem is a lack of diversification; investing in any one sector means investing in a group of stocks that tend to rise and fall in unison.

Security

In investing, a security is a transferable ownership interest (such as common stock) or IOU (such as a bond). In recent years, more and more things have become ""securitized,"" such as mortgage obligations, student loans and credit-card debt. By making such financial obligations more liquid, securitization has contributed to efficient markets and the democratization of investment opportunity. But by distributing ownership as well as risk, it has probably also increased the power of management with respect to shareholders.

Selling Short

Selling short means to sell shares you've borrowed in hopes the price will fall. Here's how it works: you borrow the shares from your broker and sell them. Now you're paying interest on the borrowed shares, but you're also earning interest on the proceeds from the sale. Sooner or later, you have to replace what you've borrowed, but the hope is that the stock price will fall. Then you can buy back the shares for less than you sold them for, replacing what you borrowed and pocketing the difference. But shorting is risky; stocks tend to rise over time, and if you short a stock that goes up, your losses theoretically are unlimited. Shorting has been especially ineffective in recent years, during the remarkable bull market, and some professional shorts literally have been driven from the field.

Selling, General and Administrative Expenses

Includes all salaries, indirect production, marketing, and general corporation expenses. Examining this figure as a percent of sales or net income compared to other companies in the same business can give some idea of whether management runs a tight ship. In recent years many companies have conducted a war on corporate overhead, cutting layers of management and reducing central administration. On the other hand, chief executive salaries have continued to soar. Note also the importance of assessing this data in the context of a company's industry. In some businesses, such as those that depend on a great deal of TV advertising, marketing expenses can be enormous.

Shareholder's Equity

This is the net worth of a company, the amount by which assets exceed liabilities. It's also known as ""book value."" But most companies are worth far more than their book value, since ""worth"" means what someone is willing to pay, and hardly any good companies can be acquired for this baseline price.

Shares Outstanding

The total number of a company's publicly traded shares.

Short Against the Box

A technique that permits an investor who wants to unload an appreciated stock to take the profits in the next year (presumably for tax reasons). Such an investor would sell short the very same security in the very same quantity. He would cover the short position with his own shares in the new year, when the profit would be recorded.

Short Covering

The process of buying back stock that has already been sold short.

Short Interest Ratio

Shares sold short divided by average daily volume. This ""days to cover"" ratio represents the number of days of average trading needed to cover short positions in a given stock. This ratio is especially worth investigating if you are considering a short sale. When too many shares of a given stock have been sold short and days to cover stretches past 8 or 10 days, covering your position could prove difficult.

Short Interest Shares

The number of shares of the stock that have been sold short, but not yet repurchased. This figure is not as telling as it once was, since much short selling today is the result of hedging rather than an expression of investor sentiment that a given stock will fall.

Short-Term Debt

Debt that must be paid in the near future (usually one year). Because this debt is due soon, a company should have plenty of current assets to cover it.

Sinking Fund

A special reserve account created by a bond issuer. The issuer promises to put money into the account at regular intervals and to use the cash that accumulates to redeem the bonds. A sinking fund gives bondholders an extra layer of protection against default.

Size of Last Sale

The most recent quantity of shares traded.

Special Income/Charges

Those income charges that are either infrequent or unusual, but not both.

Spinoff

When a company decides that a subsidiary needs to stand on its own, it might do a spinoff, distributing shares of the new entity to existing shareholders, or selling the new business to its managers or even its employees. There are many possible reasons for a spinoff. Management may decide, for instance, that this is a way to maximize shareholder value. Or it may be decide that the subsidiary is not earning the kind returns that other units of the company generate.

Split

A stock split occurs when a company decides to divide its share in two, three, four or more. Thus a stock worth Rs.100 might be the subject of a 2-for-1 split, resulting in a share price of Rs.50. Holders in this case get twice as many shares but each is worth half as much, and since nothing else about the company has changed, shareholders aren't better or worse off. Stock splits traditionally are seen as a good sign; companies split their shares when the price of each share is considered high enough to discourage ownership. But there is little evidence that splits do shareholder much good. Reverse stock splits (in which you get fewer shares, but each is worth proportionately more) do occur, but rarely.

Spread Trading

The practice of buying one option contract and selling another for the same underlying investment at the same time. The difference between the profit from one transaction and the loss on the other is the spread. The spread can either work for or against the trader. If the spread works in his favor, he makes a profit. If it works against him, he suffers a loss. Spread trading is used by futures and options traders to reduce the risk of losing large sums from a sudden movement in the market.

Standard Deviation

A measure of a mutual fund's volatility, standard deviation is a statistical measure of the range of a fund's performance. The higher the number the greater the volatility. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time the total returns of any given fund are expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund's total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that a fund's returns fall in a typical bell-shaped distribution. In any case, the greater the standard deviation, the greater the fund's volatility. For example, an investor can compare two funds with the same average monthly return of 5.0%, but with different standard deviations. The first fund has a standard deviation of 2.0, which means its range of returns for the past 36 months has typically remained between 1% and 9%. On the other hand, assume that the second fund has a standard deviation of 4.0 for the same period. This higher deviation indicates this fund has experienced returns fluctuating between -3% and 13%. With the second fund, an investor might expect greater volatility.

Statement of Cash Flow

An analysis of cash flow that presents a company's sources and uses of funds. The statement focuses on cash and involves some nonintuitive leaps (an increase in accounts receivable is a use of cash, not a source), but to the educated eye it can provide a telling picture of where a company is headed with respect to liquidity. Sources of cash include net income, depreciation and reductions in inventory. Uses of cash include dividends declared as well as increases in current assets. A statement of cash flow reveals healthy or unhealthy trends and allows for at least the possibility of predicting future cash requirements.

Stock Certificate

A document that proves your ownership of shares in a particular company.

Stop loss order

An instruction to your broker to close out your short position -- buy stock to replace the shares you borrowed -- if your losses reach a certain percentage of your investment.

Straddle

The purchase or sale of an equal number of puts and calls on an underlying stock, with the same strike price and expiration date. The investor who purchases or sells a straddle seeks to profit from moderate changes in the price of the underlying stock, regardless of whether the prices goes up or down.

Strangle

The purchase or sale of an equal number of puts and calls on an underlying stock, with the same expiration date but different strike prices. The investor who purchases or sells a strangle seeks to profit from large changes in the price of the underlying stock, regardless of whether the price goes up or down.

Strike Price

The price at which the underlying stock can be purchased (for call options) or sold (for put options) during a specified period. For example, you might sell a covered call against your XYZ Corp. shares with a strike price of Rs.50. This means that the buyer gets to buy your shares at Rs.50 each, even if the market price rises to Rs.75.

Support Level

A level below which (the thinking goes) a stock will not fall. It's the price at which investors seem to come forward to buy, perhaps because it's as low as the stock seems to go, or because the apparent bargain becomes irresistible. The trading range between the support level and resistance level is known as a ""channel.""

Symbol

A unique, market-approved code that identifies a particular security on an exchange. The symbol generally reflects the name of the security. For example, the symbol for Pakistan International Airlines stock is PIAA. Also known as the ""ticker symbol.""