Glossary

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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.

Call

Noun: The opposite of a put, a call is an option that gives you the right to buy a given stock (or commodity or other asset) at a given price in a given period. You pay a fee for this privilege. If it doesn't, the call expires worthless, and you're out the fee you paid. Calls are often used to hedge risk. Covered calls appeal to conservative investors.

Verb: A bond issuer might have the right to call a bond, meaning redeem it early, usually because interest rates have fallen.

Callable Bond

A bond that can be retired, or ""called in,"" by the issuer before the bond matures. The power to call a bond gives companies a way to respond to falling interest rates.

Say XYZ Corp. issued bonds with a 12 percent coupon several years ago, when interest rates were high. If bond rates had since dropped to 7 percent, XYZ Corp. could call the bonds, pay off the investors and issue new bonds at just 7 percent -- saving millions in interest charges. The investors would come out on the short end, because they would have to re-invest the cash at much lower rates.

Callable bonds often pay higher rates than noncallable bonds to compensate investors for this uncertainty. If you decide to buy callable bonds, just remember that the bond might be called back if interest rates drop.

Called Away

The process whereby a seller of a covered call option is obligated to surrender the underlying stock to the option buyer at the strike price of the option sold.

Candlestick Charts

A chart that displays the open, high, low, and close prices of a security for each time period and illustrates the relationship between these prices. The chart elements look like a candlestick with wicks at both ends. The actual candle portion is called the ""real body"" and is determined by the day's open and close prices. The wicks, called ""shadows,"" show the price range for the day. When the close is higher than the open, the body is colored red (if color is available) or left white. When the close is lower than the open, the body is filled in or colored black.

Capital Expenditure/Spending

Spending on plant, equipment and the like. Capital expenses usually purchase things that last more than a year; these expenses are therefore capitalized on the balance sheet, and depreciated annually. Capital spending varies widely by industry. Power utilities, cable TV firms, heavy manufacturers and the like often have large capital expenditures. Securities firms and software companies, by contrast, depend more on human resources.

Capital Gains Distribution

When mutual funds profit by selling some of the stock in their portfolio, they pass along the gains to their shareholders in the form of a capital gains distribution. Such distributions, which often mean tax trouble for investors, typically occur annually, and the net asset value of the fund falls by the amount of the distribution. Theoretically, this is a wash for investors, except the distribution is taxable.

Cash and Equivalents

Refers to how much cash the company has on hand. ""Equivalents"" means things like certificates of deposit, commercial paper and the like, which can quickly and easily be converted into cash. Cash is king, as the saying goes, and a company with a lot of cash is in a formidable position. On the other hand, large amounts of cash are a drag on performance, since most successful companies can generate a far better return on other assets than on short-term investments.

Cash at Beginning of Period

The amount of cash and cash equivalents at the beginning of the fiscal period.

Cash Flow

Net income minus preferred dividends plus depreciation (as given in the income statement). Generally speaking, cash flow is the best measure of a company's profits, and is usually calculated by adding depreciation and any other non-cash charges to earnings after taxes. Investors look to cash flow for several reasons: because firms have accounting leeway when it comes to reporting net income; because depreciation charges, while substantial in many industries, aren't genuine bills that have to be paid; and because cash flow is the key to a company's ability to pay dividends, cover debts and so forth. Thus, some analysts focus on the ratio of price to cash flow rather than the traditional price/earnings (P/E) measure. Cash flow is especially useful in assessing firms in capital intensive industries -- cable TV, for instance -- in which huge depreciation charges can hide healthy profits.

Casualty

A casualty is legally defined as when property is damaged or destroyed from a sudden and unexpected event.

Category Average Return

Calculated by adding the returns of all mutual funds in a particular category and dividing the result by the number of such funds. This gives an indication of how any one fund is performing versus comparable funds.

Category average return provides an important benchmark for fund comparisons, since it compares apples to apples and oranges to oranges. There is little point in comparing the returns of a domestic stock fund with a municipal bond fund, for example.

Churning

An unethical practice used by some brokers in which they repeatedly buy and sell in their customer's accounts for the sole purpose of generating commissions.

Class of Options

Option contracts of the same type (put or call) and style (American or European) that cover the same underlying security.

Close

The final trading price for a security or fund at the end of the most recent trading day.

Closed-End Fund

A closed-end fund is a mutual fund whose shares trade from investor to investor on an exchange like individual stocks.

Closed-end mutual funds raise money only once and offer only a fixed number of shares. Most mutual funds are open-end funds, and sell as many shares as investors want. Investors who want to sell redeem their shares through the fund.

Commission

A fee brokers charge for executing a transaction. The amount is usually based on number of shares or the total dollar amount of the trade.

Commodity

A fungible, generic item such as copper, oil, cocoa and so forth that can be bought and sold pretty much on quantity alone. Trading in commodities is a highly risky endeavor best left to professionals.

Common Stock

An ownership stake in a company. Holders of common stock shares are last in line in terms of their claim to dividends, assets, etc.

Common Stock Equity

The difference between assets and liabilities, common stock equity is another way of saying net worth. It's what would belong to the company's owners -- the holders of its common stock -- after selling the assets and paying off the creditors. Literally, paid-in capital plus retained earnings.

Company Name

The name of the organization that issued the security

Composition

A breakdown of a mutual fund's assets by investment class; in other words, how much is in stocks? How much in bonds? How much in cash?

The percentage listed as Stocks incorporates only the portfolio's straight common stocks. Cash encompasses both actual cash and cash equivalents (fixed-income securities with a maturity of one year or less). Negative percentages of cash indicate that the portfolio is leveraged, meaning it has borrowed against its assets to buy more securities or that it has used other techniques to gain excess exposure to the market. Bonds include every fixed-income security with a maturity exceeding one year, from government notes to high-yield corporate bonds. Other includes preferred stocks as well as convertible bonds and convertible preferreds.

These composition figures reveal important information about a mutual fund, including the extent to which it is living up to its billing. Does your equity fund, for instance, hold 35 percent of its assets in bonds? The composition figures are also useful for judging how bullish a fund is. A large proportion of assets in cash, for example, might indicate a defensive posture.

Concentration risk

The risk you take when you put all your money into one stock, or in your home or your business

Conglomerate

A company engaged in a variety of businesses. Conglomerates were very big in the 1960s and 1970s, but in the 1980s many were dismembered when investors realized the whole was worth less than the sum of the parts.

Consensus EPS Trend

This illustrates how the consensus estimate for a company's earnings has changed over time. Earnings estimates by analysts are important; a company that doesn't satisfy expectations can find its stock hammered.

Consensus Estimate

This is the average Earnings Per Share (EPS) estimate for a given company. It is derived by averaging the top analysts' estimated EPS figures. Consensus estimates are important because a company that doesn't satisfy expectations can find its stock hammered.

Consolidated Balance Sheet

A balance sheet that combines the assets and liabilities of the various subsidiaries of a firm into a single snapshot. Most balance sheets for large firms are consolidated.

Constant Ratio Investing

An investing strategy where investors adjust their portfolios on a regular basis to keep the ratio of stocks and bonds constant. According to ""Wealth Enhancement & Preservation,"" a Web-based database created by Robert A. Esperti and Renno L. Peterson for the National Network of Estate Planners, ""Constant-ratio investing is yet another averaging method of investing. Here you are fixing the overall allocation of stocks and other asset classes. An example might be 50 percent equities and 50 percent bonds. Each month you adjust the portfolio so that this ratio remains constant."

By sticking to the same percentage allocation week-in and week-out, you lessen the chance of being whipsawed by a sudden change in the stock market, bond market, or both.

Consumer Confidence

A US. government report that measures the level of consumer confidence based on a monthly survey of 5,000 households in USA. The report can occasionally be helpful in predicting sudden shifts in consumption patterns, though most small changes in the index are just noise. Only index changes of at least five points should be considered significant. The index consists of two subindexes - consumers' appraisal of current conditions and their expectations for the future. Expectations make up 60% of the total index, with current conditions accounting for the other 40%. The expectations index is typically seen as having better leading indicator qualities than the current conditions index.

Consumer Credit

A US.government report that measures consumer debt under three categories: auto loans, revolving loans, and credit card debt. The Consumer Credit Report is volatile and subject to massive revisions. It is also released well after every other consumer-spending indicator, including weekly chain store sales, auto sales, consumer confidence, retail sales, and personal consumption. For these reasons, the market almost never reacts to the consumer credit report.

Since we already have indications on total consumer spending well before this release, there is little to be gained from learning what portion of spending was financed through acquisition of debt. Periods of strong spending can be accompanied by relatively weak credit growth and vice versa, so this measure fails even as a coincident or lagging indicator.

Consumer Durables Sector

A category that includes auto, housewares, recreation/luxury and multi-industry companies.

Consumer Price Index

Also known as the cost-of-living index, this is a government index that measures changes in the price of typical consumer goods. The corresponding index for wholesale prices is the Producer Price Index.

Consumer Sentiment Index

An index that combines the current and expected levels of consumer confidence. This index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two components - expectations and current conditions. The expectations index is a component of the Conference Board's Leading Indicators index.

Contract Size Of An Equity Option

The amount of the underlying asset covered by the options contract. This is 100 shares for one option contract unless adjusted for a special event, such as a stock split or a stock dividend.

Contrarian

One who goes counter to the herd on the Stock Exchange. A contrarian seeks out-of-favor sectors, may sell when others buy, etc.

Convertible Security

A security that can be converted into some other kind of security. Typically this means a species of bond that can be converted into common stock at a given price at the option of the holder, who would make the conversion if the common shares rise above this price. Convertibles are attractive to investors who want the dividend and added security of a bond, but the chance to cash in on some stock gains as well. Convertibles are often issued by fast-growing companies. The difficulty of pricing convertibles leads some investors who like convertibles to invest in them via mutual funds.

Convertibles

Taxable bond funds that invest in bonds that can be converted into stock.

Corporate Bonds

Bonds issued by private corporations rather than by governments. Most corporate bonds pay somewhat higher interest than bonds backed by the full faith and credit of government entities, but government bonds usually carry tax advantages.

Jane Bryant Quinn, writing in ""Making the Most of Your Money,"" says you might want to buy a corporate bond if:

1. You're investing with tax-deferred money in your retirement plan and want more interest than Treasuries pay. Corporates are fully taxable by federal, state and local governments.

2. You want a utility bond, for its high and reliable interest payments. Quinn says one of the best ways to invest in corporate bonds is via a good, diversified mutual fund. ""Always remember, however, that to buy a long-term bond fund is to bet that interest rates won't rise over the period that you expect to hold the investment.""

Correction

A sharp, short drop in stock prices, after which the market resumes an upward climb. Of course, when the correction is happening, it's hard to distinguish from the beginnings of a bear market. That's what makes things so interesting.

Correlation

A measure of how closely two variables move together through time. For example, all utility stocks tend to have a high degree of correlation because the same forces influence their share prices. Conversely, gold stock prices are not closely correlated with utility stock prices because the two are influenced by very different factors. Thus, in building a diversified portfolio, investors often try to combine investments that aren't closely correlated with one another.

Cost Basis

The amount invested in a given security or portfolio. It's just the share price multiplied by the number of shares, plus any commission. This figure is important in determining how your investment is doing, as well as for tax purposes.

Cost of Sales

This is the cost of producing whatever it is that the company is selling. Included are materials, labor and overhead. Depreciation and similar charges are not included. Cost of sales data can provide insights into a company's operations and prospects. A maker of screwdrivers whose cost of sales is Rs. 10000/- per item is unlikely to succeed for long.

Coverage Ratio

The ratio of earnings to some given expense, such as interest or dividends paid. If a company is earning less than its dividend payout, for instance, trouble could be looming.

Covered Call

A form of option writing or selling in which the seller owns a quantity of the underlying security equivalent to the number of shares represented by the option contracts sold. A covered call position is less risky than an outright long stock position and is equivalent in its profit/loss profile to selling naked puts.

Credit risk

It's the chance that a borrower won't repay what is owed. Bond-holders face this risk, too. So do investors in money market funds, which are short-term loans in the money markets. But the risk is much greater for bondholders because the term of the debt is longer.

Credit Spread

A strategy used to collect a credit when the spread is initiated. Bullish credit spreads involve selling an out-of-the-money put and buying a further out-of-the-money put for protection. Similarly, bearish credit spreads use out-of-the-money calls.

Currency

The medium of exchange in which prices are quoted.

Currency Hedging

A tool used to protect against the risks posed by worldwide currency fluctuations.

Current (Last) Price

The current trading price of one unit of a particular security.

Current Assets

Cash, accounts receivable, inventory, and other assets that are likely to become cash within a year. Strong businesses usually have lots of current assets, although these can be a drag on performance.

Current Liabilities

Debts or other obligations coming due within a year. These should be less than current assets.

Current Offer

The price at which the owner of a security offers to sell it.

Current Ratio

Current assets divided by current liabilities from the most recent quarter. The current ratio is a measure of the firm's immediate financial health and its ability to meet current obligations. Generally, the current ratio should be 2:1 or higher; the higher the current ratio, the more conservative the firm, although a high current ratio can mean less profitability than a competing firm with a leaner current ratio. Also, like so many ratios, this one can vary by industry. Restaurant companies, for example, often have current ratios of less than 1:1, but since there is usually a delay between payment for services (which is immediate) and payments to vendors, who typically grant credit, this low ratio raises few eyebrows.

Cyclical Stock

A stock that tends to rise and fall with economic cycles. These tend to be stocks of firms that make heavy-duty items such as steel and automobiles, as well as firms such as airlines whose business increases in boom times. Other cyclicals include fibres, textiles and fertilisers. The problem for investors is that cyclical stocks are usually a leading indicator -- in other words, they run up before an economic upturn, meaning you have to be prescient to really make these work for you. What's more, expectations of a downturn can drag these same stocks right back down. Playing cyclicals effectively is a tough way to make a living.