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.

Managed Futures

A managed account or fund in which professional money managers trade futures and forward contracts. Futures and forward contracts may represent agricultural products, bonds, cattle, currencies, financial instruments, gold, hogs, oil, silver, stock indexes and so on. They are actually contracts of delivery or receipt for a particular commodity between the seller and buyer of the contracts. You may trade these contracts individually, assuming all of the potential risk and reward for each contract, or invest collectively with other individuals in a managed account or fund, thus sharing the potential risk and rewards of many different contracts among investors.

Manager Tenure

How many years a mutual fund manager has been running the fund. This is useful for determining how much of a fund's performance is attributable to its current management. A tenure of zero means the manager has been running the fund for less than one year.

Margin Account

A brokerage account that lets an investor buy securities on credit or borrow against securities held in the account. Interest is charged on such borrowing, but usually at attractive rates compared with other forms of debt. Trading on margin can enhance investment returns considerably, but like all leveraged activities, can also backfire -- if your stocks go down, for instance. The trick is to make more investing the borrowed funds than they are costing you. SECP & Stock Exchange regulations limit the extent to which margin can be used in equities trading.

Margin Call

A somewhat dreaded call for additional capital to bolster the equity in an investor's margin account. Say you've bought 100 shares of XYZ Corp. at Rs.10 each, for a total of Rs.1,000. You borrowed half of this from your broker. Now let's say XYZ falls to Rs.9. That means Rs 900 in equity is available to cover a Rs.500 debt, which sounds fine except the broker might require that lending not exceed 50%. Thus, you're now Rs.100 short of the minimum equity to maintain your margin position. If you can't provide additional cash or securities, the broker will sell your XYZ shares.

Marginal rate

That's the highest percentage rate at which any of your income is taxed. "Marginal" usually refers to the increase you see in one category of anything from an increase in another: In this case, it's the highest tax rate that applies to any of your income exceeding a level set by tax law.

Market Cap. Composition

Breaks down the fund's net assets by market capitalization. Answers the question: What proportion is invested in big companies, small companies, etc.

Market Capitalization

The value of a company's outstanding shares, as measured by shares times current price. Speaking very generally, the larger the market capitalization, the safer the company. Firms with very small market capitalization can be unusually risky.

Market Efficiency

The extent to which securities prices reflect what's known and adjust promptly to what becomes known. With modern telecommunications, a vigorous business press and a large number of buyers and sellers, American securities markets are pretty efficient, but there is perennial debate surrounding the question: how efficient? Absolutists (advocates of the efficient market hypothesis) contend that the markets are utterly efficient, meaning that all available information is already discounted in prices. The implication is that it isn't possible for an investor to ""beat"" the market without some secret inside information, or perhaps clairvoyance.

Market Order

An order to purchase or to sell at the best available price. At-the-market orders must be executed immediately, and therefore take precedence over all other orders. Market orders to buy tend to be executed at the ask price, and market orders to sell tend to be executed at the bid price.

Market Value (Current)

Also known as market capitalization, this is simply the market value of all a company's outstanding shares (in other words, price times shares). It's a rough estimate of what a company is worth, but bear in mind that someone trying to buy the whole thing would probably have to pay a premium over this figure.

Marketability risk

It's the chance that there will be no ready market for your investment if you want to sell it in a hurry. That's certainly a big risk if you buy a piece of land. Or if you buy a stock that is very thinly traded. But it is not a risk when you buy a mutual fund, which you can sell back on any business day.

Maturity

Maturity is the date on which the bond's principal must be repaid. Note that this is the face amount, regardless of what you might have paid for the issue.

Mean

The annualized average monthly return from which the standard deviation is calculated. The mean will not be exactly the same as the annualized trailing, three-year return figure for the same year. (Technically, the mean is an annualized arithmetic average while the total return figure is an annualized geometric average.)

Mean Recommendation

An arithmetic average of analysts' buy-sell recommendations for a given stock.

Median Market Cap

Gives a measure of the size of companies in which a mutual fund invests. Half the companies in the fund have a market capitalization larger than this number, and half have a market cap that is smaller. (Market capitalization is just the total market value of all outstanding shares.)

Minimum Initial Purchase

The smallest sum a fund will accept to establish a new account

Minimum Subsequent Purchase (Regular)

The smallest additional investment permitted by a given mutual fund.

Minority Interest

Represents par or the stated value of the subsidiary stock not owned by the parent company plus the minority interest's equity in the surplus of the subsidiary. This item includes preferred dividend averages on the minority preferred stock (preferred shares not owned by the reporting parent company). Minority interest also refers to stockholders who own less than 50% of a subsidiary's outstanding voting common stock. The minority stockholders hold an interest in the subsidiary's net assets and share earnings with the parent company.

Misc. Revenue Sector

A category that includes miscellaneous revenue bonds.

Modern Portfolio Theory

A sophisticated investment approach developed by University of Chicago economist Harry Markowitz, who won a Nobel Prize in 1990, also called ""portfolio management theory"" or simply ""portfolio theory."" According to ""Wealth Enhancement & Preservation,"" ""Portfolio theory allows investors to estimate both the expected risks and returns, as measured statistically, for their investment portfolios. In his article 'Portfolio Selection' (in the Journal of Finance, in March 1952), Markowitz described how to combine assets into efficiently diversified portfolios. He demonstrated that investors failed to account correctly for the variance among security returns. It was his position that a portfolio's risk could be reduced and the expected rate of return could be improved if investments having dissimilar price movements were combined. For example, some companies' stock tends to follow in step with overall economic trends. These are referred to as cyclical stocks. Other companies tend to do well when the economy does poorly, and these are known as counter-cyclicals. Holding securities that tend to move in concert with each other does not lower your risk. 'Diversification reduces risk only when assets are combined whose prices move inversely, or at different times, in relation to each other.' "" In other words, Markowitz explained how to best assemble a diversified portfolio, and proved that such a portfolio would likely do well. Markowitz also proved that, all things being equal, the portfolio with the least amount of volatility would do better than one with a greater amount of volatility.

Momentum

The underlying power or thrust behind an upward or downward price movement. Momentum is represented on a chart as a line that is continually fluctuating above and below a horizontal equilibrium level that represents the halfway point between the extreme readings. Momentum is a generic term embracing many different technical indicators, such as the RelativeThe underlying power or thrust behind an upward or downward price movement. Momentum is represented on a chart as a line that is continually fluctuating above and below a horizontal equilibrium level that represents the halfway point between the extreme readings. Momentum is a generic term embracing many different technical indicators, such as the Relative Strength Index and Stochastic Oscillators.

Money Flow

A technical indicator that keeps a running total of the money flowing into and out of a security. Money flow (MF) is calculated daily by multiplying the number of shares traded by the change in closing price. If prices close higher, money flow is a positive number. If prices close lower, money flow is a negative number. A running total is kept by adding or subtracting the current result from the previous total. When using MF to trade, the direction of the MF line is the thing to watch, not the actual ruppee amount. This indicator will often confirm underlying strength or weakness of a price trend. It may also signal a top by declining while the stock is still rising, indicating big money is leaving the stock. Conversely, when MF rises in the face of a declining price trend could indicate smart money is moving in and a bottom may be at hand.

Money Market Fund

A highly liquid mutual fund that invests in very short-term securities, such as Treasury bills, certificates of deposit and commercial paper. The share price is kept stable at Rs.1, and interest is paid at competitive rates. Money market funds have been a great succes in the US market and have taken billions upon billions of dollars in deposits away from banks in recent years, even though they aren't government insured. (Total money market fund assets stood at $1.027 trillion for the week ended October 1, 1997.) Many even offer check-writing.

Most-Active List

The stocks with the highest trading volume on a given day.

Moving Average

The average price of a security over the previous days or years. For example, a 50-day moving average is the average price of a security over the past 50 days. This gives an indication of a security's price trend. For technical analysts, a 200-day moving average is a standard longer term measure, and often this is compared with a 50-day or even 5-day moving average in an effort to gain insight into the direction of a stock. When the short-term average moves above the long-term average, it's considered a buy signal. When the short-term average is below the long-term average, it's considered time to get out.

Moving Average Envelope

A trading band (upper and lower lines) plotted on top of a security's price chart at a specified percentage above and below a selected moving average. Moving averages show the average value of a security's price over a period of time. The value is calculated by totaling all the previous closing prices over a time period and dividing them by the number of closing prices (bars) included in that time period. Depending upon the number of bars you use to calculate this figure, these lines may be very sharp (7 or 12 day moving average), or very smooth (40 day moving average). When using Investor charts to study moving average envelopes, you can select whatever moving average and deviance percentage (determines how wide the envelope is) works best for your investing strategy.

Mutual Fund

An enterprise that pools funds from customers and invests them in a portfolio of securities, theoretically in keeping with the goals and principals stated in its prospectus. Mutual funds are increasingly the vehicle of choice for lay investors seeking a return on their savings. One reason is the staggering array of choices offered by the mutual fund industry.In developed markets there are funds of every conceivable variety and risk level, but they fall into a few broad categories. Stock funds might be considered value or growth; the former are more conservative than the latter. Looked at a different way, stock funds also specialize in small, medium or large size firms, or firms in a particular sector, such as computers or health care or financial services. There are also many kinds of bond funds, as well as funds that invest in a mix of stocks and bonds. Most funds are professionally managed, but some index funds are run more or less by computer, since they seek only to match a market index, such as the Standard & Poor's 500. Finally, there are money-market funds, which many people don't even think of as mutual funds. In choosing a mutual fund, consider the fund's track record, the tenure of its manager, and the level of fees charged. There is no evidence that funds charging a hefty load, or investment fee, outperform those that don't, so it's hard to justify load funds. Most funds are ""open end"" funds, but some are ""closed end,"" meaning they trade like stocks from investor to investor.