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.

Random-Walk Theory

A theory that says technical analysis is worthless because the market is simply responding to information as it becomes available, and that whatever has come before is meaningless for predicting what's ahead.

Real Return

The return on an investment after taking inflation into account. To calculate the real return, simply subtract the inflation rate from the stated return. For instance, a 12 percent annual return in a year of 5 percent inflation results in a 7 percent real return.

Receivable Turnover

The receivable ratio is total credit sales divided by accounts receivable. Receivable turnover ratio indicates how many times the receivables portfolio has been collected during the accounting period.

Receivables

What the company is owed, less any provision for bad debts. Rising receivables could indicate increasing sales, which of course is good. But rising receivables might also be a sign that debtors are paying more slowly or the company is being forced to extend more credit to sell its products, which is bad.

Record Date

The date by which you must own a stock in order to get a dividend check on the pay date. When a company plans to issue a dividend to shareholders, it announces both a pay date for the dividend and a record date. The record date usually precedes the pay date by about two weeks. If you buy the stock the day after the record date, you won't get a dividend check.

Red Herring

A preliminary prospectus issued by stock-underwriting firms to measure investor interest in a prospective stock offering. The document must contain a warning, printed in red, that the document does not contain all the information normally required by the Securities and Exchange Commission, and that some parts may be changed before the final prospectus is issued to the public.

Redemption Fee

An amount charged when money is withdrawn from a mutual fund. Unlike a back-end load, which profits the fund company, redemption fees go back into the fund itself and thus do not represent a net cost to shareholders. Redemption fees typically are charged only on withdrawals made before some relatively brief period, commonly 30, 180 or 365 days. These fees are typically imposed to discourage market timers, whose quick movements into and out of funds can be costly and disruptive.

Relative Strength

Measures the price performance of a stock in comparison to all other stocks. Many analysts believe that stocks with strong and improving relative strength tend to continue to outperform all other stocks, all other things being equal. The figure is obtained by calculating the percent price change of a stock over a particular time period and ranking it against all other stocks on a scale of 1 to 100, with 100 being best. Stocks that are ranked from 70 to 100 are considered to have good relative strength, while stocks ranked less than 50 are considered to have poor relative strength.

Repayment of Debt

Includes the payments of long-term obligations (those of more than one year's duration).

Repurchase of Capital Stock

Includes anything that involves the repurchase of common and preferred stock for the corporate treasury.

Research and Development Costs (R&D Costs)

Spending on the development of new products (or even new knowledge), or on improving products already being made. R&D costs vary widely by industry; semiconductor firms, biotechnology companies and other businesses whose products are rapidly evolving tend to have high R&D expenses. Some other industries, such as retailing, traditionally spend little on R&D. And some industries, such as newspaper publishers, probably need to spend more. By and large, companies that engage in substantial R&D are more likely to hit profit home runs than companies who skimp in this area. Intel, the enormously profitable firm that makes the brains of most personal computers, spends huge sums on R&D.

Resistance Level

A ceiling of sorts believed by technical analysts to hang over a stock -- or the entire stock market -- at some given level, perhaps as the result of purchases made before a decline. The thinking is that investors, waiting for a rebound, will get out when things have recovered enough to wipe out their losses. Thus, the stock or market is prevented from moving higher. The trading range between the support level and resistance level is known as a ""channel.""

Return

Return on investment is calculated by taking the value of the investment held at the beginning of the ROI period compared to the current value. In other words:

((Current Value) - (Beginning Value) + (Income)) / (Beginning Value), where

(Current Value) = (the current total shares) * (the last price),

(Beginning Value) = (number of shares held prior to the period - any shares sold) * (the closing price prior to the period) + the "Cost Basis" of any shares added in this period (Buys, Reinvest, Add Shares, etc), and

(Income) = any income events such as Dividends/Interest (not Reinvested) and Realized gain/loss from Sells in this period.

For example, assume that on 1/1/99 you owned 1000 shares of MSFT (which had been purchased prior to this date), the last price (on 12/31/98) was $69 11/32, and you still own the 1000 shares and the current price is $90 1/8. The ROI (YTD) for MSFT would be calculated:

((1000 * 90.125) - (1000 * 69.34375)) / (1000 * 69.34375) = 20781.25/69343.75 = 29.968%

If you had purchased 200 additional shares at $75 each during this period, the formula would be modified as follows:

((1200 * 90.125) - (1000 * 69.34375 + 200 * 75)) / (1000 * 69.34375 + >200 * 75) = 23806.25/84343.75 = 28.225%

Return On Assets (ROA)

This ratio is a measure of a firm's effectiveness in using the assets at hand in generating earnings. Return on assets should be of special interest to investors in bank stocks.

Return On Equity (ROE)

Return on equity is probably the most widely used measure of how well a company is performing for its shareholders. It's a relatively straightforward benchmark that is easy to calculate, works for the great majority of industries, and allows investors to compare the company's use of its equity with other investments. Return on equity for most companies certainly should be in the double digits, and value investors often look for 15 percent or higher. A return of more than 20 percent is considered excellent.

Return on Invested Capital

Also known as return on investment, this ratio is a measure of how effectively management is using the scarce capital at its disposal.

Return on Sales

Net income as a percentage of sales. Return on sales varies widely by industry.Like the price/cash flow ratio, return on sales can be useful in assessing cyclical companies that sometimes have no earnings during down periods, and firms whose business requires a huge capital investment, and thus lots of depreciation.

Revenue

All the money (or other items of value) that came into the company during the given period. Revenue includes everything: sales, interest income, proceeds from the sale of a subsidiary and so forth. Revenue is thus one of the most reliable items on the income statement, as opposed to net income, which is subject to various accounting and managerial judgments. But the all-inclusive nature of revenue can make it misleading. If 50 percent of revenue in a given year came from the one-time sale of some land, clearly one shouldn't assume that the business will have similar revenue in future years.

Revenue Growth

The compound annual growth rate of a company's revenues.

Revenue Growth Quarter vs. Quarter

The rate at which revenue grew from the year-ago quarter to the most recent one.

Revenue Growth Year vs. Year

The rate at which revenue grew from the previous 12 month period to the most recent one.

Revenue Growth YTD vs. YTD

The rate at which revenue grew from the year-to-date period of the previous year to the same period in the current year.

Revenue/Employee

Revenue divided by total employment at a firm. This is a measure of how labor-intensive a business might be.

Revenue/Share

Revenue divided by shares outstanding. This figure expresses revenue in terms that most investors find more meaningful, and gives a sense of what multiple of revenue investors are willing to pay for the stock.

Risk

Generically, risk is the chance that something bad will happen, and this is a perfectly apt definition in the world of investing as well. But because this leaves little room for measurement, risk in the context of investing simply refers to the variability of investment returns. The great trade-off in investing, of course, is between risk and return. Risky investments usually must offer at least some hope of a higher return than extremely safe investments. To invest successfully, it's important to understand the nature of the risks you face as well as your attitude toward them. Imagine you are a bond holder. The primary risks you face are credit risk (the chance that you won't get your money back); market risk (the chance that interest rates will soar, reducing the value of your dividends as well as of your bond); and inflation risk (the chance that rising price levels will erode the buying power of the dividends your receive). These same risks, in different forms, beset stockholders. They face company-specific risk (bad products, bad management, or bad luck, for instance); market risk (the stock market crashes and your otherwise excellent company is dragged down along with everything else); and inflation risk (which plays havoc with everything). That last one is particularly insidious. A classic mistake made by many investors is stashing all their money in safe, quiet certificates of deposit, only to discover 20 years later that their buying power has been halved. Now, as to attitude, the question is, how much risk can you take? That depends on a variety of factors. How old are you? What is your earnings potential? What is your investment horizon? Do you prefer bungee jumping, downhill skiing, walking your dog or canasta? Remember, you can moderate risk through diversification and time. Measuring the risk of anything is difficult, but as a first step, consider the return available on a risk-free investment, such as Treasury securities or a government insured certificate of deposit. Any return on an investment in excess of this is a reward for risk, or a risk premium. Standard measures of investment risk include alpha and beta.

Revenue Growth Year vs. Year

The rate at which revenue grew from the previous 12 month period to the most recent one.

Revenue Growth YTD vs. YTD

The rate at which revenue grew from the year-to-date period of the previous year to the same period in the current year.

Revenue/Employee

Revenue divided by total employment at a firm. This is a measure of how labor-intensive a business might be.

Revenue/Share

Revenue divided by shares outstanding. This figure expresses revenue in terms that most investors find more meaningful, and gives a sense of what multiple of revenue investors are willing to pay for the stock.

Risk Rank

A Value Line measure of a mutual fund's volatility. Risk Ranks are calculated for each of two broad categories; equity and partial equity funds, and taxable and tax-exempt fixed-income funds. The ranks are based on standard deviation, a measure of a fund's volatility. Value Line uses a three-year period for this calculation, which provides enough data for reliable measurement without overweighting data that is too old to be reliable. Standard deviation accounts for both positive and negative returns equally and thus gives an indication of the potential swings in a fund's performance. Because it makes no distinction between upside and downside volatility, standard deviation will tend to give a more conservative indication of the risk a fund has historically incurred. A Risk Rank of ""1"" indicates the least volatile, or least risky, funds. Conversely, a Risk Rank of ""5"" indicates the most volatile, or the most risky, funds.

Risk Tolerance

Risk tolerance basically is the amount of psychological pain you're willing to suffer from your investments. For example, if your risk propensity is high, you might feel fairly comfortable investing in futures contracts or other types of securities that can go up and down like a roller coaster. But if your tolerance for risk is low, you should stick to more conservative investments that aren't subject to wild swings in value. No investment is worth losing sleep over.

Round Trip

Buying and selling the same stock, especially in a relatively brief period.

Rule Of 72

A quick way to determine how long it take for some types of investments to double. To use the rule of 72, simply divide 72 by the yield of the proposed investment. If the investment yields 12 percent annually, it would take only six years to double your money. At 10 percent, it would take about seven years.