Essentials of Financial Vocabularies

Exchange Traded Fund (ETF)

Exchange Traded Funds (ETFs) are a basket of securities that trade like individual stocks on an exchange. One of the key types of ETFs are passive ETFs, which track an underlying index. The NASDAQ-100 Index Tracking Stock (QQQ), launched in 1999, is one of the most popular ETFs as it tracks the Nasdaq-100 index which includes some of the world's biggest and fastest-growing technology companies.

Benchmark

A Benchmark refers to the performance of a predetermined set of securities, used for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy. Among the U.S. stock market, NASDAQ Composite Index is one of the most well-known large-cap stock benchmarks that tracks over 2,500 stocks, American depositary receipts and real estate investment trusts (REITs).

Index

The index is a statistical measure of changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Indexes measure the ups and downs of stocks, bonds, and some commodities markets, in terms of market prices and weighting of companies in the index. For example, the Nasdaq-100 is one of the world's preeminent large-cap growth indexes that covers 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

Balance Sheet

A balance sheet is also called the statement of financial condition. It is a summary of a company's assets, liabilities, and owners' equity. Before investing in a company, investors should understand the company's financial position by studying its balance sheet and its growth potential by analyzing alternative datasets.

Index Fund

An Index fund is an investment fund designed to match the returns on a stock market index. A mutual fund's portfolio matches that of a broad-based index such as the S&P 500 and its performance is meant to mirror the market as represented by that index.

Earnings Per Share (EPS)

Earnings per share refers to a company's profit divided by its number of common outstanding shares. If a company earning $2 million in one year had 2 million common shares of stock outstanding, its EPS would be $1 per share. In calculating EPS, the company often uses a weighted average of shares outstanding over the reporting term. The one-year (historical or trailing) EPS growth rate is calculated as the percentage change in earnings per share. The prospective EPS growth rate is calculated as the percentage change in this year's earnings and the consensus forecast earnings for next year.

EPS is an extremely important metric to measure a company's profitability. Investors should always evaluate a company's EPS and its growth potential by examining different alternative datasets before making investment choices.

Green Investing

Green investing refers to any investing activities that are associated with a dedication to promote environmentally-friendly business practices.

Private Market Value (PMV)

Private market value refers to the break-up market value of all divisions of a company if the divisions were each independent and established their own market stock prices.

Derivative

A financial contract whose value is based on, or "derived" from, a traditional security (such as a stock or bond), an asset (such as a commodity), or a market index. Derivatives can be associated with higher risk because of the use of leverage.

Blue Chip Stocks

A blue-chip index is an index that tracks the performance of a group of blue-chip companies, which are well-known companies with a history of growth and dividend payments.

Secondary Offering

A secondary offering is the sale of new shares by a company that has already made an initial public offering (IPO).

Penny Stocks

Penny stocks are used in the context of general equities. It refers to the stock that typically sells for less than $5 a share, although they may rise to as much as $10/ share after the initial public offering, usually because of heavy promotion.

Equity

Equity refers to the ownership interest in a firm. It also refers to the residual dollar value of a futures trading account, assuming its liquidation is at the going trade price.

Initial Public Offering (IPO)

Initial public offering (IPO) refers to a company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept considerable risks for the possibility of large gains.

Small-Cap

The stocks of companies whose market value is less than $1 billion. Small-cap companies tend to grow faster than large-cap companies and typically use any profits for expansion rather to pay dividends. They also are more volatile than large-cap companies, and have a higher failure rate.

Exchange

Exchange refers to a marketplace in which shares, options and futures on stocks, bonds, commodities, and indexes are traded.

Bad Debt

Bad debt refers to a debt that is written off and deemed uncollectible.

Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising.

Credit Rating

Credit rating is an evaluation of an individual's or company's ability to repay obligations or its likelihood of not defaulting.

Portfolio

A portfolio is a collection of investments, real and/or financials, owned by a particular person or organization.

Call Option

Call option is an option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying security at the given strike price, on or before the expiration date of the contract.

Dividend Income

Dividend income refers to distribution of earnings to shareholders that may be in the form of cash, stock, or property. Mutual fund dividends are paid out of income, on a quarterly basis, from interest generated by a fund's investments. It is also known as a dividend distribution.

Option

Options gives the buyer the right, but not the obligation, to or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Buyers of call options bet that a stock will be worth more than the price set by the (the strike price), plus the price they pay for the option Buyers of put options bet that the stock's price will drop the price set by the option. An option is part of a class of securities called derivatives, which means these securities their value from the worth of an underlying investment.

American Depositary Receipt (ADR)

American depositary receipts (ADR) refer to certificates issued by a US depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation.

If the ADRs are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR. "Unsponsored" ADRs do not receive such assistance. ADRs are subject to the same currency, political, and economic risks as the underlying foreign share. Arbitrage keeps the prices of ADRs and underlying foreign shares, adjusted for the SDR/ordinary ratio essentially equal.

American Depositary Share (ADS)

American Depositary Shares (ADS) are foreign stock issued in the US and registered in the ADR system.

Float

Float is the number of shares of a corporation that are outstanding and available for trading by the public, excluding insiders or restricted stock on a when-issued basis. A stock’s volatility is inversely correlated to its float.

Long

Long means when an investor has bought a contract or security to establish a market position and who has not yet closed out this position through an offsetting sale.

Short

Short refers to an investor who has sold a contract or security to establish a market position and who has not yet closed out this position through an offsetting purchase; it is the opposite of a long position.

Valuation

Valuation is the determination of the value of a company's stock based on fundamental financial conditions of the company.

Asset Class

Asset Class refers to different categories of assets, such as stocks, bonds, real estate, and foreign securities. There are three main asset classes: equity securities or stocks, fixed-income securities or bonds, and cash equivalents.

Commodities, real estate, and derivatives are other notable asset classes.

Passive Investing

Passive investing refers to putting money into a profitable business opportunity that is deemed passive by the IRS and thus benefits from tax deductions. It can also refer to an investment strategy of limiting transaction costs in a portfolio by investing for the long term. An example of this is an index fund following a broad market index.

Security

Security refers to paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds) or other investments. Security is also used as a general term to refer to a financial asset that can be bought or sold.

Cryptocurrency

Cryptocurrency refers to a digital currency created and controlled by computer programs, or algorithms. Those algorithms lay out how transactions are made and recorded, and how new coins or tokens are found and released. People and organizations known as miners keep records of every transaction and attempt to solve complex computer problems that, when solved, reward them with new coins as payment.

In effect, it is the users themselves and their vast combined computing power that record transactions directly between peers, rather than through banks or other intermediaries. That system is known as a blockchain and the transactions, and even the currencies, are sometimes referred to as “peer- to-peer”.

Arbitrage

Arbitrage is the method on the stock exchange of buying something in one place and selling it in another place at the same time, in order to make a profit from the difference in price in the two places.

Over-the-counter (OTC)

Over-the-counter (OTC) is a decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked by telephones and computers. The market is for securities not listed on a stock or derivatives exchange.

Blue-sky Laws

Blue-sky laws are state laws that cover the issue and trading of securities.

Leveraged buyout (LBO)

Leveraged buyout (LBO) is a transaction used to take a public corporation private that is financed through debt such as bank loans and bonds.