Here is a list of the commonly used finance terms. We are constantly updating and adding terms onto this list. Watch out for our updates in your newsletter.
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- Accretive merger: A merger in which the acquiring company’s earnings per share increase.
- Accrued interest: Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. At the time of sale, the buyer pays the seller the bond’s price plus “accrued interest,” calculated by multiplying the coupon rate by the fraction of the coupon period that has elapsed since the last payment.
- Acid ratio: Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.
- Acquisition: When a firm buys another firm.
- Acquirer: A firm or individual that is purchasing another firm or asset.
- Acquired surplus: The surplus acquired when a company is purchased in a pooling of interests combination, i.e. the net worth not considered to be capital stock.
- Acquiree: also “target”. A firm that is being acquired.
- Asset activity ratio: Ratios that measure how effectively the firm is managing its assets.
- Asset allocation mutual fund: A mutual fund that rotates among stocks, bonds, and money market securities to maximize return on investment and minimize risk.
- Autocorrection: The correlation of a variable with itself over successive time intervals. Sometimes called serial correlation.
- Automated bond system (ABS): The computerized system that records bids and offers for inactively traded bonds until they are cancelled or executed on the exchange.
- Authorised shares: Number of shares authorized for issuance by a firm’s corporate charter.
- Authority bond: A bond issued by a government agency or a corporation created to manage a revenue-producing public enterprise. The difference between an authority bond and a municipal bond is that margin protections may be incorporated in the authority bond contract as well as in the legislation that enables the authority.
- Balance Sheet: One of the three basic financial statements, the Balance Sheet presents the financial position of a company at a given point in time, including Assets, Liabilities, and Equity.
- Beta: A value that represents the relative volatility of a given investment with respect to the market.
- Bond price: The price the bondholder (the lender) pays the bond issuer (the borrower) to hold the bond (i.e., to have a claim on the cash flows documented on the bond).
- Bond spreads: The difference between the yield of a corporate bond and a U.S. Treasury security of similar time to maturity.
- Buy-side: The clients of investment banks (mutual funds, pension funds) that buy the stocks, bonds and securities sold by the investment banks. (The investment banks that sell these products to investors are known as the “sell-side.”)
- Callable bond: A bond that can be bought back by the issuer so that it is not committed to paying large coupon payments in the future.
- Call option: An option that gives the holder the right to purchase an asset for a specified price on or before a specified expiration date.
- Capital Asset Pricing Model (CAPM): A model used to calculate the discount rate of a company’s cash flows.
- Commercial bank: A bank that lends, rather than raises money. For example, if a company wants $30 million to open a new production plant, it can approach a commercial bank like Bank of America or Citibank for a loan. (Increasingly, commercial banks are also providing investment banking services to clients.)
- Commercial paper: Short-term corporate debt, typically maturing in nine months or less.
- Commodities: Assets (usually agricultural products or metals) that are generally interchangeable with one another and therefore share a common price. For example, corn, wheat, and rubber generally trade at one price on commodity markets worldwide.
- Common stock: Also called common equity, common stock represents an ownership interest in a company. (As opposed to preferred stock, see below.) The vast majority of stock traded in the markets today is common, as common stock enables investors to vote on company matters.
- Comparable transactions (comps): A method of valuing a company for a merger or acquisition that involves studying similar transactions.
- Convertible preferred stock: A relatively uncommon type of equity issued by a company, convertible preferred stock is often issued when it cannot successfully sell either straight common stock or straight debt. Preferred stock pays a dividend, similar to how a bond pays coupon payments, but ultimately converts to common stock after a period of time. It is essentially a mix of debt and equity, and most often used as a means for a risky company to obtain capital when neither debt nor equity works.
- Capital market equilibrium: The principle that there should be equilibrium in the global interest rate markets.
- Convertible bonds: Bonds that can be converted into a specified number of shares of stock.
- Cost of Goods Sold: The direct costs of producing merchandise. Includes costs of labor, equipment, and materials to create the finished product, for example.
- Coupon payments: The payments of interest that the bond issuer makes to the bondholder.
- Credit ratings: The ratings given to bonds by credit agencies. These ratings indicate the risk of default.
- Currency appreciation: When a currency’s value is rising relative to other currencies.
- Currency depreciation: When a currency’s value is falling relative to other currencies.
- Currency devaluation: When a currency weakens under fixed exchange rates.
- Default premium: The difference between the promised yields on a corporate bond and the yield on an otherwise identical government bond.
- Default risk: The risk that the company issuing a bond may go bankrupt and “default” on its loans.
- Derivatives: An asset whose value is derived from the price of another asset.
- Dilutive merger: A merger in which the acquiring company’s earnings per share decrease.
- Disclosure: A company’s release of all information pertaining to the company’s business activity, regardless of how that information may influence investors.
- Discount (markets)
- Convertible: Difference between gross parity and a given convertible price. Most often invoked when a redemption is expected before the next coupon payment, making it liable for accrued interest. Antithesis of premium.
- General: Information that has already been taken into account and is built into a stock or market.
- Straight equity: Price lower than that of the last sale or inside market.
- Discount rate: A rate that measures the risk of an investment. It can be understood as the expected return from a project of a certain amount of risk.
- Discounted Cash Flow analysis (DCF): A method of valuation that takes the net present value of the free cash flows of a company.
- Dividend: A payment by a company to shareholders of its stock, usually as a way to distribute some or all of the profits to shareholders.
- Earnings momentum: An increase in the earnings per share growth rate from one reporting period to the next.
- EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.
- EBT: A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of income taxes.
- Enterprise Value: Levered value of the company, the Equity Value plus the market value of debt.
- EPS (earnings per share): 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.
- Equity: In short, stock. Equity means ownership in a company that is usually represented by stock.
- Fed: The Federal Reserve Board, which gently (or sometimes roughly) manages the country’s economy by setting interest rates.
- Fixed income: Bonds and other securities that earn a fixed rate of return. Bonds are typically issued by governments, corporations and municipalities.
- Float: The number of shares available for trade in the market times the price. Generally speaking, the bigger the float, the greater the stock’s liquidity.
- Floating rate: An interest rate that is benchmarked to other rates (such as the rate paid on U.S. Treasuries), allowing the interest rate to change as market conditions change.
- Forward contract: A contract that calls for future delivery of an asset at an agreed-upon price.
- Forward exchange rate: The price of currencies at which they can be bought and sold for future delivery.
- Forward rates (for bonds): The agreed-upon interest rates for a bond to be issued in the future.
- Futures contract: A contract that calls for the delivery of an asset or its cash value at a specified delivery or maturity date for an agreed upon price. A future is a type of forward contract that is liquid, standardized, traded on an exchange, and whose prices are settled at the end of each trading day.
- Glass-Steagall Act: Part of the legislation passed during the Depression (Glass Steagall was passed in 1933) designed to help prevent future bank failure – the establishment of the F.D.I.C. was also part of this movement. The Glass-Steagall Act split America’s investment banking (issuing and trading securities) operations from commercial banking (lending). For example, J.P. Morgan was forced to spin off its securities unit as Morgan Stanley.
- Goodwill: An account that includes intangible assets a company may have, such as brand image.
- Hedge: To balance a position in the market in order to reduce risk. Hedges work like insurance: a small position pays off large amounts with a slight move in the market. High-yield bonds (a.k.a. junk bonds): Bonds with poor credit ratings that pay a relatively high rate of interest.
- Holding Period Return: The income earned over a period as a percentage of the bond price at the start of the period.
- Income Statement: One of the four basic financial statements, the Income Statement presents the results of operations of a business over a specified period of time, and is composed of Revenues, Expenses, and Net Income.
- Initial public offering (IPO): The dream of every entrepreneur, the IPO is the first time a company issues stock to the public. “Going public” means more than raising money for the company: By agreeing to take on public shareholders, a company enters a whole world of required SEC filings and quarterly revenue and earnings reports, not to mention possible shareholder lawsuits.
- Investment grade bonds: Bonds with high credit ratings that pay a relatively low rate of interest.
- Leveraged buyout (LBO): The buyout of a company with borrowed money, often using that company’s own assets as collateral. LBOs were the order of the day in the heady 1980s, when successful LBO firms such as Kohlberg Kravis Roberts made a practice of buying up companies, restructuring them, and reselling them or taking them public at a significant profit. LBOs are now somewhat out of fashion.
- Liquidity: The amount of a particular stock or bond available for trading in the market.
- The Long Bond: The 30-year U.S. Treasury bond. Treasury bonds are used as the starting point for pricing many other bonds, because Treasury bonds are assumed to have zero credit risk take into account factors such as inflation.
- Market cap(italization): The total value of a company in the stock market (total shares outstanding x price per share).
- Money market securities: This term is generally used to represent the market for securities maturing within one year. These include short-term CDs, Repurchase Agreements, Commercial Paper (low-risk corporate issues), among others. These are low risk, short-term securities that have yields similar to Treasuries.
- Mortgage-backed bonds: Bonds collateralized by a pool of mortgages. Interest and principal payments are based on the individual homeowners making their mortgage payments. The more diverse the pool of mortgages backing the bond, the less risky they are.
- Moody’s rating: Moody’s Long-term Corporate Obligation Ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of 1 year or more. The ratings reflect both the likelihood of default and any financial loss suffered in the event of default. Moody’s rating is widely used in the financial world along with S&P Ratings.
- Moody’s Investment Grade: Aaa → Aa1 → Aa2 → Aa3 → A1 → A2 → A3 → Baa1 → Baa2 → Baa3
- Moody’s Speculative Grade: Ba1 → Ba2 → Ba3 → B1 → B2 → B3 → Caa1 → Caa2 → Caa3 → Ca → C
- Moral hazard: The risk that the existence of a contract will change the behavior of one or both parties to the contract, e.g. an insured firm will take fewer fire precautions.
- Multiples method: A method of valuing a company that involves taking a multiple of an indicator such as price-to-earnings, EBITDA, or revenues. Municipal bonds: Bonds issued by local and state governments, a.k.a., municipalities. Municipal bonds are structured as tax-free for the investor, which means investors in muni’s earn interest payments without having to pay federal taxes. Sometimes investors are exempt from state and local taxes, too. Consequently, municipalities can pay lower interest rates on muni bonds than other bonds of similar risk.
- Net present value (NPV): The present value of a series of cash flows generated by an investment, minus the initial investment. NPV is calculated because of the important concept that money today is worth more than the same money tomorrow. Non-convertible preferred stock: Sometimes companies issue non-convertible preferred stock, which remains outstanding in perpetuity and trades like stocks. Utilities represent the best example of non-convertible preferred stock issuers.
- Par value: The total amount a bond issuer will commit to pay back when the bond expires.
- P/E ratio: The price to earnings ratio. This is the ratio of a company’s stock price to its earnings-per-share. The higher the P/E ratio, the more “expensive” a stock is (and also the faster investors believe the company will grow). Stocks in fastgrowing industries tend to have higher P/E ratios.
- Pooling accounting: A type of accounting used in a stock swap merger. Pooling accounting does not account for Goodwill, and is preferable to purchase accounting. Prime rate: The average rate U.S. banks charge to companies for loans. Purchase accounting: Atype of accounting used in a merger with a considerable amount of cash. Purchase accounting takes Goodwill into account, and is less preferable than pooling accounting.
- Put option: An option that gives the holder the right to sell an asset for a specified price on or before a specified expiration date.
- Securities and Exchange Commission (SEC): A federal agency that, like the Glass-Steagall Act, was established as a result of the stock market crash of 1929 and the ensuing depression. The SEC monitors disclosure of financial information to stockholders, and protects against fraud. Publicly traded securities must first be approved by the SEC prior to trading.
- Securitize: To convert an asset into a security that can then be sold to investors. Nearly any income-generating asset can be turned into a security.
- Selling, General & Administrative Expense (SG&A): Costs not directly involved in the production of revenues. SG&Ais subtracted from Gross Profit to get EBIT. Spot exchange rate: The price of currencies for immediate delivery.
- Shares: Certificates or book entries representing ownership in a corporation or similar entity.
- Shares authorised: The maximum number of shares of stock of a company allowed in the articles of incorporation, which may be changed only by a shareholder vote.
- Shareholder: Person or entity that owns shares or equity in a corporation.
- Shareholder’s equity: A company’s total assets minus total liabilities. A company’s net worth is the same thing.
- Shareholder’s letter: A section of an annual report where one can find general overall discussion by management of successful and failed strategies. Provides guidance for looking at specific parts of the report.
- Shark watcher: Often used in risk arbitrage. Firm specializing in the early detection of takeover activity. Such a firm, whose primary business is usually the solicitation of proxies for client corporations, monitors trading patterns in a client’s stock and attempts to determine the identity of parties accumulating shares.
- Sharpe benchmark: A statistically created benchmark that adjusts for a manager’s index-like tendencies. Named after William Sharpe, Nobel Laureate, and developer of the capital asset pricing model.
- Sharpe ratio: A measure of a portfolio’s excess return relative to the total variability of the portfolio.
- Shelf offering: Offering of registered securities covered by a prospectus whose distribution is not underwritten on a firm commitment basis. The shares may be sold in one block or in small amounts from time to time in agency or principal transactions.
- Shelf registration: A procedure that allows firms to file one registration statement covering several issues of the same security. SEC Rule 415, adopted in the 1980s, allows a corporation to comply with registration requirements up to two years prior to a public offering of securities. With the registration “on the shelf,” the corporation, by simply updating regularly filed annual, quarterly, and related reports to the SEC, can go to the market as conditions become favorable with a minimum of administrative preparation and expense.
- Shell corporation/shell company: An incorporated company with no significant assets or operations, often formed to obtain financing before beginning actual business, or as a front tax evasion.
- Statement of Cash Flows: One of the four basic financial statements, the Statement of Cash Flows presents a detailed summary of all of the cash inflows and outflows during a specified period.
- Stock: Ownership in a company.
- Stock swap: A form of M&A activity in whereby the stock of one company is exchanged for the stock of another.
- Swap: A type of derivative, a swap is an exchange of future cash flows. Popular swaps include foreign exchange swaps and interest rate swaps.
- Tender offers: A method by which a hostile acquirer renders an offer to the shareholders of a company in an attempt to gather a controlling interest in the company. Generally, the potential acquirer will offer to buy stock from shareholders at a much higher value than the market value.
- Treasury securities: Securities issued by the government.
- Underwrite: The function performed by investment banks when they help companies issue securities to investors. Technically, the investment bank buys the securities from the company and immediately resells the securities to investors for a slightly higher price, making money on the spread.
- Yield: The annual return on investment. A high-yield bond, for example, pays a high rate of interest.
- Yield to maturity: The measure of the average rate of return that will be earned on a bond if it is bought now and held to maturity.
- Yield to call: The yield of a bond calculated up to the period when the bond is called (paid off by the bond issuer).
- Zero coupon bonds: A bond that offers no coupon or interest payments to the bondholder.
- 10K: An annual report filed by a public company with the Securities and Exchange Commission (SEC). Includes financial information, company information, risk factors, etc.
- 10Q: Quarterly report required by the SEC each quarter. Provides a comprehensive overview of a company’s state of business.
- 401(K): US term. Under section 401(K) of the Internal Revenue Code, a deferred compensation plan set up by an employer so that employees can set aside money for retirement on a pre-tax basis. Employers may match a percentage of the amount that employees contribute to the plan. Contributions by both employees and employers, as well as investment earnings and interest, are not taxed until the employee withdraws the money; if the employee withdraws the money before retirement age, he or she pays an early withdrawal penalty tax. Currently, employees are allowed to annually contribute up to 15 percent of their salary but no more than $11,000 ($12,000 for people 50 or older). Many employers now offer these deferred compensation plans in lieu of or in addition to pensions.
Source: Nasdaq, NYSE, Vault
Compiled by City Sail blog contributors. All rights reserved.