Glossary

 
Glossary and List of Abbreviations

Jack's glossary gives more than just strict definitions. It tells how each term is meaningful and how it is used.

Amortization - A charge against earnings over an extended period of time to recognize the value paid for an intangible asset such as a trademark or "goodwill."

Asset - Informally, something that a company can use to generate income. It may be tangible, like a truck or building, or intangible, like a trade name, patent, or "goodwill."

Auditor's Report - A statement found in a publicly held corporation's annual report. It is issued by an accounting firm which has audited the corporation's financial statements. It states an opinion as to whether the auditing firm believes the financial statements represent an accurate picture of the corporation's financial condition and performance.

Beneficial Owner - One who legally owns or controls stock or has the ability to own or control stock through the exercise of stock options.

Book Value - The net value of a firmís assets minus its liabilities. It includes both tangible and intangible assets and is often given on a per share basis. Usually a firm's stock will sell at a price higher than its book value per share.

Cash Flow Statement - The financial statement that tells the actual amount of money flowing in and out of a company. It is divided into 3 sections, operating cash flow, investment cash flow, and financing cash flow. Operating cash flow is the one that is usually the most useful to investors.

CDO - see Collateralized Debt Obligation

CLO - see Collateralized Debt Obligation

CMO - see Collateralized Debt Obligation

Collateralized Bond Obligation - see Collateralized Debt Obligation

Collateralized Debt Obligation (CDO) - A general term for Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations. Each is a collection of the bonds, loans or mortgages packaged together for the sake of diversification, then sold in shares, like a stock. In theory, riskier packages pay higher yields.

Collateralized Loan Obligation - (CLO) see Collateralized Debt Obligation

Collateralized Mortgage Obligation - (CMO) see Collateralized Debt Obligation

Credit Default Swap (CDS) - A contract between two parties in which one party purchases insurance from another against a credit default of a third party. E.g., a hedge fund might buy a CDS from an insurance company that would make good on an investment in Ford Company bonds if Ford defaulted on its payments to the hedge fund. Most CDSs are not exchange traded.

Death Cross - In technical analysis, the point where a stock or index's 50-day moving average crosses below its 200-day moving average, indicating a possible prolonged downtrend. Contrasted with Golden Cross.

Depreciation - A charge against earnings over an extended period of time to recognize that a tangible asset, such as a building or truck, is losing value as it wears out. The implication is that the asset will eventually have to be replaced, and this will cost money. Depreciation does not actually use cash in the period in which it is charged.

Derivative - A financial instrument the value of which is based on, or derived from, another security, such as a stock, bond, commodity or market index. Examples of derivative securities include, exchange traded stock options and index options, credit default swaps and interest-rate swaps. Some derivatives are traded on exchanges, like the Chicago Board Options Exchange. Exchanges provide assurance that the parties involved in these transactions can hold up their end of an agreed transaction.

Earnings Per Share (EPS) - A company's total net profits divided by the total number of shares outstanding. It is generally considered the most useful measure of a company's profitability. If a company has preferred stock, preferred dividends are subtracted before calculating EPS for the common stock.

Earnings Yield - A stock's earnings per share divided by its price, expressed as a percentage. It shows what percentage return the company earns on the money invested in it right now, without consideration of past equity or assets. It is the inversion of a P/E.

EBITDA - A measurement of earnings before interest, taxes, depreciation, and amortization are subtracted. It is a useful measure of the basic profitability of a company. Often erroneously equated (even by analysts) with operating cash flow.

ECRI - Economic Cycles Research Institute.

Economic Cycles Research Institute - A research firm that tracks economic cycles in the U.S. It has a good, but not perfect, record of predicting recessions and the end of recessions.

Efficiency Ratio - A bank's total Non-Interest Expense as a percentage of Net Interest Income + Non-Interest Income. Lower is better. 50% is considered excellent.

EPS - See Earnings Per Share.

FFO - See Funds From Operations.

Footnote - Information pertaining to financial statements, and located just below them, that may contain important facts affecting the interpretation of the financial statements.

Form 144 - A form on which holders of "restricted stock" notify the SEC of their intention to sell restricted stock. Holders of restricted stock are usually, but not always, Insiders.

Form 4 - The form on which an Insider reports changes in stock ownership to the SEC.

Free Cash Flow - A stock analyst's term with a definition that varies somewhat depending on the particular analyst. It usually approximates operating cash flow minus necessary capital expenditures. It is, in general, supposed to measure how much cash a company has left over after making payments necessary to maintain normal operations.

Funds From Operations (FFO) - A measure of financial performance used by Real Estate Investment Trusts. It consists of net earnings with some depreciation and amortization charges added back. It does not equate to GAAP earnings or cash flow. FFO is sometimes criticized because it is subject to some manipulation in how it is applied. GAAP earnings, however, are also subject to manipulation. If conservatively applied, FFO is a fair and useful measurement in light of the fact that real estate has important attributes not shared by other investments.

GAAP (Generally Accepted Accounting Principles) - A set of accounting standards agreed upon by the professional accounting industry. These standards are designed to ensure that financial statements are reasonably accurate representations of a company's financial condition and performance. There is, however, a great deal of leeway in the application of GAAP, and adherence to GAAP does not guarantee a company's financial statements won't fail to show financial problems. Lack of adherence to GAAP, however, is a virtual giveaway that a company's financial statements can't be relied upon.

Golden Cross - In technical analysis, the point where a stock or index's 50-day moving average crosses above its 200-day moving average, indicating a possible sustained uptrend. Contrasted with Death Cross.

Goodwill - The price paid for a company in excess of the value of its tangible assets, patents, and trademarks. If you paid $200,000 for a business wherein the building and machines were the only assets and were worth $150,000, the remaining $50,000 would be "goodwill." It represents, in theory, the intangible value the business accumulated by its relationships with customers, etc. Goodwill is amortized as an expense over a period of years, not to exceed 40.

Hedonic Price Index and Hedonic Deflators - A statistical methodology the U.S. Government uses to adjust GDP output. Certain products, like computers, are indexed to a benchmark year and the reported GDP dollar value of their current year sales are increased by a multiplier based on the benchmark year. The stated purpose of the deflators is to account for the fact that the computers are better than they were the year the benchmark was created.

The problem with this approach is that "better" is a matter of utility and is by its very nature a subjective measure, although some hard metrics may be applied (like processor speed, e.g.). However, economics has a measure of utility, called "utils" while GDP is measured in dollars.

Hedonic measures, distort GDP. For example if in 2012 the U.S. had $120 billion in actual computer sales, but those making the adjustments determine that computers are three times better than they were in the 1990s when the base year of the index was set, the deflator multiplier would be 3, and the U.S. would report $360 billion in computer sales, rather than the actual $120 billion.

The German Bundesbank once complained that if they calculated GDP the way we did, their GDP growth would be 0.5% higher. Long-term studies of the use of this methodology suggest that the total collective distortion of GDP over the life of these deflators is enormous.

Insider - A person or entity who is presumed by law to be privy to non-public information about the internal operations and plans of a corporation. An insider is usually an officer or director of a corporation, but may also be an advisor, broker, or a beneficial owner of 10% or more of  a class of a corporationís stock. Insiders are required to report to the SEC, when they buy or sell their company's stock or options.

Insider Trading (illegal) - The act of trading securities based on important corporate developments not known to the public. This is usually done by passing the inside information to a person who is not a corporate Insider, in order to avoid the scrutiny of the SEC.

Insider Transaction - The purchase or sale of securities of a corporation, or the exercise of stock options, by a company insider. This is perfectly legal as long as proper notification is made to the SEC.

Interest-Rate Swap - A contract between two parties in which a party with a variable rate loan (from a third party) swaps it for a fixed rate loan, or in which the parties exchange payments if the variable rate goes above or below agreed upon thresholds. In effect, the party with the variable rate loan is paying for insurance that its interest payments will stay within a predictable range.

Liability - Informally, a debt or obligation of a company.

Limit Order - An order placed with a stock broker to buy or sell a stock at a maximum or minimum price. A buy limit order is normally used to buy a stock at any price below the limit you set. A sell limit order is normally used to sell a stock at any price above the limit you set.

MBS - see Mortgage Backed Security.

Mortgage-Backed Security (MBS) - A security in which many mortgages are packaged together for the sake of diversification, then sold in shares, like a stock; a Collateralized Mortgage Obligation.

OCF - See Operating Cash Flow.

Operating Cash Flow (OCF) - The inflows and outflows of cash from the normal sales operations of a business. It differs from  earnings because earnings may be increased by orders for which payment has not yet been received. Unpaid orders don't increase operating cash flow. OCF also differs from earnings in that earnings are reduced by charges, such as depreciation or amortization, that do not actually reduce cash in the period the charge occurs.

Options - See Stock Options.

Payout Ratio - The percentage of a company's earnings it pays out in dividends to shareholders. A lower payout ratio indicates that the company keeps more money available for other corporate needs, such as capital spending for growth. It also indicates a margin of safety for the dividends, or the ability to raise dividends in the future. A payout ratio that is too high may indicate that a company is not reserving enough for necessary corporate expenditures, and might have to cut the dividend in the future. What constitutes a good payout ratio depends on factors such as the type of business, the normal level of necessary capital investment, and the predictability of cash flows.

P/E - See Price/Earnings Ratio.

PEG - See Price/Earnings-To-Growth Ratio.

PPT - See Plunge Protection Team

Plunge Protection Team -  The nickname given to The Working Group On Financial Markets, a governmental body created during the Reagan Administration for the stated purpose of maintaining financial markets stability. It is allowed to buy and sell securities in U.S. securities markets and does not publish its actions. It executes its actions through major investment banks like Goldman Sachs and Morgan Stanley, which it also pays to "maintain liquidity."

Price/Earnings Ratio (P/E) - The price of a stock divided by its yearly earnings. A stock selling at $12 per share that earns $1 per share has a P/E of 12. A P/E is, in effect, a measure of investors' expectations for a stock's performance. Stocks with high P/Es are ones from which investors expect high future growth rates. Low P/Es imply that investors expect low growth. For a greater understanding of the implications of a P/E, please see the article, "The Deep Logic of PEG" on this web site.

Price/Earnings-to-Growth Ratio (PEG) - A company's price/earnings ratio divided by its earnings growth rate. A company with a P/E of 40 and an earnings growth rate of 20% annually would have a PEG of 2. The higher the PEG, the more danger that a stock is overpriced. For more on this subject, please see the article, "The Deep Logic of PEG" on this web site.

Proxy Statement - A document sent to shareholders of a company. It contains proposals to be voted upon by shareholders. It also contains useful information about compensation of corporate officers and ownership of stock and stock options by company officers and directors.

Real Estate Investment Trust (REIT) - A portfolio of professionally managed real estate properties securitized into stock-like units, distributable for wide public ownership. Usually designed principally to provide current income.

Recapture Rule - The SEC rule that allows the SEC to recapture gains made (or losses avoided) by an Insider who trades based on non-public information. A recapture enforcement is a civil action, not a criminal one, and is rare.

REIT - See Real Estate Investment Trust.

Relative Strength Index - a graphic market indicator in the form of an oscillator that measures the natural ebb a flow of strength within a stock's primary trend.

Restricted Stock - Stock which may not be sold for a certain period of time. It is usually owned by corporate Insiders. The holder of restricted stock must notify the SEC prior to selling it by filing a Form 144.

Return on Equity (ROE) - The ratio of a company's annual net income to the equity on its balance sheet. ROE is usually measured using the equity on the balance sheet at the end of the prior year, since the current year's income increases the current year's equity, thereby making the percentage return look smaller. ROE of about 15% is usually considered the sign of a well-managed company. ROE should not be confused with profit margin or return on assets.

Return on Assets (ROA) - The ratio of a company's annual net income to the total assets on its balance sheet. ROA is usually measured using the assets on the balance sheet at the end of the prior year, since the current year's income increases the current year's assets, thereby making the percentage return look smaller. What may be considered a good percentage return on assets varies widely with the industry in question.

ROA - see Return on Assets

ROE - see Return on Equity

ROI - See Return On Investment.

RSI - See Relative Strength Index

SEC (Securities and Exchange Commission) - A regulatory body of the Federal Government that oversees the financial markets.

Securitize (Securitization) - The practice of packaging a number of assets, such as mortgages, into a group, and dividing the collective asset into shares, like a stock, for sale to the public.

Short Sale - An action wherein a party, by agreement, borrows stock and sells it, hoping to buy it back later in the open market at a lower price before returning it to the lending party. The difference in the sell price and the later buy price, if lower, is profit. Short-selling is speculative and is suitable only for very well-informed and well capitalized investors. It can result in margin calls and substantial losses for the unwary.

Stock Options - Securities issued by a company -- usually to its officers and directors -- that allow the holder to buy stock in the company at a specified price during a specified period of time. They are widely used as part of a company's executive compensation plan. Their general purpose is to motivate executives to perform well in order to help raise the company's stock price, thereby increasing the value of their stock options.

There are also publicly traded stock options, not issued by the company itself. These are generally used by non-Insiders for speculating and hedging activities.

Tangible Book Value - The book value of assets that have a readily determinable market value, such as manufacturing facilities, trucks, and land. Goodwill  and intellectual property, such as patent or trademarks, are  excluded from assets when determining tangible book value.

10K - The formal version of a company's annual report, issued to the SEC.

10Q - The formal version of a company's quarterly report, issued to the SEC.

The Working Group On Financial Markets - A governmental body created during the Reagan Administration for the stated purpose of maintaining financial markets stability. It is allowed to buy and sell securities in U.S. securities markets and does not publish its actions. It executes its actions through major investment banks like Goldman Sachs and Morgan Stanley, which it also pays to "maintain liquidity."
 

   
Copyright © 2008 by Jack Adamo. All rights reserved.