Investments Midterm

asset allocation

How an investor spreads portfolio dollars among broad asset classes.

call money rate

The interest rate brokers pay to borrow bank funds for lending to customer margin accounts.

cash account

A brokerage account in which all transactions are made on a strictly cash basis.

hypothecation

Pledging securities as collateral against a loan.

initial margin

The minimum margin that must be supplied on a securities purchase.

maintenance margin

The minimum margin that must be present at all times in a margin account.

margin

The portion of the value of an investment that is not borrowed.

margin account

A brokerage account in which, subject to limits, securities can be bought and sold on credit.

market timing

Buying and selling in anticipation of the overall direction of a market.

Securities Investor Protection Corporation (SIPC)

Insurance fund covering investors' brokerage accounts with member firms.

security selection

Selection of specific securities within a particular class.

short interest

The amount of common stock held in short positions.

short sale

A sale in which the seller does not actually own the security that is sold.

street name

An arrangement under which a broker is the registered owner of a security.

uptick rule

Rule for short sales requiring that before a short sale can be executed, the last price change must be an uptick.

margin call

A demand for more funds that occurs when the margin in an account drops below the maintenance margin.

call option

Grants the holder the right, but not the obligation, to buy the underlying asset at a given strike price.

current yield

A bond's annual coupon divided by its market price.

derivative asset

A financial asset that is derived from an existing traded asset rather than issued by a business or government to raise capital. More generally, any financial asset that is not a primary asset.

fixed income securities

Longer-term debt obligations, often of corporations and governments, that promise to make fixed payments according to a preset schedule.

futures contract

An agreement made today regarding the terms of a trade that will take place later.

money market instruments

Debt obligations of large corporations and governments with an original maturity of one year or less.

option contract

An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specified price for a set period of time.

option premium

The price you pay to buy an option.

primary asset

Security originally sold by a business or government to raise money.

put option

Grants the holder the right, but not the obligation, to sell the underlying asset at a given strike price.

strike price

Price specified in an option contract that the holder pays to buy shares (in the case of call options) or receives to sell shares (in the case of put options) if the option is exercised. Also called the exercise price.

arithmetic average dividend growth rate

A dividend growth rate based on an arithmetic average of historical dividends.

beta

Measure of a stock's risk relative to the stock market average.

cash flow

In the context of the price-cash flow ratio, usually taken to be net income plus depreciation.

clean surplus relationship

An accounting relationship in which earnings minus dividends equals the change in book value per share.

Constant Perpetual Growth Model

A version of the dividend discount model in which dividends grow forever at a constant rate, and the growth rate is strictly less than the discount rate.

Dividend Discount Model

Method of estimating the value of a share of stock as the present value of all expected future dividend payments.

earnings yield

Inverse of the P/E ratio: earnings per share divided by price per share.

economic value added

A financial performance measure based on the difference between a firm's actual earnings and required earnings.

enterprise value

The market value of the firm's equity plus the market value of the firm's debt minus cash.

fundamental analysis

Examination of a firm's accounting statements and other financial and economic information to assess the economic value of a company's stock.

geometric average dividend growth rate

A dividend growth rate based on a geometric average of historical dividends.

growth stocks

A term often used to describe high-P/E stocks.

payout ratio

Proportion of earnings paid out as dividends.

price book ratio

Market value of a company's common stock divided by its book (or accounting) value of equity.

price cash flow ratio

Current stock price divided by current cash flow per share.

price earnings ratio

Current stock price divided by annual earnings per share (EPS).

price sales ratio

Current stock price divided by annual sales per share.

residual income model

A method for valuing stock in a company that does not pay dividends.

retained earnings

Earnings retained within the firm to finance growth.

retention ratio

Proportion of earnings retained for reinvestment.

sustainable growth rate

A dividend growth rate that can be sustained by a company's earnings.

two stage dividend growth model

A dividend discount model that assumes a firm will temporarily grow at a rate different from its long-term growth rate.

value stocks

A term often used to describe low-P/E stocks.

10-K

Annual company report filed with the SEC.

10-Q

Quarterly updates of 10-K reports filed with the SEC.

asset

Anything a company owns that has value.

balance sheet

Accounting statement that provides a snapshot view of a company's assets and liabilities on a particular date.

capital intensity ratio

A firm's total assets divided by its sales, or the amount of assets needed to generate $1 in sales.

cash flow

Income realized in cash form.

cash flow statement

Analysis of a firm's sources and uses of cash over the accounting period, summarizing operating, investing, and financing cash flows.

EDGAR

Electronic archive of company filings with the SEC.

equity

An ownership interest in the company.

financing cash flow

Cash flow originating from the issuance or repurchase of securities and the payment of dividends.

income

The difference between a company's revenues and expenses, used to pay dividends to stockholders or kept as retained earnings within the company to finance future growth.

income statement

Summary statement of a firm's revenues and expenses over a specific accounting period, usually a quarter or a year.

investment cash flow

Cash flow resulting from purchases and sales of fixed assets and investments.

liability

A firm's financial obligation.

material nonpublic information

Any information that could reasonably be expected to affect the price of a security.

noncash items

Income and expense items not realized in cash form.

operating cash flow

Cash generated by a firm's normal business operations.

percentage of sales approach

A financial planning method in which some accounts vary with the level of predicted sales.

pro forma financial statements

Statements prepared using certain assumptions about future income, cash flow, and other items. "Pro forma" literally means according to prescribed form.

Regulation FD

Requires companies making a public disclosure of material nonpublic information to do so fairly, without preferential recipients.

return on assets

Net income stated as a percentage of total assets.

return on equity

Net income stated as a percentage of shareholder equity.

consumer price index

Measures the average prices paid by urban consumers for a fixed "basket" of consumer goods and services.

core cpi

Measures the average prices paid by urban consumers for a fixed "basket" of consumer goods and services, excluding food and energy.

cyclical sectors

Economic sectors that have a high sensitivity to the business cycle.

defensive sectors

Economic sectors that have a low sensitivity to the business cycle.

discount rate

The interest rate the Fed charges its member banks on loans.

federal funds rate

Interest rate that banks charge each other for overnight loans of $1 million or more.

fiscal policy

Government determination of tax rates and spending policies.

gross domestic product

The market value of goods and services produced over a period of time.

labor force

All nonmilitary working-age people who are employed or unemployed but seeking employment.

labor force participation rate

The labor force divided by the nonmilitary working-age population.

leading, lagging, and coincident economic indicators

Economic time series data that tend to change in advance of, behind, or with the economy.

Nominal GDP

The dollar value of economic output in terms of the current year.

open market operations

The buying and selling of bonds directly on the secondary market for purposes of increasing or decreasing the money supply.

real gdp

The value of economic output adjusted for inflation.

unemployment rate

The percentage of the labor force that is unemployed but seeking employment.

ask price

The price at which a dealer is willing to sell. Also called the offer or offering price.

best efforts underwriting

The type of underwriting in which the underwriter sells as much of the issue as possible but can return any unsold shares to the issuer without financial responsibility.

bid price

The price a dealer is willing to pay.

broker

An intermediary who arranges security transactions among investors.

circuit breakers

All the methods used by stock exchanges during large sell-offs.

crowdfunding

The practice of raising small amounts of cash from a large number of people, typically via the internet.

dealer

A trader who buys and sells securities from inventory.

designated market maker

A new class of market maker at the NYSE; replaced the role of specialists on the exchange floor.

DMM's post

Fixed place on the exchange floor where the DMM operates.

Dutch auction underwriting

The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

electronic communications network

A website that allows investors to trade directly with each other.

firm commitment underwriting

The type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.

floor brokers

Firms that execute customer orders to buy and sell stock transmitted to the exchange floor.