SIE for Dummies: Securities Analysis

2025-2026

Systematic Risk

Risk that affects the overall market because of political, social, economic, or natural events. It cannot be eliminated through diversification.

Nonsystematic Risk

Company- or industry-specific risk that can generally be reduced through diversification.

Interest-Rate Risk

The risk that a security’s value will decline when interest rates change. Bond prices and interest rates generally move in opposite directions, with long-term bonds most affected.

Purchasing-Power (Inflation) Risk

The risk that investment income or principal will not keep pace with inflation. Fixed-income investments and fixed annuities are especially exposed.

Business Risk

The risk that a corporation will perform poorly, reduce dividends, or fail because of its operations or financial condition.

Regulatory Risk

The risk that actions by regulators or rating organizations will adversely affect an issuer or security.

Political (Geopolitical) Risk

The risk that political instability, government action, or events in a country will reduce an investment’s value.

Market Risk

The risk that securities will decline because of general market conditions or investor expectations.

Reinvestment Risk

The risk that interest or principal received will have to be reinvested at a lower rate. Callable bonds and mortgage-backed securities are especially exposed when rates fall.

Legislative Risk

The risk that changes in federal or state law will adversely affect particular securities or industries.

Currency (Exchange-Rate) Risk

The risk that an investment’s value will change because the exchange rate between currencies changes. Foreign securities are particularly affected.

Base Currency

The first currency in a currency pair, which is exchanged for the counter currency.

Counter Currency

The second currency in a currency pair, received in exchange for the base currency.

Spot Exchange Rate

The current rate at which one currency can be exchanged for another.

Liquidity (Marketability) Risk

The risk that a security cannot be sold quickly at a fair price. Limited partnerships and thinly traded or long-term securities have greater liquidity risk.

Capital Risk

The possibility of losing all money invested. Options and warrants may expire worthless.

Prepayment Risk

The risk that mortgage-backed or other callable investments will return principal earlier than expected, usually when rates fall and borrowers refinance.

Timing Risk

The risk of buying or selling at the wrong time and failing to maximize a gain or avoid a loss.

Diversification

Spreading investments among issuers, industries, asset types, maturities, and credit qualities to reduce nonsystematic risk.

Hedge

A position designed to protect another investment or reduce exposure to loss.

Fundamental Analysis

In-depth study of a company’s management, financial statements, earnings, industry, and economic conditions to determine a security’s value.

Fundamental Analyst

Decides what to buy by comparing intrinsic value with market price and identifying securities believed to be underpriced or overpriced.

Balance Sheet

A snapshot of a company’s financial position at a specific time, showing assets, liabilities, and stockholders’ equity.

Assets

Items a company owns.

Current Assets

Assets expected to be converted to cash within 12 months, including cash, marketable securities, receivables, inventory, and prepaid expenses.

FIFO Inventory

First-in, first-out inventory accounting assumes the oldest inventory is sold first.

LIFO Inventory

Last-in, first-out inventory accounting assumes the newest inventory is sold first.

Straight-Line Depreciation

Deducts an equal amount of depreciation each year over an asset’s useful life.

Accelerated Depreciation

Deducts more depreciation in earlier years and less in later years.

Fixed Assets

Long-lived assets not easily converted to cash, such as buildings, furniture, and equipment. Most may be depreciated, but land is not.

Intangible Assets

Assets without physical form, such as trademarks, patents, formulas, copyrights, and goodwill.

Goodwill

The amount paid above the fair market value of identifiable assets when one company acquires another.

Liabilities

Amounts a company owes.

Current Liabilities

Obligations due within 12 months, including accounts payable, wages, taxes, declared dividends, short-term notes, and maturing debt.

Long-Term Liabilities

Obligations due after 12 months, including mortgages, long-term bank loans, corporate bonds, and long-term notes.

Stockholders’ Equity

Net worth equal to assets minus liabilities.

Par Value

An arbitrary value assigned to stock for accounting purposes.

Additional Paid-In Capital

The amount investors paid for issued shares above par value.

Treasury Stock

Previously issued stock repurchased and held by the corporation. It is not outstanding and receives no dividends or voting rights.

Retained Earnings

Cumulative earnings kept by the company after paying dividends.

Income Statement

Shows a company’s profitability over a period by comparing revenue and expenses.

Gross Profit

Net sales minus cost of goods sold.

EBITDA

Earnings before interest, taxes, depreciation, and amortization.

Operating Profit (EBIT)

Earnings before interest and taxes, after operating expenses and depreciation.

Taxable Income (EBT)

Earnings before taxes, after interest expense.

Net Income (EAT)

Earnings after taxes.

Earnings Available to Common

Net income minus preferred dividends.

Technical Analysis

Uses price, volume, patterns, and market indicators to determine when to buy or sell, based on the belief that market history tends to repeat.

Benchmark (Index)

A statistical measure used to evaluate the performance of an investment or group of investments.

Narrow-Based Index

Measures a particular industry or market segment.

Broad-Based Index

Measures securities from many industries and is used as an indicator of the overall market.

S&P 500 Index

Broad-based index of 500 large-cap U.S. common stocks.

Wilshire 5000 Total Market Index

Broad index intended to represent the overall U.S. equity market.

Russell 2000 Index

Index of approximately 2,000 small-cap companies.

Lipper Indexes

Compare the performance of mutual funds within specific investment categories.

Dow Jones Composite Average

Combines the Dow Jones Industrial, Transportation, and Utility averages.

Dow Jones Industrial Average (DJIA)

Price-weighted average of 30 large industrial companies and a widely used market indicator.

Dow Jones Transportation Average

Tracks 20 transportation companies.

Dow Jones Utility Average

Tracks 15 utility companies.

Dow Theory

Major market trends are confirmed when the DJIA and Dow Jones Transportation Average move in the same direction.

Business Cycle

Repeating economic movement through expansion, peak, contraction, and trough.

Expansion

Economic activity, demand, production, property values, and employment generally rise; the stock market is usually bullish.

Peak

The top of an expansion before economic activity begins to contract.

Contraction

Demand, production, property values, and economic activity decline while defaults and bankruptcies may increase; the market is generally bearish.

Trough

The lowest part of a contraction before recovery and a new expansion.

Fiscal Policy

Government decisions about taxation, spending, and borrowing, controlled by Congress and the president.

Monetary Policy

Federal Reserve actions affecting the money supply, credit, and interest rates.

Easy-Money Policy

Expands money supply and generally lowers interest rates. The Fed may buy securities, lower the discount rate or reserve requirement, or reduce Regulation T.

Tight-Money Policy

Contracts money supply and generally raises interest rates. The Fed may sell securities, raise the discount rate or reserve requirement, or increase Regulation T.

Open-Market Operations

Federal Reserve purchases and sales of U.S. government and agency securities to control money supply.

Federal Open Market Committee (FOMC)

Directs the Federal Reserve’s open-market operations.

Discount Rate

Interest rate charged by Federal Reserve Banks on loans to member banks. Raising it tightens money; lowering it eases money.

Reserve Requirement

Percentage of deposits banks must keep as reserves. Raising it reduces lendable funds and tightens money.

Regulation T as a Fed Tool

Sets the percentage investors must deposit for margin purchases. Increasing it reduces available investor credit and tightens money.

Balance of Payments

Accounting of a nation’s economic transactions with the rest of the world over a period.

Strong U.S. Dollar

Makes foreign goods cheaper for Americans and U.S. exports more expensive for foreigners, tending to increase money flowing out of the United States.

Weak U.S. Dollar

Makes U.S. goods cheaper for foreigners and foreign goods more expensive for Americans, tending to support exports.

Leading Indicators

Statistics that tend to change before the overall economy, including money supply, stock prices, the federal-funds rate, and retail sales.

Lagging Indicators

Statistics that turn after the economy, including the prime rate and other measures that confirm an existing trend.

Gross Domestic Product (GDP)

Total value of goods and services produced within the United States during a year.

Gross National Product (GNP)

GDP plus income earned abroad by U.S. businesses and residents, excluding U.S. income earned by foreign businesses and residents.

Monetarist Theory

Holds that economic performance is largely determined by money supply and that the economy can remain relatively stable with limited government intervention.

Keynesian Theory

Supports active fiscal policy, such as government spending, borrowing, and taxation, to stimulate or slow the economy.

Supply-Side Economics

Seeks growth by lowering taxes and regulation so businesses and individuals can invest, produce, and spend more.

Defensive Industry

Provides essential goods or services whose demand tends to remain stable through the business cycle, such as utilities, food, clothing, and pharmaceuticals.

Cyclical Industry

An industry whose sales and earnings rise and fall significantly with the business cycle.