Finance & investment

Sole proprietorship

A business owned and run by one person.

Partnership

A business owned and run by more than one owner.

Limited partnership

A partnership with two kinds of owners: general partners and limited partners.

Limited liability

When an investor’s liability is limited to her investment.

Limited liability company (LLC)

A limited partnership without a general partner

Corporation

A legally defined, artificial being, separate from its owners.

Stock

The ownership or equity of a corporation divided into shares.

Equity

The collection of all the outstanding shares of a corporation.

Shareholder (also stockholder or equity holder)

An owner of a share of stock or equity in a corporation.

Dividend payments

Payments made at the discretion of the corporation to its equity holders.

S corporations

Those corporations that elect subchapter S tax treatment and are exempted by the U.S. Internal Revenue Service’s tax code from double taxation

C corporation

Corporations that have no restrictions on who owns their shares or the number of shareholders; they cannot qualify for subchapter S tax treatment and are subject to direct taxation.

Board of directors

A group of people elected by shareholders who have the ultimate decisionmaking authority in the corporation.

Chier executive officer (CEO)

The person charged with running the corporation by instituting the rules and policies set by the board of directors.

Agency problem

When managers, despite being hired as the agents of shareholders, put their self-interest ahead of the interests of those shareholders

hostile takeover

A situation in which an individual or organization—sometimes referred to as a corporate raider—purchases a large fraction of a company’s stock and in doing so gets enough votes to replace the board of directors and its CEO.

Stock market (also stock exchange or bourse)

Organized market on which the shares of many corporations are traded.

Liquid

Describes an investment that can be easily turned into cash because it can be sold immediately at a competitive market price.

Primary market

When a corporation issues new shares of stock and sells them to investors.

Secondary market

Markets, such as NYSE or Nasdaq, where shares of a corporation are traded between investors without the involvement of the corporation.

Market makers

Individuals or companies at an exchange who match buyers with sellers.

Specialists

Market makers at the NYSE.

Bid price

The price at which a market maker is willing to buy a security.

Ask price

The price at which a market maker is willing to sell a security.

Liquidity

Extent to which the market for an asset is liquid, meaning that assets can be easily turned into cash because they can be sold immediately at competitive market prices

Bid- ask spread

The amount by which the ask price exceeds the bid price.

Transaction cost

In most markets, an expense such as a broker commission and the bid-ask spread investors must pay in order to trade securities.

Limit order

Order to buy or sell a set amount of a security at a fixed price.

Limit order book

Collection of all current limit orders for a given security

Market orders

Orders to trade immediately at the best outstanding limit order available

High frequency traders (HFTs)

Traders who place, update, cancel, and execute trades many times per second.

dark pools

Trading venues in which the size and price of orders are not disclosed to participants. Prices are within the best bid and ask prices available in public markets, but traders face the risk their orders may not be filled if an excess of either buy or sell orders is received.

Listing standards

Outlines of the requirements a company must meet to be traded on the exchange.

Financial institutions

Entities that provide financial services, such as taking deposits, managing investments, brokering financial transactions, or making loans

financial statements

Accounting reports issued by a firm quarterly and/ or annually that present past performance information and a snapshot of the firm’s assets and the financing of those assets.

Annual report (10-K)

The yearly summary of business, accompanying or including financial statements, sent by U.S. public companies to their shareholders

Generally accepted accounting principles (GAAP)

A common set of rules and a standard format for public companies to use when they prepare their financial reports.

Auditor

A neutral third party, which corporations are required to hire, that checks a firm’s annual financial statements to ensure they are prepared according to GAAP, and provides evidence to support the reliability of the information

Balance sheet (or statement of financial position)

A list of a firm’s assets and liabilities that provides a snapshot of the firm’s financial position at a given point in time

assets

The cash, inventory, property, plant, and equipment, and other investments a company has made.

Liabilities

A firm’s obligations to its creditors.

Shareholders equity, stockholders equity

An accounting measure of a firm’s net worth that represents the difference between the firm’s assets and its liabilities.

common stock and paid- in- surplus

The amount that stockholders have directly invested in the firm through purchasing stock from the company

retained earnings

Profits made by the firm, but retained within the firm and reinvested in assets or held as cash.

current assets

Cash or assets that can be converted into cash within one year.

marketable securities

Short-term, low-risk investments that can be easily sold and converted to cash.

accounts receivables

Amounts owed to a firm by customers who have purchased goods or services on credit.

inventories

A firm’s raw materials as well as its work-in-progress and finished goods.

long- term assets

Assets that produce tangible benefits for more than one year.

depreciation

A yearly deduction a firm makes from the value of its fixed assets (other than land) over time, according to a depreciation schedule that depends on an asset’s life span.

book value

The acquisition cost of an asset less its accumulated depreciation.

current liabilites

Liabilities that will be satisfied within one year.

accounts payable

The amounts owed to creditors for products or services purchased with credit.

notes payable, short term debt

Loans that must be repaid in the next year

Net working capital

The difference between a firm’s current assets and current liabilities that represents the capital available in the short term to run the business.

long term debt

Any loan or debt obligation with a maturity of more than a year

book value of equity

The difference between the book value of a firm’s assets and its liabilities; also called shareholders’ equity and stockholders’ equity, it represents the net worth of a firm from an accounting perspective.

liquidation value

The value of a firm after its assets are sold and liabilities paid.

market capitalization

The total market value of equity; equals the market price per share times the number of shares.

market- to book ratio (price to book P/B ratio)

The ratio of a firm’s market (equity) capitalization to the book value of its stockholders’ equity.

value stocks

Firms with low market-to-book ratios.

growth stocks

Firms with high market-to-book ratios.

enterprise value

The total market value of a firm’s equity and debt, less the value of its cash and marketable securities. It measures the value of the firm’s underlying business.

income statement

A list of a firm’s revenues and expenses over a period of time.

net income or earnings

The last or “bottom” line of a firm’s income statement that is a measure of the firm’s income over a given period of time.

gross profit

The third line of an income statement that represents the difference between a firm’s sales revenues and its costs.

operating income

A firm’s gross profit less its operating expenses.

EBIT

A firm’s earnings before interest and taxes are deducted.

earnings per share (EPS)

A firm’s net income divided by the total number of shares outstanding.

Stock options

The right to buy a certain number of shares of stock by a specific date at a specific price.

convertible bonds

Corporate bonds with a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock

dilution

An increase in the total number of shares that will divide a fixed amount of earnings.

diluted EPS

The earnings per share a company would have based on the total number of shares including the effects of all stock options and convertible bonds.

EBITDA

A computation of a firm’s earnings before interest, taxes, depreciation, and amortization are deducted.

statement of cash flows

An accounting statement that shows how a firm has used the cash it earned during a set period.

capital expenditures

Purchases of new property, plant, and equipment.

payout ratio

The ratio of a firm’s dividends to its net income.

statement of stockholders equity

An accounting statement that breaks down the stockholders’ equity computed on the balance sheet into the amount that came from issuing new shares versus retained earnings.

management discussion and analysis (MD&A)

A preface to the financial statements in which a company’s management discusses the recent year (or quarter), providing a background on the company and any significant events that may have occurred.

off balance sheet transactions

Transactions or arrangements that can have a material impact on a firm’s future performance yet do not appear on the balance sheet.

gross margin

The ratio of gross profit to revenues (sales), it reflects the ability of the company to sell a product for more than the sum of the direct costs of making it.

operating margin

The ratio of operating income to revenues, it reveals how much a company has earned from each dollar of sales before deducting interest and taxes.

net profit margin

The ratio of net income to revenues, it shows the fraction of each dollar in revenues that is available to equity holders after the firm pays its expenses, plus interest and taxes.

current ratio

The ratio of current assets to current liabilities.

quick ratio (acid test ratio)

The ratio of current assets other than inventory to current liabilities.

Cash ratio

The ratio of cash to current liabilities.

asset turnover

The ratio of sales to total assets.

accounts receivable days (average collection period or days sales outstanding)

An expression of a firm’s accounts receivable in terms of the number of days’ worth of sales that the accounts receivable represents.

accounts payable days

An expression of a firm’s accounts payable in terms of the number of days’ worth of cost of goods sold that the accounts payable represents.

inventory days

An expression of a firm’s inventory in terms of the number of days’ worth of cost of goods sold that the inventory represents.

inventory turnover ratio

The cost of goods sold divided by either the latest cost of inventory or the average inventory over the year, it shows how efficiently companies turn their inventory into sales.

interest coverage ratio or times interest earned (TIE) ratio

An assessment by lenders of a firm’s leverage, it is equal to a measure of earnings divided by interest.

leverage

A measure of the extent to which a firm relies on debt as a source of financing.

debt equity ratio

The ratio of a firm’s total amount of short- and long-term debt (including current maturities) to the value of its equity, which may be calculated based on market or book values.

debt to capital ratio

The ratio of total debt to total debt plus total equity.

net debt

debt in excess of a firm’s cash reserves

debt to enterprise value ratio

The ratio of a firm’s net debt to its enterprise value.

equity mulitplier

A measure of leverage equal to total assets divided by total equity

price earnings ratio

The ratio of the market value of equity to the firm’s earnings, or its share price to its earnings per share.

PEG ratio

The ratio of a firm’s P/E to its expected earnings growth rate.