Foundations of Investing: Common Stock, Capital Structure, Special Situations, and ETFs

Vocabulary practice flashcards covering common stock mechanics, capital structure, leverage, special corporate situations (splits, buybacks, M&A), and exchange-traded fund (ETF) structure and evaluation.

Common Stock

A financial security that represents a fractional ownership stake in a company, granting the holder voting rights and a residual claim on corporate assets and earnings.

Voting Rights

The legal right of common shareholders to vote on major corporate matters, typically allocated as one vote per share, such as the election of the board of directors.

Residual Claim

The legal standing of common shareholders granting them rights to a company's assets and earnings only after lenders, debt holders, and preferred shareholders have been paid.

Subordination

The structural priority order placing common stock last in line within a company's capital structure, ranking behind all debt obligations and preferred equity.

Capital Structure

The specific combination of equity (issuing stock) and debt (borrowed funds) used by a corporation to finance its overall assets and operations.

Debt

A financing method with a fixed cost where lenders are owed a predetermined amount of interest regardless of whether the business performs well or poorly.

Financial Leverage

The practice of using borrowed money (debt) to boost the potential return on invested equity, which magnifies positive returns when assets outperform the cost of debt but amplifies losses when asset earnings fall short.

Price-to-Earnings (P/E) Ratio

A valuation metric defined as $\text{P/E} = \frac{\text{Share Price}}{\text{Earnings Per Share}}$, indicating how much investors are willing to pay for each dollar of a company's current annual earnings.

Earnings Per Share (EPS)

A company's net profit divided by its total number of shares outstanding, serving as the denominator in the P/E ratio and typically rising after a stock repurchase.

Stock Split

A corporate action in which a company divides each existing share into multiple new shares, proportionally lowering the share price while keeping total holding value and market capitalization unchanged.

Share Repurchase (Buyback)

A transaction wherein a corporation buys back its own shares from the open market, reducing the share count and concentrating existing value among fewer outstanding shares.

Mergers and Acquisitions (M&A)

Corporate transactions where an acquiring company buys a target company, often paying an additional premium above the target's pre-deal market price to obtain ownership control.

Deal Premium

The extra cash or value paid by an acquirer above the current pre-deal share price of a target company to secure controlling interest.

Follow-on Offering

An issuance of additional stock by a publicly traded firm after its initial public offering (IPO) to raise capital, which dilutes the ownership percentage of existing shareholders.

Exchange-Traded Fund (ETF)

An investment fund that holds a diversified basket of securities tracking an index and trades continuously on an exchange throughout the day like a common stock.

SPDR S&P 500 ETF (SPY)

The first U.S.-listed ETF, launched on January 22, 1993, by State Street and the American Stock Exchange with an initial asset base of approximately $\$6.53\text{ million}$.

World Equity Benchmark Shares (WEBS)

The first international ETFs, launched by Morgan Stanley on the AMEX in 1996 to track MSCI country indices, later rebranded under the name iShares.

Authorized Participant (AP)

A large institutional trading firm that has contractual permission to create or redeem ETF shares directly with the fund trust by exchanging baskets of underlying securities.

Creation Unit

A large standard block of new ETF shares (such as $50{,}000$ shares in the case of SPY) issued by the ETF trust to an Authorized Participant in exchange for the underlying basket of stocks.

Net Asset Value (NAV)

The underlying intrinsic value of all assets held in an ETF's portfolio, kept in alignment with the ETF's secondary market price through the creation and redemption process.

Expense Ratio

The annual operational management fee charged by an ETF or fund, stated as a percentage of total assets under management.

Assets Under Management (AUM)

The total market value of all underlying securities held and managed by a fund, commonly used as a metric for fund stability and liquidity.

Tracking Difference

The measured performance differential between an ETF's actual returns and the return of its benchmark target index over a given timeframe.