FIN2450 Key Terms (Exam 2)

asset allocation

the process of spreading your assets among several different types of investments (sometimes referred to as asset classes) to lessen risk

business cycle

the increase and decrease in a nation’s economic activity

corporate bond

a corporation’s written pledge to repay a specified amount of money, along with interest

dividend

a distribution of money, stock, or other property that a corporation pays to stockholders

economics

the study of how wealth is created and distributed

emergency fund

an amount of money you can obtain quickly in case of immediate need

equity capital

money that a business obtains from its owners

expense ratio

all the different management fees, 12b-1 fees, if any, and fund operating costs for a specific mutual fund

government bond

the written pledge of a government or a municipality to repay a specified sum of money, along with interest

line of credit

a short-term loan that is approved before the money is actually needed

liquidity

the ability to buy or sell an investment quickly without substantially affecting the investment’s value

maturity date

the date on which a corporation, government, or municipality will repay the borrowed money

mutual fund

pools the money from investors to invest in a variety of securities

rate of return

the total income you receive on an investment over a specific period of time divided by the original amount invested

speculative investment

a high-risk investment made in the hope of earning a relatively large profit in a short time

blue chip stock

a safe investment that generally attracts conservative customers

cyclical stock

a stock that follows the business cycle of advances and declines in the economy

defensive stock

a stock that provides consistent dividends and stable earnings during declines in the economy

growth stock

a stock issued by a corporation that has the potential of earning profits above the average profits of all firms in the economy

income stock

an investment that pays higher-than-average dividends

large cap stock

a stock issued by a corporation that has a large market capitalization, in excess of $10 billion

micro cap stock

a stock issued by a company that has a market capitalization of less than $300 million

midcap stock

a stock issued by a corporation that has market capitalization of between $2 and $10 billion

penny stock

a stock that sells for $5 or less per share

small cap stock

a stock issued by a company that has a market capitalization of between $300 million and $2 billion

value stock

a stock that is attractive to investors because it may be undervalued based on its fundamentals, including dividends, earnings, sales revenues, and other factors

account executive

a licensed individual who buys or sells securities for clients; also called a stockbroker

annualized holding period yield

a calculation that takes into account the total return, the original investment, and the time the investment is held

beta

a measure reported in many financial publications that compares the volatility associated with a specific stock issue with the volatility of the overall stock market or an index like the s&p’s 500 stock index

book value

determined by deducting all liabilities from the corporation’s assets and dividing the remainder by the number of outstanding shares of common stock

common stock

the most basic form of ownership for a corporation

day trader

an individual who buys and then later sells stocks and other securities in a very short period of time

designated market maker

buys or sells a particular stock in an effort to maintain an orderly market

direct investment plan

a plan that allows stockholders to purchase stock directly from a corporation without having to use an account executive or a brokerage firm

dividend reinvestment plan

a plan that allows current stockholders the option to reinvest or use their cash dividends to purchase stock of the corporation

dividend

a distribution of money, stock, or other property that a corporation pays to stockholders

dividend payout

the percentage of a firm’s earnings paid to stockholders in cash

dividend yield

the annual dividend amount divided by the investment’s current price per share

dollar cost averaging

a long-term technique used by investors who purchase the same stock at equal intervals

earnings per share

a corporation’s after-tax income divided by the number of outstanding shares of a firm’s common stock

efficient market hypothesis

an investment theory based on the assumption that all available information is already factored into a stock’s price

equity financing

money received from the sale of shares of ownership in a business

ex-dividend

a situation when a stock trades “without dividend,” and the seller—not the buyer—is entitled to a declared dividend payment

fundamental analysis

a theory based on the assumption that a stock’s intrinsic or real value is determined by the company’s future earnings

initial public offering

occurs when a corporation sells stock to the general public for the first time

investment bank

a financial firm that assists corporations in raising funds, usually by helping to sell new security issues

limit order

a request to buy or sell a stock at a specified price or better

margin transaction

a speculative technique that allows you to borrow part of the money needed to buy a particular stock

market order

a request to buy or sell a stock at the current market price

option

the right—but not the obligation—to buy or sell a stock at a predetermined price during a specified period of time

over-the-counter market

a decentralized marketplace where two parties trade stocks that are not listed on a securities exchange with the help of a broker or dealer

preferred stock

a type of stock that gives the stockholder the advantage of receiving cash dividends before common stockholders are paid any dividends

price-earnings ratio

the price of a share of stock divided by the corporation’s earnings per share of stock

price-to-book ratio

the current price of one share of stock divided by the book value for one share of stock

primary market

a market in which you purchase financial securities, via an investment bank or other representative, from the issuer of those securities

proxy

a legal form that lists the issues to be decided at a stockholders’ meeting and requests that stockholders transfer their voting rights to some individual or individuals

record date

the date on which a stockholder must be registered on the corporation’s books in order to receive dividend payments

secondary market

a market for existing financial securities that are currently traded among investors

securities exchange

a marketplace where member brokers who represent investors meet to buy and sell securities

selling short

selling stock that has been borrowed from a brokerage firm and must be replaced at a later date

stock market bubble

a term used to describe a situation when stocks are trading at prices above their actual worth

stock split

a procedure in which the shares of stock owned by existing stockholders are divided into a larger number of shares

stop-loss order

an order to sell a particular stock at the next available opportunity after its market price reaches a specified amount

technical analysis

a theory based on the assumption that a stock’s market value is determined by the forces of supply and demand in the stock market, not on the expected earnings or the intrinsic value of an individual corporation's stock

total return

a calculation that includes the annual dollar amount of dividends as well as any increase or decrease in the original purchase price of the investment