Glossary of Investment Terms
List of Investment Terms
The title given by some brokerage firms to their stockbrokers. Other variations on the title include registered representative, financial advisor and financial consultant.
Interest that is due but hasn't yet been paid. It most often comes into play when you buy bonds in the secondary market. Bonds usually pay interest every six months, but it is earned (accrued) by bondholders every month. If you buy a bond halfway between interest payment dates, you must pay the seller for the three months' interest accrued but not yet received. You get the money back three months later when you receive the interest payment for the entire six-month period.
Active Duration Management
Duration Management is based on forecasts of probable trends in interest rates and is performed on a continual basis. These forecasts are supported by detailed analysis of important economic factors and lead to adjustments in the average maturity of our bond portfolios. At the same time, the changing shape of the yield curve is evaluated to determine the spacing of our maturities.
The amount paid by a company to its shareholders over the course of one year.
An attempt to profit from momentary price differences that can develop when a security or commodity is traded on two different exchanges. To take advantage of such differences, an arbitrageur would buy in the market where the price is lower and simultaneously sell in the market where the price is higher.
The process of dividing investment funds among the different categories of assets, such as cash equivalents, stocks and bonds.
When you buy or sell a security "at-the-market," the broker will execute your trade at the next available price.
A fee charged by mutual funds to investors who sell their units before owning them for a specified time.
Also called a coupon bond, it is not registered in anyone's name. Rather, whoever holds the bond (the "bearer") is entitled to collect interest payments merely by cutting off and mailing in the attached coupons at the proper time. Bearer bonds are no longer being issued.
A bear thinks the market is going to go down. This makes bearish the opposite of bullish.
Bid & Ask Price
“Bid Price” is the dollar amount a potential buyer is willing to pay for a particular stock at a given point in time. “Ask Price” is what a potential seller is willing to accept for a stock that they own. When the bid price and ask price meet, a trade has been executed, and the transaction is reported on the respective stock exchange.
There is no set definition of a blue-chip stock, but most would agree it has at least three characteristics: It is issued by a well-known, respected company, has a good record of earnings and dividend payments, and is widely held by investors.
An interest-bearing security that obligates the issuer to pay a specified amount of interest for a specified time, usually several years, and then repay the bondholder the face amount of the bond. Bonds issued by corporations are backed by corporate assets; in case of default, the bondholders have a legal claim on those assets. Bonds issued by government agencies may or may not be collateralized. Interest from corporate bonds is taxable; interest from municipal bonds, which are issued by state and local governments, is free of federal income taxes and, usually, income taxes of the issuing jurisdiction. Interest from Treasury bonds, issued by the federal government, is free of state and local income taxes but subject to federal taxes.
A judgment about the ability of the bond issuer to fulfill its obligation to pay interest and repay the principal when due. The best-known bond-rating companies are Standard & Poor's and Moody's. Their rating systems, although slightly different, both use a letter-grade system, with triple-A the highest rating and C or D the lowest.
Book Value per Share
A measure used to determine the level of safety associated with each individual share after all debts are paid accordingly.
Calculated as: Book Value Per Share = (Shareholder’s Equity – Preferred Equity)/Number of Common Shares Outstanding
Should the company dissolve or declare bankruptcy, this would be the approximate amount of money that a common shareholder would receive.
The BSX Index is a weighted index. This is a type of market index whose individual companies are weighted according to their market capitalization, so that larger companies (BNTB being the largest) carry a larger percentage weighting. The value of the BSX index can be calculated by adding up the collective market capitalizations the listed companies and dividing it by the number of securities in the index (17 in this case).
Here is a breakdown of the BSX index as of March 11th, 2008:
|Company||Shares Outstanding||Market Price||Market Value||% Base|
|West Hamilton Holdings Ltd||1,424,640||13||18,520,320.00||0.65%|
|BDA Press Holdings||1,380,245||14||19,323,430.00||0.67%|
|KFC Bermuda ltd.||614,931||7.5||4,611,982.50||0.16%|
|Bermuda Container Lines||3,000,000||14||42,000,000.00||1.47%|
A bull is someone who thinks the market is going to go up, which makes bullish the opposite of bearish.
Capital Gain or Loss
The difference between the price at which you buy an investment and the price at which you sell it. Adding the capital gain or loss to the income received from the investment yields the total return.
Certificate of Deposit
Usually called a CD, a certificate of deposit is a short- to medium-term instrument (one month to five years) that is issued by a bank or savings and loan association to pay interest at a rate higher than that paid by a pass book account. CD rates move up and down with general market interest rates. There is usually a penalty for early withdrawal.
Short-term IOUs issued by corporations without collateral. They are bought in large quantities by money-market funds.
The fee that a buyer or seller pays to their broker or brokerage firm once a trade has been executed on the stock exchange. Also referred to as “transaction cost”.
A share of ownership in a corporation, which entitles its owner to all the risks and rewards that go with it. In case of bankruptcy, common stockholders' claims on company assets are inferior to those of bondholders.
A bond that is exchangeable for a predetermined number of shares of common stock in the same company. The appeal of a convertible is that it gives you a chance to cash in if the stock price of the company soars. Some preferred stock is also convertible to common stock.
Annual income (interest or dividends) divided by the current price of the security. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors.
Calculated as: Current Yield = Annual Cash Income/Current Market Price
Also referred to as "bond yield" for fixed income, or "dividend yield" for stocks.
A mix of a company's long-term debt, short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of short-term loans, bond issues or long-term notes payable, while equity is classified as common stock, preferred stock, or retained earnings.
A common measure of capital structure is the debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is considered “highly leveraged” and prone to bankruptcy should its operations falter.
A revenue or expense stream that changes a cash account over a given period. Cash in-flows usually arise from one of three activities - financing, operations or investing. Cash out-flows result from expenses or investments. Healthy amounts of cash flow are essential to a company’s solvency (and hence, survival) by ensuring that creditors, employees and others can be paid on time, and that investment can be made in capital equipment and future growth initiatives.
The “statement of cash flows” is an accounting statement that shows the amount of cash generated and used by a company in a given period, calculated by adding non-cash charges (such as depreciation) to net income after taxes.
A corporate IOU that is not backed by the company's assets and is therefore somewhat riskier than a bond.
A cut-rate firm that executes orders but provides little if anything in the way of research or other investment aids.
A brokerage account in which the customer has given the broker the authority to buy and sell securities at his or her discretion—that is, without checking with the customer first.
A share of company earnings paid out to stockholders. Dividends are declared by the board of directors and paid quarterly. Most are paid as cash, but they are sometimes paid in the form of additional shares of stock.
Due diligence. The work performed by a broker or other representative in order to investigate and understand an investment thoroughly before recommending it to a customer.
The work performed by a broker or other representative in order to investigate and understand an investment thoroughly before recommending it to a customer.
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
An indicator of a company's financial performance, which is calculated as follows:
EBITDA = Revenue – Expenses (excluding interest expense, taxes, depreciation, and amortization)
EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and what is not) included in the calculation.
EPS (Earnings Per Share)
The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.
Calculated as: EPS = Net Income – Dividends on Preferred Stock/Number of Common Shares Outstanding
Diluted EPS expands on the basic EPS by including the shares of convertibles or warrants in the outstanding shares number.
The period between the declaration of a dividend by a company or a mutual fund and the actual payment of the dividend. On the ex-dividend date, the price of the stock or fund will fall by the amount of the dividend, so new investors do n't get the benefit of it. Companies and funds that have "gone ex-dividend" are marked by an X in the newspaper listings.
A measure of the costs of running a mutual fund. Expressed as a percentage of the fund's assets, the expense ratio is the best tool for comparing the management costs you'll incur by investing in different funds.
A catch-all description for investments in bonds, certificates of deposit and other debt-based instruments that pay a fixed amount of interest.
The sales commission charged at the time of purchase of a mutual fund, insurance policy or other product.
Full-service broker. A brokerage firm that maintains a research department and other services designed to supply its individual and institutional customers with investment advice.
A brokerage firm that maintains a research department and other services designed to supply its individual and institutional customers with investment advice.
GAAP (Generally-Accepted Accounting Principles)
The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of both authoritative standards (set by policy boards) and time-honored methods of recording and reporting accounting information.
An order to buy or sell a security at a specified price, which stays in effect until it is executed by the broker because that price was reached, or until it is canceled by the customer.
A company's total sales revenue minus its cost of goods sold. The amount of money the company generated over the cost of producing its goods or services. This amount can then be used to pay fixed expenses such as rent and employee payroll costs.
A statistical composite that tracks the ups and downs in one or more financial markets.
IPO (Initial Public Offering)
The first sale of stock by a private company to the public. IPO’s are often issued by relatively small, young companies seeking capital to expand their operations, but can also be done by large privately-owned companies looking to become publicly traded.
Mutual funds, banks, insurance companies, pension plans and others that buy and sell stocks and bonds in large volumes. Institutional investors account for 70% or more of market volume on an average day.
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, and copyrights), goodwill, and brand recognition are all common intangible assets. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.
While intangible assets don't have the obvious physical value of a factory or equipment, they can prove very valuable for a firm and can be critical to its long-term success or failure. For example, a company such as Coca-Cola wouldn't be nearly as successful were it not for the high sales and profits obtained through its brand-name recognition.
Current Yield: this is simply the annual coupon rate divided by the clean price of the bond.
ISMA Yield: a standard yield to maturity calculation recommended by the ISMA (formerly AIBD). Yield is compounded annually regardless of the coupon frequency.
SABE Yield: Semi-Annual Bond Equivalent Yield; a method of converting yields and other measures of value in order to place them on a comparable basis. This method assumes interest is reinvested semi-annually. SABE is often applied to discount securities in order to compare their rate of return to the yield to maturity on coupon bonds.
Simple Yield: a modified version of the current yield that accounts for a deviation in a bond's clean price from par. Any capital gain or loss is assumed to occur uniformly over the life of the bond.
U.S. Street Method: The standard yield to maturity calculation used in the United States by market participants other than the U.S. Treasury. Yield is compounded semi-annually regardless of the coupon frequency. If the value date does not fall on a coupon date, the present value of the bond on the next coupon date is discounted over the fractional period with compound interest.
U.S. Treasury Method: The yield to maturity used by the U.S. Treasury to price bonds at auction. Partial periods are discounted using simple rather than compound interest.
Yield to Average Life: A yield which assumes the entire issue amount matures on the average life date rather than the maturity date. This is a quick-and-dirty method for comparing bonds with sinking funds with straight issues.
Yield to Equivalent Life: The discount rate that equates the present value of the future cash flows to the dirty price where the cash flows take into account the bond's amortization schedule. This calculation is appropriate for sinking funds; however, it is rarely used because of its complexity.
Yield to Maturity: The yield if the bond is held to maturity. This is the most frequently used measure of value for a bond. Generally, the calculation is a function of coupon payments, dirty price, and the method for discounting coupons and the redemption value. However, the exact functional form is determined by market or dealer conventions.
The percentage paid as a fee for the use of money, expressed as an annual percentage of the principal amount. Influenced by a variety of factors including economic growth, inflation, supply/demand and international factors.
A high-risk, high-yield bond rated BB or lower by Standard & Poor's or Ba or lower by Moody's. Junk bonds are issued by relatively unknown or financially weak companies, or they have only limited backing from reasonably solvent companies.
An order to buy or sell a security if it reaches a specified price. A stop-loss order is a common variation.
The ability to quickly convert an investment portfolio to cash without suffering a noticeable loss in value. Stocks and bonds of widely traded companies are considered highly liquid. Real estate and limited partnerships are illiquid.
The act of financing the purchase of securities partly with money borrowed from the brokerage firm. Regulations permit buying up to 50% "on margin," meaning an investor can borrow up to half the purchase price of an investment.
A combination of stocks traded on an exchange, whose share prices are combined and used as a relative price indicator of the market as a whole. Stock market indices are normally “weighted-average”, whereby larger companies account for a greater portion of the index. Examples include the S&P 500 Index and the BSX Domestic Issuers Index. The alternative to weighting by market cap is a price-weighted index such as the Dow Jones Industrial Average.
A mutual fund that invests in short-term corporate and government debt and passes the interest payments on to shareholders. A key feature of money-market funds is that their market value doesn't change, making them an ideal place to earn current market interest with a high degree of liquidity.
A professionally managed portfolio of stocks and bonds or other investments divided up into shares. Minimum purchase is often $500 or less, and mutual funds stand ready to buy back their shares at any time. The market price of the fund 's shares, called the net-asset value, fluctuates daily with the market price of the securities in its portfolio.
Mutual Fund Manager
These individuals do the specialized work of selecting which securities to buy, keep and sell. The result of their decisions determine the returns the fund pays.
Pronounced Naz-dak, it is the acronym for the National Association of Securities Dealers Automated Quotations System, a computerized price-reporting system used by brokers to track over the counter securities as well as some exchange-listed issues.
Net Asset Value (NAV)
This is the price at which mutual fund shares are bought and sold by investors. The number represents the value of the fund’s holdings, minus management expenses, divided by the number of fund shares outstanding. Most funds calculate the net asset value after each trading day.
A stock trade involving fewer than 100 shares. For contrast, see round lot.
A company’s profits after subtracting “one-time” or non-recurring expenses from net income. This is a very important measure for the financial analyst, who wishes to understand the recent performance of a company in order to project future performance estimates. For example, if a company recorded a gain on the sale of an asset, this amount would be subtracted from reported net income to arrive at the company’s “core” profits from ongoing operations.
The right to buy or sell a security at a given price within a given time. The right to buy the security is called a "call." Calls are bought by investors who expect the price of the stock to rise. The right to sell a stock is called a "put. " Puts are purchased by investors who expect the price of the stock to fall. Investors use puts and calls to bet on the direction of price movements without actually having to buy or sell the stock. One option represents 100 shares and sells for a fraction of the price of the shares themselves. As the time approaches for the option to expire, its price will move up or down depending on the movement of the stock price.
Outstanding Shares (Shares O/S)
The number of a shares in a company’s stock held by common investors, in addition to shares owned by corporate executives, employees and “insiders”. This number is shown on a company's balance sheet under the heading "Capital Stock" and is more important than the authorized shares or “float”. It is used in many financial calculations, including market capitalization and earnings per share (EPS).
The face value of a stock or bond. Also called par value.
The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings.
Calculated as: Payout Ratio = Dividends Per Share/Earnings Per Share
The payout ratio provides an idea of how well earnings support the dividend payments, as well as what plans a company might have for its earnings. For example, a low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends (for example, technology and high-growth companies.) More mature companies tend to have a higher payout ratio because of a lower opportunity to invest earnings in growth plans, thereby returning income to shareholders in the form of dividends.
Generally thought of as a recently issued stock selling for less than $5 a share and traded over the counter. Penny stocks are usually issued by small, relatively unknown companies and lightly traded, making them more prone to price ma nipulation than larger, better-established issues. They are, in short, a gamble.
Preferred stock. A class of stock that pays a specified dividend set when it is issued. Preferreds generally pay less income than bonds of the same company and don't have the price appreciation potential of common stock. They appeal mainly to corporations, which get a tax break on their dividend income.
Usually called the P/E, it is the price of a stock divided by either its latest annual earnings per share (a "trailing" P/E) or its predicted earnings (an "anticipated" P/E). Either way, the P/E is considered an important indi cator of investor sentiment about a stock because it indicates how much investors are willing to pay for a dollar of earnings.
The document that describes a securities offering or the operations of a mutual fund, a limited partnership or other investment. The prospectus divulges financial data about the company, background of its officers and other information needed by investors to make an informed decision.
The formal authorization by a stockholder that permits someone else (usually company management) to vote in his or her place at shareholder meetings or on matters put to the shareholders for a vote at other times.
ROA (Return on Assets)
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Sometimes this is referred to as "return on investment".
Calculated as: ROA = Net Income/Total Assets
ROA for public companies can vary substantially and will be highly dependent on the industry. It is best to compare ROA against a company's previous ROA numbers or the ROA of a similar company.
ROE (Return on Equity)
A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.
Calculated as: ROE = Net Income/Shareholder’s Equity
The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
ROI (Return on Investment)
Often abbreviated ROI, this is a company's net profit after taxes divided by its total assets, which include common stock, preferred stock and bonds.
ROR (Rate of Return)
The gain or loss on an investment over a specific time period (usually one year) expressed as a percentage increase or decrease from the initial cost. Return on investment for a stock is calculated by any unrealized capital gains or losses, plus or minus the dividend received.
A hundred shares of stock, the preferred number for buying and selling and the most economical unit when commissions are calculated.
The LOM Fixed Income Portfolio’s are managed with a “sector rotation” style. Our managers look at the market in terms of individual sectors, i.e. governments, corporates, asset-backed securities, mortgage securities, etc. Relative valuation between sectors is an important consideration. We will invest in those sectors that offer good absolute and relative value with consideration given to the sector’s performance outlook and its historical spread to Treasuries. Sectors, which LOM believes are undervalued, will generally be over weighted in the Portfolio and subsequently sold as they become fully valued.
Share Classes (class A, class B, etc.)
Represent ownership in the same company, but with different voting rights.
The most recent trading price for a given stock, as reported by the exchange(s) on which the company trades.
A technique used to take advantage of an anticipated decline in the price of a stock or other security by reversing the usual order of buying and selling. In a short sale, the investor (1) borrows stock from the broker and (2) immediately sells it. Then, if the investor guessed right and the price of the stock does indeed decline, he can replace the borrowed shares by (3) buying them at the cheaper price. The profit is the difference between the price at which he sells the shares and the price at which he buys them later on. Of course, if the price of the shares rises, the investor will suffer a loss.
Financial reserves set aside to be used exclusively to redeem a bond or preferred stock issue and thus reassure investors that the company will be able to meet that obligation.
The difference between the bid and asked prices of a security, which may also be called the broker's markup. In options and futures trading, a spread is the practice of simultaneously buying a contract for the delivery of a commodity in one month and selling a contract for delivery of the same commodity in another month. The aim is to offset possible losses in one contract with possible gains in the other.
A financial services professional who provides financial advice to clients regarding their investments. Stock brokers typically work for a larger institution, such as a bank or “brokerage firm”. Individual “brokers” are sometimes referred to as “investment advisors” or “financial planners”.
Stock Market (Stock Exchange)
A centralized market overseen by a governing body, where companies that have become “publicly listed” trade their shares (i.e. after their “IPO” or Initial Public Offering). The largest global stock exchanges include the New York Stock Exchange (NYSE), the NASDAQ, and the London Stock Exchange (LSE).
Instructions to a broker to sell a particular stock if its price ever dips to a specified level.
A corporate action where an acquiring company makes a bid for the outstanding shares of a target company. A “hostile” takeover is one that is strongly resisted by the target firm, and may involve defensive maneuvers such as a “poison pill” which make a potential takeover less attractive.
A measure of investment performance that starts with price changes, then adds in the results of reinvesting all earnings, such as interest or dividends, generated by the investment during the period being measured.
Triple Witching Hour
A phrase made popular by program trading, it is the last hour of stock market trading on the third Friday of March, June, September and December. That's when options and futures contracts expire on market indexes used by progr am traders to hedge their positions in stocks. The simultaneous expirations often set off heavy buying and selling of options, futures and the underlying stocks themselves, thus creating the "triple" witching hour.
Variable Rate Demand Note (VRDN)
Also called a Variable Rate Demand Note (VRDO), is a long term, taxable, or tax-exempt bond issued on a variable rate basis that can be tendered for purchase at par whenever rates reset upon seven-day notice by the investor. The bonds tendered are then resold by the remarketing agent in the secondary market to other investors. VRDNs can be converted to a long term fixed rate security upon appropriate notice by the issuer.
Volatility management allows portfolio managers to assess both portfolio and individual security risk given current and potential market movement. Volatility is a comprehensive measure of portfolio risk that captures sector, security, duration, yield curve and other non-traditional sources of risk. This analysis is accomplished through the use of interest rate simulation, sector and security sensitivity analysis, and portfolio modeling which allows us to analyze the effect of interest rate changes on our portfolio.
Measures the variation of bond returns and/or interest rates over a set time period. It can be integral to pricing many issues with call options.
A measure of both a company's efficiency and its short-term financial health.
Calculated as: Working Capital = Current Assets – Current Liabilities
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a “red flag” that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivable numbers continue to fall, making it difficult to pay off bank loans and other short-term liabilities.
A graphic depiction of interest rates across all maturities, 0-30 years. The shape of the curve is largely influenced by the Federal Reserve Policy as well as factors listed under "Interest Rates" above.
In general, the return earned by an investment. In discussing bonds, yield can be any of several kinds. "Coupon yield" is the interest rate paid on the face value of the bond, which is usually $1,000. "Current yield" is the interest rate based on the actual purchase price of the bond, which may be higher or lower than the face amount. "Yield to maturity" is the rate that takes into account the current yield and the difference between the purchase price and the face value, with the difference assumed to be paid in equal installments over the remaining life of the bond.
Individual security selection is bottom-up and based upon analysis of each individual investment. As value investors, we seek to identify securities that are inefficiently priced and/or misunderstood. Our focus is on the spread between a specific security, a comparable duration Treasury and peer group issues. Our internal research team is responsible for specific security recommendations.
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