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M & A FINANCE GLOSSARY

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Contact FEC to expand definitions or for definitions not included in this glossary.  

M & A FINANCE GLOSSARY  A B C D E F G H-I J-K-L M N O P Q-R S T U-V W-X-Y-Z    

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11th District Cost of Funds  A monthly cost-of-funds index (COFI) reflecting the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts. The 11th district covers Arizona, California and Nevada. The index is published on the last day of the month and reflects the cost of funds for the prior month.  It’s an index that is used to set the cost of variable-rate loans, such as an adjustable-rate mortgage. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn’t vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. COFI usually lags market interest rates in both up and down markets. That means loans tied to this index rise and fall more slowly than rates in general.

 

91-day T-bill Auction Average Discount Rate  The U.S. government issues short-term debt at a discount at a competitive auction, usually on a weekly basis. At a discount means the note is sold at a discount from face value and then redeemed at maturity at the full face value. The difference between the discounted price and the face value determines the yield. The yield on 91-day Treasury bills is the average discount rate.  The rate is used as an index for various variable rate loans, particularly Stafford and PLUS education loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up.

 

182-day T-bill Auction Average Discount Rate  The U.S. government issues short-term debt at a discount at a competitive auction, usually on a weekly basis. At a discount means the note is sold at a discount from face value and then redeemed at maturity at the full face value. The difference between the discounted price and the face value determines the yield. The yield on 182-day Treasury bills is the average discount rate.  The rate is used as an index for various variable rate loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up.

Accounts Payable (A/P or Payables)  Money owed to suppliers by a business.

Accounts Receivable (A/R or Receivables)  Money owed by customers to a business.

Accounts Receivable Aging Report  Analysis of accounts receivables broken down into categories by length of time outstanding.

Acquiree, Transferee, Victim, Offeree, Target Company  The company which is being merged or taken over by another company.

Acquirer, Predator, Offeror, Corporate Raider  The company which is making a bid for the merger or takeover of another company.

Acquisition  The purchase of the controlling interest or ownership of another company. This can be affected by:

Acquisition Loans  Debt instruments used to finance the purchase of a business, a merger or other business acquisition transaction.

Acquisition of Assets  Acquirer may purchase only assets or some specific assets and not all the assets and liabilities of the company.

Accredited Investor  Certain securities offerings are restricted to accredited investors, or limit the number of unaccredited investors that may participate. An "Accredited Investor" defined as:

ACRS (Accelerated Cost Recovery System)  Schedule of depreciation rates allowed for tax purposes.

Actual EPS, CPS, or DPS  Reported annual Earnings Per Share (EPS -Trailing 12 months), cash flow (CPS) or Dividends Per Share (DPS) for a company for the fiscal year indicated. For companies which report on a quarterly basis, this information will contain the sum of the actual earnings, cash flow or dividends for the previous four quarters. For companies that report semi-annually, the field will contain the sum of the previous two semi-annual actuals.

Adjusted Yield - Mutual fund  Represents what a fund's yield would have been if the fund's manager had not agreed in advance to waive all or a portion of the fund's management fees and/or to reduce expenses. The fund's manager may terminate such agreement at any time upon notice to the fund's Board.

ADR (American Depository Receipts)  A security, created by a U.S. bank, that evidences ownership to a specified number of shares of a foreign security held in a depositary in the issuing company's country of domicile. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities. U.S. investors often prefer ADRs to direct purchase of foreign shares because of the ready availability of price information, lower transaction costs, and timely dividend distribution.  Certificates that represent a given number of shares in a foreign corporation, held on deposit in a U.S. bank that has overseas branches. They can be bought and sold directly in the U.S. market, offering U.S. investors an easy way to participate in individual foreign stocks.

After Hours Best Ask  The price at which someone who owns a security offers to sell a NASDAQ security during the current day’s After Hours market; also known as the asked price. Investors may trade in the After Hours Market (4:00-6:30 p.m. ET for NASDAQ stocks and 4:00-8:00 p.m. ET for NYSE and Amex stocks). Participation by Market Makers and ECNs is strictly voluntary and as a result, this session may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders. NASD Rule 3350 (the Short Sale Rule) will initially not apply during 4:00 p.m. to 8:00 p.m. ET.
 
After Hours Best Bid  he price a prospective buyer is prepared to pay at a particular time for trading a NASDAQ security during the current day’s After Hours market. Investors may trade in the After Hours Market (4:00-6:30 p.m. ET for NASDAQ stocks and 4:00-8:00 p.m. ET for NYSE and Amex stocks) on The NASDAQ Stock Market. Participation by Market Makers and ECNs is strictly voluntary and as a result, this session may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.
 
After Hours High  The after hours high represents the highest price a person purchased this security during the current day’s After Hours trading session. Investors may trade in After Hours Market (4:00-6:30 p.m. ET for NASDAQ stocks and 4:00-8:00 p.m. ET for NYSE and Amex stocks). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.
 
After Hours Last Sale  An electronic entry by an NASD Member firm representing the price involved in a transaction of a NASDAQ security during the current day’s After Hours session. The trade report must be submitted to NASDAQ within 90 seconds after the execution of the trade. Investors may trade in the After Hours Market (4:00-6:30 p.m. ET for NASDAQ stocks and 4:00-8:00 p.m. ET for NYSE and Amex stocks). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.

After Hours Low  The after hours low represents the lowest price a person purchased this security during the After Hours trading session. Investors may trade in the After Hours Market (4:00-6:30 p.m. ET for NASDAQ stocks and 4:00-8:00 p.m. ET for NYSE and Amex stocks). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.

After Hours Volume  An electronic entry by an NASD Member firm representing the number of shares involved in a transaction of a NADAQ security during the current day’s After Hours session. The trade report must be submitted to NASDAQ within 90 seconds after the execution of the trade. Investors may trade in After Hours Market (4:00-6:30 p.m. ET for NASDAQ stocks and 4:00-8:00 p.m. ET for NYSE and Amex stocks). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.
 
After Hours % Change  After Hours Percent change represents the percent increase/decrease between the last sale and the Market Close. 

Agency Costs  Costs to the firm associated with the potential for conflict of interest between management and shareholders when these two groups are different.

Agency Theory Theory concerning the relationship between a principal (shareholder) and an agent of the principal (company's managers). It involves the nature of the costs of resolving conflicts between the principals and agents.

Airport Finance   Reference to books on finance that you might find at airports, with titles like "How To Buy a House with Zero Down," or "All you need is $5,000 to Make a Million in One Year," or "Which Investments are Best in 1990's."

Alpha -Mutual Fund the difference between a fund's actual returns versus its expected performance, given its level of market risk as measured by beta. A positive alpha indicates the fund performed better than its beta would predict while a negative alpha indicates the fund's underperformance given the expectations by the fund's beta.

Amalgamation  It is blending of two or more companies. The shareholders of each company would become the shareholders of the company which is undertaking the activity. It is similar to a merger.

AMEX  American Stock Exchange.

AMEX Composite - XAX The AMEX Composite Index - (XAX)  The American Stock Exchange introduced a new AMEX Composite Index with a new ticker symbol, XAX, on January 2, 1997. The XAX is a market capitalization-weighted, price appreciation index, and replaces the AMEX Market Value Index (XAM) which, since its inception, has been calculated on a "total return basis" to include the reinvestment of dividends paid by AMEX companies. The new AMEX Composite Index is more comparable with other major indexes, which reflect only the price appreciation of their respective components.

Amortization Amortized Loans  For loan purposes, the systematic process by which a lender calculates loan payments so as to liquidate a debt over time. Payments are made at specific time intervals to reduce the outstanding debt to zero at the end of the loan period. Loans that are paid off in equal periodic payments.

Analyst A person with expertise in evaluating financial investments; he or she performs investment research and makes recommendations to institutional and retail investors to buy, sell, or hold; most analysts specialize in a single industry or business sector.

Announcement Date The date on which the company first made news of the split public.

Annual Report (10-K)  A report that all public companies must file annually with the SEC

Annuity  Investment that generates a stream of equal cash flows.  A contract between the contract owner and an insurance company guaranteeing that in return for a purchase payment(s), a series of fixed or variable income payments will be paid for the life of the annuitant or for a specified period of time, beginning right after purchase (immediate annuity) or after an accumulation period (deferred annuity).

Antitrust Laws  Laws that prohibit companies from working as a group to set prices, restrict supplies or stop competition in the marketplace.

Appraisal  A professional opinion of the value of a business or other property. See also valuation.

Appreciation  When an investment increases in value, it appreciates. For example, a stock whose price goes from $20 a share to $25 a share, it has appreciated by $5. An increase in an asset’s value

Arb  Arbitrage See arbitrage

Arbitrage (risk arbitrage) Simultaneous purchase of a security and sale of another to generate a risk-free profit.

Arbitrageur  A person involved in arbitrage.

Arrearage  An overdue payment, generally referring to omitted preferred stock dividends.

Ask  The highest price anyone wants to pay for the security at a given time.

Asset Allocation  The process of determining the optimal division of an investor's portfolio among different assets. Most frequently this refers to allocations between debt, equity, and cash.  Dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to balance the risks of investing. Asset allocation models vary based on an individual’s specific financial goals and situation.  Investment strategy that diversifies assets among stocks, bonds and money market instruments to help reduce investment risk.

Assets Anything that the firm owns. Any possessions of value in an exchange.

Asset-based Analysis  A valuation methodology utilizing the fair market value, rather than book value, of items on a company's balance sheet. This method is most useful for asset-intensive companies.

Asset Purchase  A type of transaction in which the buyer purchases assets from the target company, rather than a stock purchase in which the buyer purchases the shares of the target company. The existing entity itself is not transferred in an asset purchase.

Asset Utilization Ratios  Ratios that measure the speed at which a company is turning over or utilizing its assets, for example inventory turnover ratio.

Asymmetric Information  One group has more information about, say, on the well being of the company, than another. An example would be managers having more intimate knowledge about the company than a typical shareholder.

ATS  See ECN

Average Annual Total Return (Standardized)   An SEC standardized calculation that represents the average annual change in value of an investment over specified periods and assumes reinvestment of dividends and capital gains.

Automatic Investment Plan   Any plan in which an investor can automatically accumulate shares of a fund or company on a regular basis.

Average Daily Share Volume The number of shares traded per day, averaged over a period of time, usually one year.

Average Maturity  The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.

Average Tax Rate  The rate calculated by dividing the total tax liability by the entity's taxable income.

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Balance Sheet  A basic accounting statement that represents the financial position of a firm on a given date. Provides a snapshot of a company's financial condition at one point in time. It shows assets, including investments and liabilities as of a certain date. It also states a company's equity.

Balanced Mutual Fund  This is a mutual fund that buys common stock, preferred stock and bonds.

Bankers' Acceptance  A draft drawn on a specific bank by a seller of goods to obtain payment of goods that have been sold to a customer. The customer maintains an account with that specific bank.

Bankruptcy  Re-organization under "Chapter 11."

Basis

Basis Point  .01 percent. Used to measure changes in yields of bonds.

Basket  Generally an amount either above or below which claims may not be made for breaches of an agreement. It is used so that either claims are capped or minor breaches do not lead to claims.

Bear Market  General decline in security prices. A falling market, or a market in which prices are generally decreasing. A bear market in stocks is usually brought on by the anticipation of declining economic activity while a bear market in bonds is usually caused by rising interest rates.

Beginning Net Asset Value  The market value of a fund share on a predetermined start date.

Best Ask  The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time.

Best Bid  The highest quoted bid of all competing Market Makers to buy a particular stock at any given time.

Best Effort Purchase A method of selling newly issued securities whereby the underwriters are expected to sell as many securities as possible. They are not obligated to sell the entire subscription. Also see "firm commitment."

Beta  A relative (to a benchmark) measure of risk. Measures of an asset's non-diversifiable -- market-- risk. See also systematic risk.  Mutual Fund - a measure of a fund's volatility in relation to the stock market, as measured by a stated index. By definition, the beta of the stated index is 1; a und with a higher beta has been more volatile than the market, and a fund with a lower beta has been less volatile than the market.

Bid  The lowest price anyone wants to sell the security for at a given time. (See: Ask, and Bid-Ask Spread)

Bid-Ask Spread  The difference between the bid and the ask for a security at a given time.

Big Board  refers to the New York Stock Exchange (NYSE).

Bill  Debt that has less than 1-year maturity at time of issue.

Blue Chip   Stocks of well-established companies that have a history of earnings and of paying dividends and increasing profits. These companies have reputations for sound management and quality products. The stock prices tend to rise and fall in conjunction with the overall market. These stocks are also known as large-cap stocks. The stocks in the Dow Jones Industrial Average.  Common stock of a nationally known company that has a long record of profit, growth, and dividend payment, and a reputation for quality management, products, and services.

Book Value  Net asset value of a company's securities. Book value can be a guide in selecting underpriced stocks and is an indication of the ultimate value of securities in liquidation.

Bond  Long-Term IOU whereby the holder (lender or buyer) is promised to receive fixed payments over a pre-specified time period. Corporate bonds are one of the available instruments that companies can resort to for their financing needs.

Bond Par Value The face value ($1,000) that is to be returned to a bondholder at maturity.

Book to Bill  This is the semiconductor book to bill ratio. It reports on the amount of semiconductor chips that are booked for delivery as compared with those that companies already have billed for.

Book Value  The depreciated value of a company's assets (original cost less accumulated depreciation) less the outstanding liabilities.   A company's book value is its total assets minus intangible assets and liabilities, such as debt. A company's book value might be more or less than its market value. Also known as net worth.

Bottom Line  The net income "line" of the income statement

Bourse  French term for stock exchange.

Broker A person who facilitates transactions (buy and sell) in the secondary market.

Brokerage Commission  The amount of money your brokerage house would charge for a given transaction (buy/sell). This is how these firms make their living.

Broker/Dealer  An individual or firm that is in the business of buying and selling securities. Broker/dealers are registered with the Securities and Exchange Commission (SEC).

Brokers Calls  Individuals who buy stocks on margin borrow part of the funds to pay for the stocks they buy from their broker. The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests it. The rate paid on such loans is usually about 1% higher than the rate on short-term Treasury bills.

Bubbles  See Efficient Market Hypothesis (EMH)

Bull Market A market with the general prices advancing. A rising market, or a market in which prices are generally increasing for stocks, bonds, or commodities.  Term used to describe a prolonged rise in the price of securities.

Bullish  One who believes the general market will rise. (See: Bear)

Business Cycle A recurring pattern of expansion and contraction in the economy. The average cycle is three to four years..

Buyback  When a firm repurchases its own stock from the public.

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C/A  See Current Assets

C/L  See Current Liability

Call Option  See Option

Call Premium  The difference between then call price and the security's value.

Call Provision  A provision that entitles the corporation to repurchase its bonds or preferred stock from their holders at stated prices over specified periods.

Callable Bond  A bond that the issuing company has the right to buy back at a pre-specified price.

Cafeteria Plans  An employee benefits plan that allows employees to customize their benefit package. Employees receive a fixed amount of dollars that can be allocated between several fringe benefits.

Cap  See Capitalization

Capital  The amount of money you have invested. When your investing objective is capital preservation, your priority is trying not to lose any money. When your investing objective is capital growth, your priority is trying to make your initial investment grow in value.

Capital Appreciation- Increased market value of an asset as measured by share price.

Capital Asset  All property used in conducting a business other than assets held primarily for sale in the ordinary course of business or depreciable, and real property used in conducting a business.

Capital Asset Pricing Model (CAPM)  An equation relating an asset's relative riskiness (beta) to its required return.  An element of modern portfolio theory. A mathematical model showing an "appropriate" price, based on relative risk combined with the return on risk-free assets.

Capital Budget  List of planned investment projects, usually prepared annually.

Capital Budgeting The decision-making process with respect to investment in fixed-assets. It involves measuring the additional cash flows associated with investment proposals and evaluating the viability of those proposed investment.

Capital Gain  Profit from a sale of an investment constitutes a capital gain. For example, if you bought a share of stock for $5 and later sold it for $7.50, you would have a capital gain of $2.50. The profit made when an asset is sold for more than the purchase price is a capital gain.

Capital Gains Distribution  Payments to mutual fund shareholders of profits from the sale of securities in a fund's portfolio. Capital gains distributions (if any) are usually made annually.

Capital Gains Tax  Tax on the gain realized from the sale of capital assets such as stock, mutual funds, business interests, or other asset. Long-term capital gains tax rates apply to assets held longer than 12 months.

Capital Loss  Amount by which the proceeds from the sale of a capital asset are less than its cost basis. If the sale price is less than the purchase price, this is a capital loss.

Capital Markets  Markets for long-term financial securities.

Capital Rationing. Shortage of funds that forces a company to choose between projects.

Capital Structure  Mix of different securities issued by a company.

Capitalization  A company's amount of permanent capital. Usually measured as the sum of a company's market value of long term equity and debt.

Capitalization Ratio  Measurement of the company’s debt component of the company’s capitalization. Measures the extent of debt used in relation to the company’s permanent capital. Determined by dividing long-term debt by long-term debt plus equity.

CAPM  See Capital Asset Pricing Model.

Cash Budget  A detailed plan of future cash flows. This budget is composed of four elements: cash receipts, cash disbursements, net change in cash for the period, and new financing needed.

Cash Flow  The amount of cash a company generates and uses during a period, calculated by adding non-cash charges (such as depreciation) to the net income after taxes. Cash Flow can be used as an indication of a company's financial strength. It is also sometimes referred to the "money value" of trades in a stock during a trading day. Cash flow measures real money flowing into, or out of, a company’s bank account. Unlike reported earnings, there is little a company can do to overstate their bank balance. Every company filing reports with the Securities and Exchange Commission (SEC) is required to include a cash flow statement within their quarterly and annual reports.

CD (Certificate of Deposit)  Receipts for funds deposited in bank or S&L for a fixed period. The funds earn a fixed interest rate.

Change This shows the change in price of a security from the previous day's closing price. For instance, -1 means the security has fallen $1.00.

Characteristic Line The line of "bet fit" through a series of historical returns for the firm's stock relative to the market returns. The slope of this line, called beta, represents the average movement of the firm's stock returns in response to a change in the market's returns.

Cheap  An asset is said to be cheap when it is worth (intrinsic value) more than its market value.

Circular Merger  Companies producing distinct products seek amalgamation to share common distribution and research facilities and promoting market enlargement. The acquiring company benefits by economies of resource sharing and diversification.

Clandestine Takeover (or) Creeping Takeover  An entity may buy up to 5% stake in a company without any prior permission. After 5%, one is to inform the stock exchange.

Class “A” Property- Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility, and a definite market presence.

Class of Stock  A type of share with particular rights and privileges such as the right to vote on corporate matters. The most common classes of stock are common stock, voting preferred stock, and non-voting preferred stock

Closed-End Fund  An investment fund that does not stand ready to purchase its own shares from its owners. Its shares can trade on an exchange.

Closing Price (alternatively close)  The price at which the last trade took place on a given day in a particular security.

Collar  An upper and lower limit on the interest rate on a floating-rate note.

Collateral  Assets that are used as security for a loan.

Commercial Paper  Unsecured debt (IOU), issued by large corporations, with maturities (at time of issue) less than a year. They can be traded on OTC.

Commission  The broker=s fee for purchasing or selling assets.

Commodity  A commodity is food, a metal or another physical substance that investors buy or sell, usually via futures contracts.

Common Shares - Common Stock  Securities that represent equity ownership in a company. Common shares topically allow an investor to vote on such matters as the election of board of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. When people talk about a company's stock, they usually mean common stock. When you own common stock in a company, you share in its success or failure. As part owner, you vote on important policy issues, such as picking the board of directors. If the company prospers, you may get part of the profits, called a dividend. Also, the value of your share of the company many go up; common stock generally has the most potential for growth. However, that value also can drop if the company does poorly, and if it goes bankrupt common stockholders are the last to receive any payment.

Common Shares Outstanding  The number of common shares of stock outstanding at the end of the year, including stock held by the company in its treasury.

Competitive Bid  A mechanism to select a lead investment bank in which investment banks submit a bid representing their compensation. The issuing firm solicits bids on the underwriting and chooses the underwriter who offers the most favorable terms.

Compounding  The process of determining the future value of a payment or a series of payments when applying the concept of compounding interest. This process is the opposite of discounting.

Conglomerate Merger  Merger between two corporations in unrelated business.

Consensus Rating The average of analysts recommendations for a single entity. As many brokers have different ratings systems, their recommendations must be standardized so that a consensus can be calculated. The I/B/E/S ratings are calculated using a standard set of recommendations, maintained by I/B/E/S, each with an assigned numeric value:

1. Strong Buy
2. Buy
3. Hold
4. Under-perform
5. Sell

Each recommendation received from the analysts is mapped to one of the I/B/E/S standard ratings. Assigning a numeric value to the broker text enables I/B/E/S to calculate a consensus recommendation. This consensus recommendation appears as the mean (average) of the assigned values.

Consol  A perpetual bond issued by the British government. Sometimes used as a general term for perpetuity.

Consolidation The fusion of two companies in which both the companies loose their identity and form a new company. Share holders receive the shares of the new company.

Consumer Price Index (CPI)  The CPI measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S. Department of Labor publishes the CPI every month.

Continuing Operations  Term used in an income statement to denote recurring income as opposed to income generated by sales of assets or discontinued operations.

Conversion Price The price paid for a common stock that is obtained by converting either convertible bonds or preferred convertible stock.

Conversion Ratio  The number of shares of common stock for which a convertible security can be exchanged for.

Convertible Bond  Bond that can be converted to equity at a pre-specified conversion ratio.

Convertible Preferred Stock  Preferred shares differ from common shares in three main respects. First, unlike common shares, preferred shares generally have no voting rights in the company. Second, preferred shares have preference over common shares if in the unfortunate event that the company is forced to liquidate its assets. Third, and most important for seed capital investors, most preferred shares carry provisions for guaranteed rates of return paid to the preferred shareholders. Convertible preferred shares are preferred shares that are convertible, either at the option of the company or the shareholder, to common shares. Convertible preferred shares give a potential investor the comfort level of guaranteed income on their investment, along with the option to convert to common shares when the company becomes profitable.

Core Investor  A shareholder or a group of investors that holds enough shares to be able to influence management decisions.

Corporation  A legal entity that functions separate and apart from its owners. A corporation is a legal "person" created separately from those who own & operate it. As an artificial "person", the corporation's debts and taxes are separate from its owners (founders), thereby, offering personal liability protection of all business structures. Because the corporation continues to exist even after the death of a founders, it offers estate planning advantages.  Raising capital to finance expansion, equipment, or development; without borrowing, is another fundamental reason for incorporating. Many companies that were unable to secure traditional financing as a sole proprietorship, have been literally "born" overnight by stock offerings.

Cost Budgets  Budgets prepared for every major expense category of the firm, such as administrative cost, financing cost, production cost, selling cost, and research and development. 

Cost of Capital  The rate that must be earned by the company to satisfy all the firm's providers of capital. It is based on the opportunity cost of funds.

Coupon  Interest payment on debt.

Coupon Interest Rate The Interest to be annually paid by the issuer of a bond as a percent of par value, which is specified in the contractual agreement.

Coupon Rate  A bond's coupon rate is stated on the bond. It tells how much interest the bond will pay every year based on the bond's face value. For example, if you buy a $1,000 bond with an 8% coupon rate, you'll get $80 a year in interest. Like a bond's face value, its coupon rate never changes.

Covariance  A measure of co-movement between two variables.

Covenants  Provisions in the legal agreements on loans, bonds, or lines of credit. Usually written by the lender to protect its position as a creditor of the borrowers.  See Bond Covenants

CP  See commercial paper

Credit Scoring  A procedure for assigning scores to companies or individuals on the basis of the risk of default.

Credit Union  An agency providing financial services to its members.

Crown Jewels In some countries a company calls its precious assets as crown jewels to depict the greed of the acquirer under the takeover bid. These precious assets attract the raider to bid for the company’s control. The company sells these assets at its own initiative leaving the rest of the company intact. (Instead of selling the assets, the company may also lease them or mortgage them so that the attraction of free assets to the predator is suppressed.)

Cum dividend  With dividend.

Cum Rights  With rights.

Cumulative Voting  A shareholder may cast all his or her votes for one candidate for the board of directors. Also see majority voting.

Current Asset  Asset that is expected to be turned into cash within a year.

Current Liability  Liability that is expected to be paid in less than a year.

CUSIP (Committee on Uniform Securities Identification Procedures)  The committee which supplies a unique nine-character identification, called a CUSIP number, for each class of security approved for trading in the U.S.

Custodian  An organization which maintains and safeguards an individual's, mutual fund’s, or investment company’s assets for them.

Cyclical Stock  The stock of a company whose fortunes are closely tied to the cyclical ups and downs of the economy in general. For example, General Motors is a cyclical stock since its business of selling autos is highly dependent on the general health of the economy.

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Date of Record  The date on which a shareholder must officially own shares in order to be entitled to a dividend.

Day High  This is the highest price that a security has traded at during the day.

Day Low  This is the lowest price that a security has traded at during the day.

Days to Cover Calculated as the aggregate short interest for the month divided by the average daily share volume traded for the period between short interest settlement dates. If days to cover is between 0 and 1, it is rounded up to 1 on Nasdaq.com

DCF Discounted Cash Flows

Dealer  A person (or firm) who facilitates transactions in the secondary market. They make their living on the difference between the prices they pay for the assets in their inventory and what they sell them for.

Debentures  Unsecured debt

Debt  IOU, such as bank loans, bonds, commercial paper, government bonds and bills.

Debt Offerings  Commonly known as a bond or note offering.  Many investors and especially seed capital investors may prefer to invest in debt rather than in equity of a company. In return for their investment, the debt is secured by some or all of the assets of the company, and is traditionally structured as an installment note at a modest interest rate. This gives the investor the comfort of being a full-fledged creditor, rather than a last-in-line shareholder if the company folds. Further, the investor's payments come off the top, rather than off the bottom, of the profit and loss statement.

Declaration Date  The date on which a firm announces a future dividend payment.

Default Risk  Uncertainty of a firm's ability to meet its debt obligations on time and in full.

Default Risk Premium (DRP)  The additional return lenders require to compensate them for default risk.

Defensive Merger  The directors of a threatened company may acquire another company for shares as a defensive measure to forestall the unwelcome takeover bid. For this purpose, they put large block of shares of their own company in the hands of shareholders of friendly company to make their own company least attractive for takeover bid.

De-Merger or Corporate Split or Division  This takes place when part of a company’s undertaking is transferred to a newly formed or an existing company. Some or that part of the shares of the first company are also transferred to the new company. The reminder of the first company’s undertaking continues to be vested in it and the share holders of the main company gets reduced by that extent.

De-Merger By Agreement  In this, the de-merger takes place by an agreement with the shareholders and the creditors of the company. All the assets of the old company would be transferred to the new company and henceforth the new company would pay all the creditors.

Defined Benefit Plan  This is a type of retirement plans that provides a fixed amount of money after you retire following a set number of years (in other words, the benefit is "defined" in advance). Once you retire, the amount you receive is fixed and usually does not increase with inflation.

Defined Contribution Plan  This is a type of retirement plan in which the level of contributions and the benefits will vary, depending on the return from the investments. You don't owe any income taxes on the money or any earnings until you make a withdrawal.

Deleted  A security is no longer included in The NASDAQ Stock Market.

Depreciation  A decrease in value due to age, wear and tear, etc.-reduction in the book or market value of an asset; portion of an investment that can be deducted from taxable income.

Derivative Security  A financial asset whose value is based on an underlying asset. Options and futures are examples.

Dilution  (1) A decrease in the proportion of income to which each shareholder is entitled, (2) A decrease in the % ownership of individual shareholders.

Discontinued Operations  Operations that have been or will be discontinued by the company. These items are reported separately on the income statement.

Discount  (1) The amount by which a bond or preferred stock may sell below its par value. (2) The notion that market prices "takes into account@ or include all publicly available relevant information.

Discount Bond  A bond that sells at value below par value.

Discount Broker  Brokerage services provided at a cost lower than full-service brokers.

Discounted Common Stock  Many investors are going to be wary of committing to a seed capital investment unless they feel that they are really getting a good deal for their money. When offering common shares of a company to raise seed capital, particularly when a company is a start-up venture with little or no track record, it is often prudent to offer common shares at a substantial discount to what a selling price will be during the direct public offering. Offering discounted common shares will convince many potential investors to invest at the seed-capital stage, when their investment is most needed, rather than to wait for the direct public offering.

Discounting  The inverse of compounding. This process is used to determine the present value of a cash flow.

Discount Rate  (1) The interest rate used in calculating the present value of cash flows. The rate reflects the time value of money and risk of the cash flows. (2) The interest rate charged by the twelve Federal Reserve Banks for short-term loans made to member banks.

Distribution Date  Date on which the payout of realized capital gains on securities in the fund portfolio occurred.

Diversifiable Risk  The components of an asset's risk that can be eliminated when the asset is combined in a well-diversified portfolio.

Diversification The acquisition of a group of assets in which returns on the assets are not directly related over time. Proper investment diversification is intended to reduce the risk inherent in particular securities. An investor seeking diversification for a securities portfolio would purchase securities of firms that are not similarly affected by the same variables. For example, an investor would not want to combine large investment positions in airlines, trucking and automobile manufacturing because each industry is significantly affected by oil prices and interest rates. The act of not putting all your investments in only one or few assets.

Divestiture  A division of a company that is sold out to new investors.

Dividend  Distribution of wealth by firm to shareholders based on number of shares owned.

Dividend Reinvestment Plan (DRIP)  An investment plan that allows shareholders to automatically reinvest dividends and capital gains distributions, thereby accumulating more stock while avoiding brokerage commissions.

Dividend Yield  Dividends per share divided by the price of the security.

Diversification  Similar to asset allocation, diversification is a strategy designed to reduce overall portfolio risk.

DJIA (Dow Jones Industrial Average)  This is the best known U.S. index of stocks. It contains 30 stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing. These 30 companies are chosen from sectors of the economy most representative of our country's economic condition. There are three other Dow Jones Averages: the transportation, the utility, and the composite.

Dollar Cost Averaging  This is a method of investing. Money is invested at regular intervals in the same investment. Because you invest the same amount each time, you automatically buy less of the investment when its price is higher and more when its price is lower. Though the method doesn't guarantee a profit or guard against loss in declining markets, the average cost of each share is usually lower than if you buy at random times. For dollar cost averaging to work you must continue to invest regularly over time and purchase shares in both market ups and downs.

DPO  A company can sell stock directly to the public, and without the full registration and reporting required for IPO's.  DPO's range in offerings from up to $1 million, all the way up to $25 million, depending on the type of offering made.  Each different type of offerings has different requirements, restrictions and limitations. There are Federal and State DPO types.

DRP  See Default Risk Premium.

Due Diligence  The practice of investigating a potential investment.

Duration  A measure of a bond price's sensitivity to a 100-basis point change in interest rates. A duration of 7 would mean that, given a 100-basis point change up/down in rates, a bond's price would move up/down by 7%.

- E -

Earnings Per Share (EPS)  Company's earnings divided by the number of shares outstanding.

Earnings Report  A financial statement, also called Income Statement, issued by a company showing its earnings or losses over a given period.

EBIT  A company's Earnings Before Interest and Taxes.

EBITDA Earnings before interest, taxes, depreciation, and amortization.

ECN (ATS)  Alternative trading systems, known as ECN's, have become integral to the securities markets, providing  enhanced flexibility and reduced trading costs, as well as competition to the established securities exchanges and the NASDAQ Stock Market.

In 1999, ECNs account for approximately 30% of total share volume and 40% of the dollar volume traded in NASDAQ securities. ECN's account for approximately 3% of total share and dollar volume in listed securities. In contrast, in 1993, ECN's accounted for only 13% of share volume in NASDQ securities and only 1.4% of listed share volume.

The vast majority of ECN activity currently involves trading in NASDAQ securities during regular trading hours. In 1999, an average of 93% of ECN share volume was reported to be in NASDAQ securities. Approximately 96% of ECN share volume in NASDAQ National Market System ("NMS") securities was effected during the regular trading session from 9:30 a.m. to 4:00 p.m. The overall level of ECN activity in listed stocks remained relatively small in 1999, and around 26% of this share volume was effected in the after-hours market. In 2000 and continuing this year  ECN's grew volume and market share even as consolidation has started to occur.  

Initially, ECNs were not integrated into the national market system, serving primarily as closed trading systems available only to institutions and broker-dealers. As a result, posted prices on the ECNs were better than those prices posted on NASDAQ, fragmenting the market and making quotes disseminated to the public less reliable. Ultimately, this situation had its most severe impact on the individual investor. Spreads, the difference between the bid and ask price, were artificially wide in the public markets. The result for individual investors was inferior execution prices.

In response to the disparities in the market, the SEC adopted the Order Handling Rules in January 1997 - requiring market makers and specialists to reflect in their quote the price of any orders they placed in an ECN if the price was better than what they were displaying to the public.

Investors won this round as the Order Handling Rules caused spreads to narrow dramatically. However, loopholes are quite common in the securities markets, and the Order Handling Rules did not stipulate that all market participants had to display their ECN orders to the public. Soon enough, many institutional orders and non-market maker orders were not available to the public, impairing price transparency.

The SEC acted to eliminate the loopholes by adopting Regulation ATS, allowing alternative trading systems to either define themselves as a market participant and register as a broker-dealer or as a separate market and register as an exchange. 

 

Economic Investment  Investment in real assets: plant, equipment, and intangible assets.

EDGAR (Electronic Data Gathering, Analysis, and Retrieval)  An electronic system implemented by the SEC that is used by companies to transmit all documents required to be filed with the SEC in relation to corporate offerings and ongoing disclosure obligations. EDGAR became fully operational mid 1995.

Efficient Market  A market in which information is instantaneously reflected in the price.

Efficient Market Hypothesis (EMH)  A hypothesis that U.S. equity markets are efficient.

Effective Annualized Seven-Day Yield Yield for 7 day period including the day reported, calculated by adding 1 to the base period return used in calculating the standard 7 day yield raising the total to the power of 365 divided by 7 and subtracting 1 (NOTE: To be reported on Wednesday only).

EMH  See Efficient Market Hypothesis

Ending Net Asset Value  The market value of a fund share on a predetermined end date.

EPS  See Earnings Per Share

Equity Carved Out  A type of divestiture and different to spin off. It resembles the IPO of some portion of equity stock of a wholly owned subsidiary by the parent company. Some of the subsidiary’s shares are offered for sale to general public for increasing cash inflow without losing control. This is also called a "split off IPO" (Initial Public Offering).

ERM  See Exchange Rate Mechanism 

Estate  All assets a person owns at the time of death, including securities, real estate, business interests, physical property, and cash, less outstanding liabilities. The estate is distributed to heirs according to the terms of the person's will or, if there is no will, by court ruling.

Estate Freeze  Techniques or methods used to control the future appreciation of assets for the purpose of reducing estate taxes.

Estate Planning  The process of developing and implementing a master plan that facilitates the distribution of your property after your death according to your goals and objectives.

Estate tax  A tax imposed by the federal government and some state governments on the transfer of assets to heirs

Eurobonds  Bonds that are marketed internationally.

Eurodollar Market  A banking market in U.S. dollars outside the U.S.

Exercise Price  The price at which a call option or put may be exercised. Also called strike price.

Exchange  There are three main U.S. stock exchanges on which securities are traded. The American Stock Exchange (AMEX), Nasdaq is the National Association of Securities Dealers, and the New York Stock Exchange ( NYSE).

Exchange Rate Mechanism (ERM), or the currency grid, is a system that limits currency fluctuations to a range of 15 percent in either direction.

Ex-Dividend Date  The date which determines ownership of stock for the purpose of paying dividends. Owners purchasing shares on or after the ex-dividend date do not receive the dividends. Only owners before this date would be registered to receive the declared dividend. The date is set at four business days prior to the record date. Also see dividend.

External Financing  Financing projects through new issues of securities; debt and/or equity.

Extra Dividend  Dividend that is not expected to be repeated.

- F -

Face Value  Value of security shown on certificate. Also called par value, which is typically $1,000.

Family of Funds  Group of mutual funds managed by the same investment management company. Each fund typically has a different objective; one may be a growth-oriented stock fund, whereas another may be a bond fund or an index fund. Shareholders in one of the funds can usually switch their money into any of the family's other funds, sometimes at no charge.

Fed (Federal Reserve Bank)  Refers to the U.S. Central Bank, whose functions include interest rate policy, regulation of banks, and "stabilization" of foreign exchange (FX).

Federal Discount Rate  The interest rate at which an eligible financial institution may borrow funds directly from a Federal Reserve bank. Banks whose reserves dip below the reserve requirement set by the Federal Reserve's board of governors use that money to correct their shortage. The board of directors of each reserve bank sets the discount rate every 14 days. It's considered the last resort for banks, which usually borrow from each other.  The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur. Raising the rate makes it more expensive to borrow from the Fed. That lowers the supply of available money, which increases the short-term interest rates. Lowering the rate has the opposite effect, bringing short-term interest rates down.

Federal Funds  Non-interest-bearing deposits of banks with the Federal Reserve. Banks lend excess reserves out to each other.

Federal Funds Rate  The interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis. The law requires banks to keep a certain percentage of their customer's money on reserve, where the banks earn no interest on it. Consequently, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth to maintain the proper level.  Like the federal discount rate, the federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.

Federal Gift Tax  A federal tax that is imposed on the transfer of securities, property, or other assets. The tax is based on the fair market value of the transferred assets and applies to transfers valued over $10,000 per individual per year (indexed for inflation).

Federal Home Loan Bank  A Federally chartered, privately owned company charged with regulating the S&L industry.

Federal Reserve Board  Seven-member board that supervises the banking system by issuing regulations controlling bank holding companies and federal laws over the banking industry. It also controls and oversees the U.S. monetary system and credit supply.

FHLB  See Federal Home Loan Bank.

Fiduciary  A person, company, or association that holds assets in trust for a beneficiary. The fiduciary is charged with the responsibility of investing the assets wisely for the beneficiary's benefit. Examples of fiduciaries include executors of wills and estates, trustees, and those who administer the assets of underage or incompetent beneficiaries.

Fiduciary  Capacity  A person is said to act in a fiduciary capacity when business is transacted, or money and property are handled for the benefit of another. The term is not limited to technical or express trusts, but may also apply to such offices or relations as attorneys, guardians, executors, brokers, and agents.

Fiduciary  Income Tax Return  An income tax return that is filed by the court representative or estate administrator for a decedent's estate, trust, or a bankruptcy estate to report income, deductions, gains, losses, distributions, income that is accumulated or held for future distribution, income tax liability of the estate or trust, and employment taxes on wages paid to household employees. The return is not required if the decedent's estate is not probated.

Financial Assets  Securities that have a claim on assets.

Financial Investment  Investment in financial assets.

Financial Intermediaries  Financial institutions that assist the transfer of savings from economic agents with excess savings to those that need capital for investments.

Financial Markets  Markets or exchanges where financial assets are traded. The largest two in the U.S. are the NYSE and Nasdaq.

Financial Risk  Additional risk borne by shareholders because of a firm's use of debt.

Firm Commitment  Agreement between a company and its lead investment banker in which the latter is obligated to sell all the shares to be issued.

Firm Specific Risk  Uncertainty in returns due to factors specific to the company. See diversifiable risk.

Fixed Assets (overhead)  A cost that is fixed for a given period of time. It is not dependent on the amount of goods and services produced during the period. Tangible fixed assets include real estate, plant and equipment. Intangible assets include patents, trademarks, and customer loyalty.

Fixed Annuity  A contract issued by an insurance company allowing for a fixed rate of interest in both the accumulation and income phases; periodically adjusted by the insurance company.

Fixed Income Securities  These securities pay a fixed rate of return by investing in government, corporate, or municipal bonds, which pay such a fixed rate. These investments could offer you an advantage in times of low inflation, but are not likely to protect you against the declining buying power of your money during times of high inflation.

Float  The float is the number of shares of a security that are outstanding and available for trading by the public.

Floatation Cost  The underwriter's revenue associated with assisting a firm in issuing and marketing new securities.

FNMA "Fannie Mae" Federal National Mortgage Association.  A publicly owned corporation sponsored by the federal government that provides liquidity in the mortgage market. It buys mortgages from mortgage underwriters financed by issuing bonds.

Foreign  A non-U. S. company with securities trading on NASDAQ.

Free Cash Flow Value  The value of a firm based on the cash flow available for distributing to any of the providers of long-term capital to the firm. The free cash flows equal operating cash flow less any incremental investments made to support a firm's future growth.

Friendly Mergers  Mergers and acquisitions through the negotiations, willingness and consent of the acquiree company are called friendly mergers.

Five-Year Treasury Constant Maturity  An index published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a five-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.  This figure is used as a reference point to establish the price of other securities such as corporate bonds. Treasury securities are considered risk-free since they are backed by the U.S. government. This figure, and an added margin based upon the risk involved, is used in pricing various debt securities. It is also used in establishing certificate of deposit (CD) yields.

Front Running  A term that refers to situations when a manager who has private information about the direction of movement of an asset takes a private position in the asset before purchasing it for the fund.

Full-Service Broker  Brokers who provide services in addition to assisting in buying and selling of securities in the secondary market. Services can include providing company profiles and investment strategy recommendations.

Fund Supermarkets  Mutual fund "supermarkets," the likes of Charles Schwab and Fidelity Investments, are financial services companies that "sponsor" mutual funds, i.e., they provide investors with easy access to a broad range of mutual funds.

Futures Contract  This is an agreement that allows an investor to buy or sell a commodity, like gold or wheat, or a financial instrument, like a currency, at some time in future. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying asset. These contracts trade on organized futures exchanges.

Futures Exchange  Traded contracts specifying a future date of delivery or receipt of a specific product or asset. The assets include agricultural products like, pork bellies and oranges; metal; and financial instruments and indices. They are used by firms to hedge against potentially unfavorable price changes, and by speculators who hope to benefit from betting on the direction or magnitude of change.

Futures Market   Where futures contracts are traded.

- G -

Gain  The profit made on a property or securities transaction realized when property or a stock, bond, mutual fund, futures contract, or other financial instrument is sold for more than its purchase price. When business property or security has been held for more than one year, the gain is taxable at more favorable capital gain rates. If the asset is held for less than one year the gain is taxed at regular income tax rates.

Ginnie Mae.  See GNMA.

GNMA  See Government National Mortgage Association.

Golden Parachute or First Class Passengers Strategy  A plan devised by existing management stipulating that an acquiring company has to pay executives of the acquired company a substantial sum of money in the event of removing the former.

Government National Mortgage Association ("Ginnie Mae")  A government-owned corporation that purchases mortgages and re-packages them as pass-through securities. The holder of a pass-through bond owns a portion of the underlying mortgages.

Greenmail  In a typical greenmail, the acquiring firm has already purchased a number of shares of the target firm's stock. Management of the target company offers to buy back the stock, at a price higher than the market. A large block of shares is held by an unfriendly company, which forces the target company to repurchase the stock at a substantial premium to prevent the takeover. (This could prove to be an expensive deal to the raider.)

Grey Knight  A friendly party of the target company who seeks to takeover the predator.

Growth Stocks  Stocks of companies that have an opportunity to invest in projects that earn more that the required rate of return.

- H -

Hurdle Rate  The minimum required return on a project.

Hedging  The purchase or sale of a derivative security (such as options or futures) in order to reduce or eliminate risk associated with undesirable price changes of another security.

Held  A situation where a security is temporarily not available for trading (e.g. Market Makers are not allowed to display quotes).

Holding Company  A holding company would have more than 50% of the total voting power and has the control on the other company.

Horizontal Merger  Merger between two companies that produce similar products. Also referred to as horizontal integration.

Horizontal Integration  When firms in the same industry merge. Also referred to as horizontal merger

Hostile Takeover  A merger or acquisition in which management resists the group initiating the transaction.  Also called raids or takeover raids.

House of Issue  The investment bank that underwrites and floats a security issue.

- I -

Income Property  Real estate that generates cash flow.

Income Stocks  Companies with high dividend yield or no NPV > 0 opportunities.

Incorporation  The act of establishing a corporation.  Personal financial liability, tax advantages, financial and estate planning, raising capital to finance expansion, equipment, or development; with or without borrowing, is a fundamental reason for incorporating.  See Corporation.

Indenture  The legal agreement between the firm issuing the bond and the bondholders, providing the specific terms of the loan agreement.

Index  A yardstick to measure change from a base year.

Index Funds  Mutual funds whose objective is to replicate the performance of an index. The most popular equity index is the S&P 500.

Individual Retirement Account (IRA)   A tax-deferred retirement account for an individual who does not participate in a pension plan at work or who does participate and meet certain income.

Inflation  A general increase in prices of goods and services.

Inflationary Premium (IP)  Additional compensation over the T-bill that levers require to compensation them for the risk of expected inflation.

Inflation-Indexed Bonds  U. S. Government indexed bonds with inflation protection

Inside Market  The highest bid and the lowest offer prices among all competing dealers in a NASDAQ security, i.e., the best bid and offer prices.

Insiders  These are directors and senior officers of a corporation -- in effect those who have access to inside information about a company. An insider also is a shareholder who owns more than 10 percent of the voting shares of a company.

Insider Trading  An illegal offence for an individual who is an insider by virtue of being connected with the company and has access to price sensitive information which other share holders do not have and uses this information for his/her or others personal gain

Intangibles  All intangible assets like goodwill, patents, trademarks, unamortized debt discounts and deferred charges

Interlocking Directors  When competing companies have a common Board of Directors. This is illegal in the US but is common practice in Japan.

Interlocking Shareholdings or Cross Shareholdings  Two or more group companies acquire shares of each other in large quantity or one company may distribute shares to the share holders of its group company to avoid threats of takeover bids. (If the interlocking of shareholdings is accompanied by joint voting agreement then the joint system of defense is termed as "Pyramiding", which is the safest device or defense.)

Intermediaries  See Financial Intermediaries

Internal Financing  Financing projects through retained earnings.

Internal Rate of Return (IRR)  The discount rate at which present value of the current cash flows of an investment equal the cost of the investment.  When the IRR is greater than the required return, called the hurdle rate in capital budgeting, the investment is acceptable.

In-the-money Options  An option that would be worth exercising if it expired immediately. Also see out-of-the-money options.

Investment Banks are firms that assist companies in initial sale of securities in primary market.

Investment Company  A company that uses its capital to invest in other companies. There are two types: the closed-end and the open-end, or mutual fund.

Investment-Grade Bonds  Bonds rated Baa or above.

IP (Inflationary Premium)  Additional return required to compensate asset holders for inflation uncertainty.

IPO (Initial Public Offering)  Securities are offered for the first time to the public.

IPO Date  The date that the security started publicly trading.

M & A FINANCE GLOSSARY  A B C D E F G H-I J-K-L M N O P Q-R S T U-V W-X-Y-Z 

 

- J -

Joint Holding or Joint Voting Agreement  Two or more major shareholders may enter into agreement to block voting or to block sale of shares or may sell the shares together. This agreement is entered into with the cooperation of Offeree Company’s management.

Joint Venture  This is an agreement between two or more companies where there will be an agreed contribution and participation of the respective companies.

Junk Bond  A bond that is not of investment quality, with rating below BBB.

- K -

Keiretsu  Japan's industrial structure.

- L -

Last Sale Reporting An electronic entry by NASD Members to The NASDAQ Stock Market of the price and the number of shares involved in a transaction in a NASDAQ security. The trade reported must be submitted to NASDAQ with 90 seconds of the execution of the trade.

LBO (Leverage Buyout)  A corporate restructuring where the existing shareholders sell their shares to a small group of investors. The purchasers of the stock sue the firm's unused bet capacity to borrow the funds to pay for the stock. Typically the company becomes private.  It is can be known as management buyout. Management may raise capital from the market or institutions to acquire the company on the strength of its assets.

LEAP  A LEAP is a long-term option contract for a company's stock. They usually run for one year or more and are available on several U.S. exchanges.

LLC (Limited Liability Company) Also called Limited Liability Partnership (LLP) It a new type of partnership that is now permitted in many states. Unlike a regular and limited partnership, in an LLC, all partners enjoy limited liability with regard to business's liabilities, and, in that regard, they are similar to shareholders in a corporation.

LLP See LLC

Letter of Credit  Letter from a bank stating that it has established credit in the company's favor.

Leverage  Use of debt financing.

Leveraged Buy Outs  This is the acquisition of a company by its management personnel. It is also known as management buyout. Management may raise capital from the market or institutions to acquire the company on the strength of its assets.

LIBOR (London InterBank Offered Rate)  The lending rate among international banks in London.

Limit Order  When you instruct your broker to buy or sell a given security at a specific price.

Limited Liability  Limitation of a shareholder's losses to the amount invested.

Limited Partnership  Organization made up of General Partner, who manages a project, and limited partners, who invest money, but have limited liability, are not involved in day to day management, and usually can not lose more than their capital contribution.

Liquidate To convert assets into cash.

Liquidity  Refers to an investor's ability to convert an asset into cash. The faster the conversion the more liquid the asset. Liquidity is a risk in that an investor might not be able to convert the asset to cash when most needed. Moreover, having to wait for the sale of an asset can pose an additional risk if the price of the asset decreases while waiting to liquidate.

Liquidity Premium (LP)  Additional return required to compensate investors for purchasing illiquid assets. Also see liquidity.

Liquidity Risk Premium (LRP)  The additional return required by investors in securities that cannot be converted into cash at a reasonably predictable price or time.

Liquidation Value The amount that could be realized if an asset were sold independently of the going concern.

Listed  Traded on an exchange, such as the NASDAQ, NYSE or AMEX

Listing  When a company's stock trades on an official exchange as above.

Load  A commission paid by an investor to a broker for the purchase or sale of a mutual fund.

Long  Investors who go "long" own stock or another financial security. It is a term that means the opposite of "short." See short selling.

Long Ownership of Securities. (See Long)

Long-Term Gain  A gain on the sale of a capital asset where the holding period was six months or more and the profit was subject to the long-term capital gains tax.

- M -

Maintenance Margin  Minimum margin that must be maintained on a futures contract.

Majority Voting  Voting system under which each board of director is voted upon separately. See cumulative voting.

Management's Discussion and Analysis (MD&A) A key area looked at by analysts; an interpretive section of the prospectus and of the annual report, frequently called the Financial Review.

Mandatory Bid  A bid is laid by the offeror when he has 30% or more and less than 50% of the voting rights of the offeree company and this should be in cash and the offer price should be the highest price, which offeror had paid in the past 12 months for that shares.

Margin  Cash or securities set aside by an investor as evidence for ability to honor a financial commitment.

Margin Account  A brokerage account that permits an investor to purchase securities on credit and to borrow on securities already in the account. Buying on credit and borrowing are subject to standards established by the Federal Reserve and by the firm carrying the account. Interest is charged on any borrowed funds only for the period of time the loan is outstanding.

Marginal Tax Rate  The tax rate that would be applied to the next dollar of income.

Marked-to-Market  An arrangement whereby the profits or losses on a futures contract are settled up each day.

Market Makers  The exchange member firms that use their own capital to represent a stock and compete with each other to buy and sell the stocks they represent. There are over 500 member firms that act as NASDAQ market makers. One of the major differences between The NASDAQ Stock Market and other major markets in the US is NASDAQ's structure of competing market makers. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds.

Market Cap  This is the company's market capitalization. If a company has 1 million shares and the company's shares are selling for $10, the market cap is $10 million. Also called Market Capitalization.

Market Capitalization (MCAP) Price per share multiplied by the total number of shares outstanding; also the market's total valuation of a public company.

Market Category The market it trades on, either NASDAQ National Market(NNM) or Nasdaq SmallCap Market (SCM).

Market Close An electronic entry by NASD Members to The NASDAQ Stock Market of the regular trading day's last reported trade. Investors may trade during the regular trading session from 9:30am - 4:00pm. Trades must be submitted to NASDAQ within 90 seconds of the execution of the trade by an NASD Member Firm.

Market Close Date Date on which the closing Net Asset Value (NAV) was last calculated.

Market Makers The NASD member firms that use their own capital, research, retail and/or systems resources to represent a stock and compete with each other to buy and sell the stocks they represent. There are over 500 member firms that act as NASDAQ Market Makers. One of the major differences between The NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds.

Market Maker Spread The difference between the price at which a Market Maker is willing to buy a security and the price at which the firm is willing to sell it i.e., the difference between a Market Maker's bid and ask for a given security. Since each Market Maker positions itself to either buy or sell inventory at any given time, each individual Market Maker spread is not indicative of the market as a whole. 

Market Order  When an investor instructs his/her broker to buy or sell an asset at the price prevailing in the market. In such a case, the investor, unlike the case of the limit order, does not put any restrictions on price.

Market Portfolio  A conceptual construct of a value-weighted index of all securities. In practice, the S&P 500 index is used as a proxy, to represent the average investor's return.

Market Risk  Uncertainty from factors influencing a large number of stocks, such as inflation, interest rates, oil-shocks, etc.

Marketable Securities  Security investments that the firm can quickly convert into cash balances.

Market Surveillance The department responsible for investigating and preventing abusive, manipulative, or illegal trading practices on The NASDAQ Stock Market. Considerable resources are devoted to surveillance.  The NASDAQ Stock Market. A vast array of sophisticated automated systems reviews each trade and price quotation on an on-line, real-time basis. Off-line computer-based analyses are conducted to evaluate trading patterns on a monthly, weekly and daily basis. Whenever any of these automated systems indicate unusual price or volume in a stock, NASDAQ Market Surveillance analysts determine if this was the result of legitimate market forces or perhaps a violation of rules. Among other things, analysts review press releases, review historical trading activity, interview brokers, Market Makers, and NASDAQ-listed company officials. Market Surveillance continues its inquiries until unusual movements are adequately explained. If legitimate market forces were at work the case is closed without action. If it appears rule violations have occurred, a disciplinary action is initiated. Where corporate insiders or members of the investing public are involved in a potential violation, the case will be referred to the SEC.

Market Timing  Ability to determine the time occurrence of peaks and troughs of stock markets.

Market Value  The value observed in the market place, whereby buyers and sellers negotiate mutually acceptable price for the asset.

Material News  News released by a NASDAQ company that might reasonably be expected to affect the value of a company's securities or influence investors' decisions. Material news includes information regarding corporate events of an unusual and non-recurring nature, news of tender offers, unusually good or bad earnings reports, and a stock split or stock dividend. (See also Trading Halt.)

Maturity Matching  The practice of financing long-term projects with long-term assets, while financing short-term projects with short-term financing.

Maturity Date  The date on which the last payment on a bond is due.

Maturity Risk Premium (MRP)  Risk associated with interest rate uncertainty. The longer the time to maturity, the higher the premium.

MBO (Management Buyout)  An LBO with the new investor group is the firm's management.

MBS (Mortgage Backed Securities)  Mortgage "pass-through" securities.

Merchant Banker  Middle men that settle negotiations for merger or takeover between the offeree and offeror.

Medium-term Note  Debt with a typical maturity of 1 to 10 years at the time of issue that is offered by a company..

Merger  Acquisition in which all assets and liabilities of a company are absorbed by the buyer to form a combined business entity. It is the fusion of two or more companies (or) Merger is a combination of two or more companies into a single company where, it survives and others loose the corporate identity. The survivor acquires the assets and liabilities of the rest.

MITI  Japan's Ministry of International Trade & Industry.

Money Market   Market for short-term debt securities with maturity of one year or less, and often 30 days or less. Highly liquid investments.

Money Market Fund  A mutual fund that invests only in money markets.

Monitoring Costs  An agency cost that arises when bondholders take steps to ensure that protective covenants in the bond indenture are adhered to by the firm. Similarly, shareholders take steps to ensure that management is acting in the best interest of the owners, i.e., that managers are maximizing the wealth of shareholders.

Monthly Treasury Average (1 year)  An index determined by the monthly average of one-year Treasury bills.  It’s an index that is used to set the cost of various variable-rate loans, particularly adjustable-rate mortgages. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn’t vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Its use as a loan index is relatively new. The MTA generally fluctuates more than the 11th District cost-of-funds index, although they track each other closely.

Moral Hazard  Refers to human nature's increased incentive to take risk when insured.

Municipal Bond (Muni)  State or local government offer "muni" bonds, as they are called, to finance special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Mutually Exclusive Projects  Two projects that cannot both be undertake as they perform essentially the same task.

Mutual Fund  Managed investment fund whose shares are sold to investors.  A fund operated by an investment firm that raises money from shareholders and invests in a group of assets, in accordance with the prospectus’ stated set of objectives. Typically highly diversified.

Mutual Fund 12(b)-1 Fee  Fee assessed to shareholders by the mutual fund for some of its promotional expenses. A 12b-1 fee must be specifically registered as such with the Securities and Exchange Commission and the fact that such charges are levied must be disclosed.

Mutual Fund Common Foot Note Definitions:

Footnote A To be used if the fund's return to shareholders may differ due to capital gains or losses. This footnote applied to money market funds only.

Footnote B To be used if there are any sales charges or account charges which impact yield. This footnote applies to money market funds only.

Footnote C Capital gains figure includes return of capital.

Footnote D To be used on any day that a mutual fund's net asset value is reduced by a capital gains distribution.

Footnote F To be used by any type of fund that reports quotations as of the day prior to the day of reporting

Footnote G To be used if the fund's capital gains figure includes short-term gains

Footnote N To be used by mutual funds when the fund does not have a sales load, i.e. there is no front-end and no contingent deferred sales load.

Footnote P To be used by mutual funds if the fund has adopted a rule 12(b)1 distribution plan under which a specific charge is made against the net assets of the fund

Footnote R To be used by mutual funds with redemption fees, contingent deferred sales charges, or other charges deducted from net asset value upon redemption other than charges for special services such as wire transfer).

Footnote S To be used on the ex-date for stock splits or stock dividends

Footnote T To be used if the fund began reporting prices to NASDAQ during the current year.

Footnote X To be used by mutual funds on any day a fund goes ex-dividend.

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NAV (Net Asset Value) The market value of a fund share, synonymous with a bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions.

NASD National Association of Securities Dealers. A self-regulatory securities industry organization responsible for the operation and regulation of the stock market and for conducting regulatory reviews of members' business activities.

NASDAQ National Association of Securities Dealers Automated Quote.

NASDAQ Composite Index  The NASDAQ Composite Index measures all NASDAQ domestic and non-U. S. based common stocks listed on The NASDAQ Stock Market. The Index is market-value weighted. This means that each company's security affects the Index in proportion to it's market value. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Today the NASDAQ Composite includes over 5,000 companies, more than most other stock market indexes. Because it is so broad-based, the Composite is one of the most widely followed and quoted major market indexes.

NASDAQ International Ltd. A subsidiary of the NASD headquartered in London, England. Its mission is to support NASD members in London, serve as a liaison to international companies seeking to list securities on NASDAQ, encourage foreign institutional participation in NASDAQ stocks, and to heighten the international image of the NASD and its markets.

NASDAQ International Service An extension to The NASDAQ Stock Market's trading systems that allows early morning trading from 3:30 to 9:00 A.M. Eastern Standard Time on each U.S. trading day. This NASDAQ service enables participants to monitor trades during London market hours. NASD members are eligible to participate in this session through their U.S. trading facilities or through those of an approved U.K. affiliate.

NASDAQ National Market Securities The NASDAQ National Market consists of over 3,000 companies that have a national or international shareholder base, have applied for listing, meet stringent financial requirements and agree to specific corporate governance standards. To list initially, companies are required to have significant net tangible assets or operating income, a minimum public float of 500,000 shares, at least 400 shareholders, and a bid price of at least $5. The NASDAQ National Market operates from 9:30 A.M. to 4:00 P.M. EST, with extended trading in SelectNet from 8:00 A.M. to 9:30 A.M. EST and from 4:00 P.M. and 5:15 P.M. EST.

NASDAQ SmallCap Market Securities The NASDAQ SmallCap Market comprises of over 1,400 companies that want the sponsorship of Market Makers, have applied for listing and meet specific and financial requirements. Once a company is approved and listed on this market, Market Makers are able to quote and trade the company's securities through a sophisticated electronic trading and surveillance system. The NASDAQ SmallCap Market operates from 9:30 A.M. to 4:00 P.M. EST., with extended trading in SelectNet from 8:00 A.M. to 9:30 A.M. EST and from between 4:00 P.M. and 5:15 P.M. EST.

NASDAQ-100 Index  The NASDAQ-100 Index includes 100 of the largest non-financial domestic companies listed on the NASDAQ National Market tier of The NASDAQ Stock Market. Launched in January 1985, each security in the Index is proportionately represented by its market capitalization in relation to the total market value of the Index. The Index reflects NASDAQ's largest growth companies across major industry groups. All index components have a minimum market capitalization of $500 million, and an average daily trading volume of at least 100,000 shares. The number of securities in the NASDAQ-100 index makes it an effective vehicle for arbitrageurs and securities traders. In October 1993, the NASDAQ-100 Index began trading on the Chicago Board Options Exchange. On April 10, 1996 the Chicago Mercantile Exchange began trading futures and futures options on the Nasdaq-100 Index

Negotiated Underwriting/Deal  A means by which firms choose the underwriter for a new security issue. See competitive bidding.

Net Asset Value (NAV)  The market value of a fund share, synonymous with a bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions.

Net Change  The difference between today's price of last trade and the previous day's last price. For mutual funds, it is the difference between today's closing Net Asset Value (NAV) and the previous day's closing. The previous day's close on the NASDAQ web site, for example, is updated at 3:30 A.M.

Net Lease  A property lease in which the tenant pays all expenses normally associated with ownership, such as utilities, maintenance, repairs, insurance, and taxes.

Net Present Value (NPV)  A project's net contribution to shareholders wealth, which is determined by the present value of a project's cash flows less initial investment.

New Working Capital (NWC)  Current assets minus current liabilities.

Net Worth  Book value of a company's common stock, surplus, and retained earnings.

NL  No Load

No Load (NL)  See Load

Nominal Interest Rate  Interest as expressed in money terms. See real interest rate.

No Quote (NQ) No Market Makers making an inside market at this time.

NPVGO  Net Present Value of Growth Opportunities. A firm valuation model where NPV of investment opportunities is explicitly examined.

NWC  Net Working Capital is the difference between current assets and current liabilities.

NYSE  New York Stock Exchange.

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Odd Lot  Refers to buying stocks in a quantity that is not a multiple of 100.

Off-Balance-sheet Financing  Financing that is not shows as a liability in a company's balance sheet.

Offer Price The price at which the shares were originally offered to the public.

OID Debt  Original Issue Discount Debt

One-Year Treasury Constant Maturity  An index published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a one-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.  It's an index that is used to set the cost of variable-rate loans, particularly adjustable-rate mortgages (ARMs). Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Roughly half of all ARMs are based on this index. It is volatile and responds quickly to changes in economic conditions.

Open  The price at which a security opens the trading day.

Open-End Fund  A mutual fund that stands ready to redeem stocks and issue new stock. Also see closed-end funds.

Open Order  An order to buy or sell a security that remains in effect until it is either canceled by the customer or executed.

Operating Costs  The day-to-day expenses of running a business.

Operating Leverage  Amount of fixed operating costs.

Opportunity Cost of Capital  The expected return that is foregone by investing in a project rather than a financial security with comparable risk.

Option  A privilege sold by one party to another that offers the buyer the right to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date. The choice to take a specific action in the future. 

Ordinary Income   Income other than capital gains

Organized Market  A central physical location where exchange of securities takes place under a set of rules and regulations. This type of market is also referred to as "Auction Market."

OTC (Over The Counter Market)  Financial markets that are not located in a single physical area. NASDAQ is an example. A security which is not traded on an exchange, usually due to an inability to meet listing requirements. For such securities, broker/dealers negotiate directly with one another over computer networks and by phone, and their activities are monitored by the NASD.

Out-of-the-money Option  An option that would not be worth exercising if it matured immediately. See in-the-money option.

Overbought  Typically a reference to a security or the general market after it exhibits a sharp rise in prices and is therefore vulnerable to a price drop (called a correction by technical analysts).  When a stock has been overbought, there are fewer buyers left to drive the price up further.

Over-Rewarded  A security whose expected (average) return is above its required return. Also called under-priced.

Over-Valued  An asset whose market value is greater than its intrinsic (formula or theoretical) value.  Often perceived to be too expensive.

Oversold  Opposite of overbought - see above.

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PA (Professional Association)  A type of corporation that provides most of the benefits of incorporation but do not relieve the participants of professional (malpractice) liability. This type of organization is common among accountants, doctors, and lawyers. Also called Professional Corporation (PC).

Pac-Man Strategy  The target company attempts to takeover the hostile raider. This happens when the target company is larger than the predator. The name comes from the video game. It is another takeover repellent devised by management. For example, Bendix Corp. tried to take control of Martin-Marietta by a tender offer. When the takeover effort failed, Martin-Marietta counterattacked by buying Bendix stock in an attempt to take control of Bendix. Thus, Martin-Marietta became the PacMan. To counter, Bendix successfully courted Allied Corporation to come to its rescue. Allied bought Bendix so that Martin-Marietta could not buy enough control. In this case Allied was a White Knight.

PC (Professional Corporation)  See PA.

P/B Ratio (Price/Book Ratio) A stock analysis statistic in which the price of a stock is divided by the reported book value (as of the date specified) of the issuing firm.

P/C Ratio (Price/Cash Flow Ratio) A financial ratio that compares stock price with cash flow from operations per outstanding shares.

P/E Ratio (Price/Earnings Ratio) A stock analysis statistic in which the current price of a stock (today's last sale price) is divided by the reported actual (or sometimes projected, which would be forecast) earnings per share of the issuing firm; it is also called the "multiple". This is a common stock's current market price divided by annual per share earnings. This ratio is a short way of saying that a share is selling at so many times its actual or anticipated annual earnings. A price-earnings ratio is one tool used to compare one share to another.

P/S Ratio (Price/Sales Ratio) A financial ratio that compares stock price with sales per share (or market value with total revenue).

Partial Bid  When a bid is made for acquiring part of the shares of a class of capital where the offeror intends to obtain effective control. This is made for the equity shares.

Partnership  A form of organization with two or more persons associate to conduct a non-corporate business. Its main disadvantage is unlimited liability. The tax treatment of a partnership is similar to that for a proprietorship, in that the business avoids corporate taxes. Also see LLC, and PA

Par Value  (1) A stock's par value is the minimum price at which more shares can be issued. (2) A bond's par value = $1,000 to be paid at maturity. Also see principal

Passive Income   Income derived from business investments in which the individual is not actively involved, such as a real estate limited partnership.

Passive Management  An investment strategy that does not involve the periodic shuffling of a portfolio's components. A buy-and-hold strategy.

Patient Capital  Investors interested in long-term value maximization.

Payment Date  Date on which dividends are paid to registered owners.

Payout Ratio  Percent of earnings that is paid out as dividends.

Penny Stocks  Low-priced speculative issues of stock selling at less than $1.00 a share.

Pension Fund  Assets held in trust to cover the costs of pension benefits to participants.

Pension Plan Sponsor  A group of employees with a pension plan under management. The California Public Employees' Retirement System (Calipers) is an example.

Pension Plan  A plan established by a firm, labor union, government, or other organization to provide for the payment of benefits to the plan participants over a period of years after retirement.

Piggy Back Warrants  Some warrants entitle the holder to acquire shares plus additional warrants at a later date. The warrants that are received upon the exercise of the initial warrants are known as piggy back warrants.

Plant/Assets Ratio  The percentage of total assets that is tied up in land, buildings and equipment.

Points  Points apply to security prices. In the case of shares, one point indicates $1.00 per share. For bonds and debentures, one point means 1% of par value. Par value is almost universally 100 for bonds.

Poison Pill  An anti-takeover plan devised to automatically be activated when the company gets bought over in an unfriendly takeover. A Golden Parachute is one such device. Another might be a plan whereby all the firm's debt becomes due if the current management is removed.  A corporate provision to combat hostile takeovers. When triggered, the poison pill allows shareholders to acquire additional shares at below market price, thereby increasing the number of shares outstanding and making the takeover prohibitively expensive. Such plans are relatively new in corporate Canada and are the subject of some controversy regarding whom they are designed to protect.

Poison Put  A covenant allowing the bond holder to demand repayment in the event of a hostile takeover.  A corporate provision to combat hostile takeovers. When triggered, the poison pill allows shareholders to acquire additional shares at below market price, thereby increasing the number of shares outstanding and making the takeover prohibitively expensive. Such plans are relatively new in corporate Canada and are the subject of some controversy regarding whom they are designed to protect

Portfolio  A combination of assets.  All investments collectively owned by the same individual or organization.  The entire combination of securities or investments an individual or institution holds. A portfolio can contain a variety of government and company bonds, preferred and common stocks from different businesses and other types of securities and assets.

Preemptive Right  The right of a shareholder to purchase newly issued shares of the company before the general public.

Premium  (1) This generally refers to extra money an investor is willing to pay to buy something. (2) For a bond, a premium is the amount for which the security sells above its par value.

Preemptive Right  Common shareholder's right to subscribe to any new issue of stock so as to maintain, undiminished, their fraction of total number of shares outstanding.

Preferred Stock  Stock that takes priority over common stock in regard to dividend and liquidation. The dividend is usually fixed at time of issue.

Pre-Market High The Pre-Market high represents the highest price a person purchased this security during the Pre-Market session. Investors may trade in the Pre-Market (8:00-9:30 a.m. ET). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.

Pre-Market Last Sale An electronic entry by an NASD Member firm representing the price involved in a transaction of a security during the Pre-Market session. The trade report must be submitted to NASDAQ within 90 seconds after the execution of the trade. Investors may trade in the Pre-Market (8:00-9:30 a.m. ET). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.

Pre-Market Low The Pre-Market low represents the lowest price a person purchased this security during the Pre-Market session. Investors may trade in the Pre-Market (8:00-9:30 a.m. ET). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.

Pre-Market % Change Pre-Market Percent change represents the percent increase/decrease between the last sale and the Market Close.

Pre-Market Volume An electronic entry by an NASD Member firm representing the number of shares involved in a transaction of a NASDAQ security during the Pre-Market. The trade report must be submitted to NASDAQ within 90 seconds after the execution of the trade. Investors may trade in Pre-Market (8:00-9:30 a.m. ET). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.

Pre-Syndicate Bid A Pre-Syndicate Bid can be entered in the NASDAQ System to stabilize the price of a NASDAQ security prior to the effective date of a registered secondary offering. This activity is permissible under SEC Rule 10b-7. 

Previous Day's Close The previous trading day's last reported trade. The Previous Day's Close on the NASDAQ Web site is updated at 3:30 A.M. CST.  

Primary Offering or Primary Market  The original sale of any new issue of a company's securities.

Primary Market is where firms sell new financial assets typically with the assistance of an investment banker.

Prime Rate  The interest rate that banks charge their "best" clients, , i.e., those with the lowest possibility of default.

Principal  (1) Shareholders; (2) Amount of debt that must be paid at maturity.  A dealer buying or selling securities for his or her own account. The term "principal" can also refer to a person's capital or to the face value of a bond.

Principal Orders Refers to activity by a broker/dealer when buying or selling for its own account and risk.

Prior Preferred  A preferred stock which in the liquidation of the issuing company would rank ahead of other classes of preferred shares as to asset and dividend entitlement.

Private Company  A company whose shares are not traded on the open market.

Private Offering (Placement)  A direct sale, by the issuing firm, of newly issued securities to a small group of investors. There are a number of advantages of utilizing a Private Offering:

1. Used to include Angel Investors or develop seed capital

2. More control over the offering process

3. Ability to make acquisitions with stock or create equity partnerships

4. Creates avenue for future public company objective

5. Less regulatory filing requirements

6. Less expensive avenue to raise capital

7. Increased ability to obtain financing

8. May allow most efficient financial and estate planning

Private Placement Memorandum (PPM’s)  Pursuant to Regulation D of the Securities Act of 1933 (the “Act”), is for companies seeking to solicit and raise private investment funds for development and growth. Memorandums can be designed to be offered to a maximum of thirty-five “non-accredited” investors and an unlimited number of persons who meet the definition of “accredited investors” set forth in Rule 501(a) of Regulation D promulgated under the Act. The Units offered in a memorandum can rely upon a transactional exemption from the registration requirements of Section 5 of the Securities Act of 1933. (See U.S.C.A. Section 77a et. seq., as amended). This transactional exemption is available under Regulation D, Rule 505 or 506, of the Act (See 17 C.F.R. Section 501-508) and essentially limits solicitation for investment funds to friends, family and prior business acquaintances.  The underwriting of a security and its sale to a few buyers, usually institutional, in large amounts. No formal prospectus is needed to be prepared in this instance as the buyers are considered to be sophisticated.

Probability Distribution  A graph that shows the different possible outcomes of a single variable and the probability of getting the outcome.

Professional Association (PA)  See PA.

Professional Corporation (PC)  See PA.

Profit Taking  Selling stock after a period of rising prices to realize the profit. The term is used to explain a downturn in the market.

Pro Forma  Projected financial performance.  When a new issue is being planned for distribution, the corporation issuing the security must tell the suppliers of the new capital how they intend on spending the money received from the sale of the securities. The corporation publishes a pro forma balance sheet which integrates the new pool of money into their current operation. This shows the shareholders how the corporation would have spent the money if they had it on the day the pro forma balance sheet was created.

Pro Rata  This means "in proportion to."  For example, a dividend is a pro rata payment because the amount of dividend each shareholder receives is in proportion to the number of shares he or she owns.

Program Trading  A sophisticated computerized trading strategy whereby a portfolio manager attempts to earn a profit from the price spreads between a portfolio of equities similar or identical to those underlying a designated stock index, e.g. the Standard & Poor's 500 Index, and the price at which futures contracts (or their options) on the index trade in financial futures markets.

Promissory Note (PN)  Promise to pay.

Prospectus  Summary of the registration statement providing information to investors on an issue of securities. A legal document which describes the securities being offered for sale to the public. These documents usually disclose pertinent information concerning the company's operations, securities, management and purpose of the offering. The prospectus must be prepared in accordance with requirements of the applicable securities regulators.

Protective Covenants  Clauses in a loan agreement aimed at reducing default risk to the bondholders.

Proxy Battles Take place when the agenda items at the meeting are likely to be opposed by dissident shareholders. Management of the company collect proxies to face these opponents in the meeting of Board of Directors.

Proxy Statement  Information provided to stockholders in conjunction with the solicitation of proxies. (See: Proxy Vote)

Proxy Vote  Vote cast by one person on behalf of another at the company's annual meeting.

Purchase Fund  A fund set up by a company to retire, through purchases in the market, a specified amount of its outstanding preferred shares or debt. Purchases are made at or below a stipulated price.

Push-out  During a stock split, a push-out occurs when new shares are forwarded directly to the registered holders of old share certificates, without the holders having to surrender these old shares. Both old and new shares have equal value.

Put  Option to sell an asset at a specified excise price on or before a specified exercise date. Also see call option.  An option which gives the holder the right, but not the obligation, to sell a fixed amount of a certain stock at a specified price within a specified time. Puts are purchased by those who think a stock may go down in price.

M & A FINANCE GLOSSARY  A B C D E F G H-I J-K-L M N O P Q-R S T U-V W-X-Y-Z 

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Quant Finance  Quants are the "rocket scientists" of Wall Street. They use Quantitative techniques to solve financial problems.

Quarterly Report (10 Q) A report, which public companies are required to file quarterly with the SEC, that provides unaudited financial information and other selected material.  

Quick (Asset) Ratio  A liquidity measure: cash plus cash equivalents plus trade receivables divided by total current liabilities. Also known as the acid test ratio. It is a more stringent measure of short-term liquidity than the current ratio because it excludes inventories from current assets (which presumes that current liabilities cannot be paid with inventory).

Quote  The highest bid to buy and the lowest offer to sell a security at a given time. (See: Ask, and Bid)

- R -

Raiders  Investors who attempt to acquire other firms in an unfriendly takeover.

Rally  An increase in the price of a stock or the level of the market.

Rating Agency  Companies that rate the likelihood of a firm to default on its debt obligations.

Real Assets  Tangible assets include: plant and equipment; intangible include: technical expertise, trademarks & patents.

Real Interest Rate  Interest Rate that is adjusted for inflation.

Real Rate of Return (RRR)  The annual percentage return realized on an investment adjusted for changes in the price level due to inflation or deflation.

Reconstruction  A company transfers its undertaking and its assets to a new company in consideration of the issue of the new company’s shares to the first company’s members. If the first company members debentures are not paid off, the new company should give the debentures to the respective holders and thus the first company would loose the identity.

Record Date  Date set by the company when dividends are declared. Owners who are registered on this date receive dividends. Also see ex-dividend date.

Red Herring  A preliminary prospectus.

Refunding  Replacement of existing debt with a new issue of debt.

Regression Analysis  A statistical technique for fitting best line through data.

Regular Dividend  Dividend that is expected to be maintained at regular time intervals.

Regulation A Offering  Regulation A is a lot like a SCOR offering (see SCOR), only this is the Federal version.  Regulation A limits offerings to $5 million in a 12 month period, with no minimum share price. A company may also make a secondary offering within that 12-month period, but that amount is included in the $5 million total.

Regulation D Filings  Rule 505 of Regulation D of the Securities Act of 1933, as amended, allows firms to raise up to $5 million in a twelve (12) month period. Securities can be sold to a maximum of thirty-five (35) non-accredited investors and an unlimited amount of accredited investors. Potential investors cannot be generally solicited and advertising is not permitted in most states. Stock sold through this private placement venue is restricted stock and generally may not be sold for several years. Rule 506 of the same act allows firms to raise an unlimited amount of money in a twelve month period. This offering may be sold to thirty-five (35) non-accredited (sophisticated) investors and an unlimited number of accredited investors. This program is designed for emerging growth companies who have access to potential major investors. This offering does not require registration with the SEC or state authorities, just notification. Regulations vary from state to state. Both the federal and state regulatory authorities require an offering memorandum that meets standard disclosure requirements.

REIT (Real Estate Investment Trust)  A Real Estate Investment Trust is a corporation whose primary business is owning and managing real estate properties, such as apartment buildings, office buildings, hotels, warehouses, health care facilities, shopping malls or golf courses.  While many REITs invest directly in these properties, some types of REITS can also invest in real estate related loans, such as mortgages. A hybrid type of REIT can invest in a combination of real properties and mortgages. Structurally, a REIT is set up as a company, shares of which may be purchased by investors. The management of the REIT company uses those pooled investment dollars to buy and manage an array of properties. Collectively, all shareholders indirectly own small pieces of each of the properties that the REIT owns and operates.  Real Estate Investment Trusts (REITs) were created by Congress in 1960 to provide smaller investors with the opportunity to invest in real estate, an important component of a well-balanced investment portfolio. Prior to the creation of REITs, real estate investing was only available to the institutional investor community because of the large amount of capital that is required for such investments.  REITs are companies that are dedicated to owning, and in many cases managing, income-producing real estate, such as apartments, shopping centers, office buildings and industrial buildings. REITs do not pay corporate income taxes, as most other companies are required to do, and therefore shareholders are able to enjoy the benefit of eliminating “double-taxation”.  In order to qualify as a REIT, the corporation is legally obligated to pay at least 90% of its taxable net income to its shareholders.

Reorganization  Financial restructuring of a firm under bankruptcy. Both the firm's assets and its financial structure are modified.

Repo (Repurchase Agreement)  Purchase of Treasury securities from a securities dealer with an agreement that the dealer will repurchase them at a specified price.

Required Return  Minimum return required by investors to compensate them for assuming risk.

Residual Dividend  An approach to dividends that suggests a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.

Retained Earnings  Earnings not paid out as dividends.

Retirement Plans (IRS Code Sections 401-507)

401(a)
This retirement plan meets the qualification requirements of Internal Revenue Code Section 401(a). In this type of plan, employers determine the amount of money that they may contribute on your behalf each year, the requirements that you must meet to receive those contributions, and under what circumstances the money may be made available to you. Some 401(a) plans may allow for employee after-tax contributions or, in the case of a 401(k) plan, employee pre-tax contributions. Types of 401(a) plans include profit sharing plans, pension plans, and money purchase plans.

401(k)
Under section 401(k) of the Internal Revenue Code, employees of private corporations and, beginning in 1997, some tax-exempt organizations, can set aside money for retirement on a pre-tax basis through a plan sponsored by their employer. To encourage saving for retirement through these plans, the federal government created special tax advantages for 401(k) contributions.

403(b)
Under Section 403(b) of the Internal Revenue Code, employees of 501(c)(3) non-profit institutions (such as colleges and universities, hospitals, museums, research institutes, and foundations and public schools) can set aside money for retirement on a pre-tax basis through a plan offered by their employer. To encourage saving for retirement through these plans, the federal government created special tax advantages for 403(b) contributions.

457
Under section 457 of the Internal Revenue Code, employees of state or local governments, their agencies, and tax-exempt employers can set aside money for retirement on a pre-tax basis through a plan sponsored by their employer. To encourage saving for retirement through these plans, the federal government created special tax advantages for 457 contributions. Different from a 401(k) or other type of qualified retirement plans, a 457 has no requirement to be non-discriminatory.

457(f)
Under Section 457(f) of the Internal Revenue Code, an employer can set aside money to supplement retirement income for a select group of employees in their organization. Since these programs are designed to attract and retain key employees and do not provide a benefit for all employees, these programs do not qualify for all of the tax advantages that are made available to 401(a) plans, for example.

Registered Representative  An individual who is licensed to sell securities and has the legal power of an agent, having passed the Series 22, 6 or 7and Series 63 examinations. Usually works for a brokerage licensed by the SEC, NYSE, and NASD.

Retained Earnings  Net profits that are kept in a business after dividends are paid.

Return  The profit made on an investment, expressed annually as a percentage of the total amount invested.

Return of Capital  The distribution of cash resulting from depreciation tax savings,  the sale of a capital asset or of securities in a portfolio, or any other transaction unrelated to retained earnings. .Returns of capital are not directly taxable but may result in a higher capital gains taxes later if they reduce the acquisition cost base of the property involved.

Return on Equity (ROE)  An amount, expressed as a percentage, earned on a company's common stock investment for a given period. It is calculated by dividing common stock equity (NET WORTH) at the beginning of the accounting period into net income for the period after preferred stock dividends but before common stock dividends.  Return on equity tells common stock holders how effectively their money is being employed.  Comparing percentages for current and prior periods reveals trends and comparison with industry composites reveals how well the company is holding its own against its competitors.

Revenue Sharing Notes  This is a new concept developed for small business financing. A revenue sharing note is structured as an unsecured note to pay back the principal over a period of months or years. Like other debt offerings, the revenue sharing note positions the investor as a creditor rather than as a shareholder. As an extra incentive, the revenue sharing note also features an agreement by the company to pay to the investor a percentage of gross sales of the company, for as long as the note is outstanding. This percentage is over and above the principal payments. These notes typically pay around 1% of gross sales.

Revenue Sharing Preferred Shares  These preferred shares work much like revenue sharing notes. Rather than a set percentage payment, the preferred dividend comes in the form of a percentage of gross revenues of the company. This investment vehicle combines the revenue sharing aspects of the note with the equity position of preferred or convertible preferred shares.

Risk  The possibility of loss of capital on an investment.

Risk Premium  Additional return, over the risk-free rate, to compensate investors for accepting (holding) risk.

Risk Aversion  The dislike of risk. For risk averse investors, the pain from losing $1 is greater than the pleasure of winning $1. Thus, such investors have to be compensated with additional return to induce them to hold risky assets.

Round Lot  The purchase or sale of a quantity of stocks that is in multiples of 100, such as 200, 1,000, etc.

Russell 2000  An equity index comprising 2000 mid-capitalization U.S. listed stocks.

- S -

S&P 500  Standard and Poor's stock price index comprising the 500 largest companies in the US.

Sales Load The sales fee that the buyer pays in order to acquire an asset. The fee varies according to the type of asset and the way it is sold. Many mutual funds impose a sales charge. As a result of the load, only a portion of the investor’s funds go into the investment itself.

Sallie Mae   See Student Loan Marketing.

Salvage value  Scrap value of a plant or equipment.

SB-2 Offerings  SB-2 was created in 1993 in order to replace the S18 Blind Pool, since blind pools are no longer allowed.  A blind pool was when a company raised money, as in an IPO, and the use of the capital was undisclosed.  An SB-2 can be used to raise an unlimited amount of money. An SB-2 though, does require a prospectus, unlike a SCOR, but that prospectus is allowed to use forecasting.  SB-2 offerings also must follow GAAP when preparing financial statements. The SB-2 was designed to allow companies to raise capital inexpensively and quickly. The SB-2 is the basis for a Regulation A and Regulation D offerings. Regulations A and D limit offering amounts, but lower requirements and restrictions.

 

SCOR Offerings  SCOR offerings allow a small company to raise up to $1 million over a one year period, with a minimum stock price of $5 per share.  As stated earlier, the company has the option of selling stock directly to the public or using an underwriter.  A SCOR places no limits on the number of people purchasing the securities. There are no conditions on the purchasers. SCOR is meant to be less expensive and simpler than Federal offerings.

 

Scrip  A certificate exchangeable for cash before a specified date, after which it may have no value. Usually issued for fractions of shares in connection with a stock dividend or split or in a reorganization of a company.  For example, a one-for-three stock dividend would result in many shareholders being entitled to a fraction of a share (1/3 or 2/3) for which scrip would be issued instead of an actual stock certificate.

Seasoned New Issue  Additional issue of shares.

Seat  A figure of speech for a membership on an exchange.

SEC (Securities and Exchange Commission)  The federal agency created by the Securities Exchange Act of 1934 to administer that act and the Securities Act of 1933. The statutes administered by the SEC are designed to promote full public disclosure and protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce or through the mails must be registered with the SEC.

Secondary Distribution  or Secondary Offering   The redistribution of a block of stock after it has been initially sold by the issuing company. Usually a large block of shares is involved (e.g. from the settlement of an estate) and these are offered to the public at a fixed price, set in relationship to the stock's market price.

Secondary Market  Where trading (exchange of ownership) of financial assets takes place.  Secondary markets are the stock exchanges and the over-the-counter market. Securities are first issued as a primary offering to the public.  When the securities are traded from that first holder to another, the issues trade in these secondary markets.

Securities  Transferable certificates of ownership of investment products such as notes, bonds, stocks, futures contracts and options.


Securities Administrator  A general term referring to the provincial regulatory authority (e.g. securities commission) responsible for administering provincial securities acts.


Securities Advisor  A person or firm registered with applicable securities commissions to generally advise the public on securities, often through publications.

Securities Commission  Each province has a securities commission or administrator which oversees the provincial securities act. This act is a set of laws and regulations which set down the rules under which securities may be issued and traded.


Securitization  1. The development of markets for a variety of debt instruments that permit the ultimate borrower to bypass the banks and other deposit-taking institutions and to borrow directly from lenders. 2. In a narrow sense it also refers to the process of converting loans of various sorts into marketable securities by packaging the loans into pools and then selling shares of ownership in the pool itself.

Seesaw Finance  Issues related to daily movements in stock prices. "The market went down yesterday due to profit taking," or "The market did not go up yesterday despite US invasion of Mars."

Self-Regulatory Organizations (SROs)  Many important rules governing securities industry practices and standards in Canada are set by the self-regulatory organizations, which include the NASD and NYSE.  Many of the regulatory and compliance functions have been delegated to the SROs by the SEC.

Selling Group  A collection of investment bankers who participate in the distribution of new issues to potential investorsInvestment dealers who assist a banking group in marketing a new issue of securities in order to obtain wide distribution. These dealers do not assume financial responsibility for the underwriting of the issue as the banking group does.

Seven-Day Yield Yield for seven day period including the day reported.

Senior Debt  Debt which, in the event of liquidation, must be repaid before subordinated debt receives any payment. Also see Junior Debt.  A senior debt issue ranks before other issues in terms of claims on assets in the event of a company break-up. For example, senior bonds rank before junior bonds, which rank before senior debentures, which rank before junior debentures, etc.

Serial Bond or Debenture  A bond or debenture issue in which a predetermined amount of the principal becomes due and payable each year.

Settlement Date  In US financial markets, an investor must pay for the purchase of shares by the third business day after securities are bought. An investor is also obligated to deliver an investment that he or she has sold by the third business day after the transaction.

Share or Stock  A unit of measuring ownership in a company (i.e., if a firm has 1,000 shares outstanding and if you own 100 of them, then you have a 10% claim on the firm's net income (NI) and assets).  These two terms are used interchangeably. Certificates representing ownership in a corporation and the appropriate claim on the corporation's earnings and assets.

Shareholder or Stockholder  Someone who owns preferred or common shares of a company.


Shareholders' Equity  Ownership interest of common and preferred stockholders in a company. It is also the difference between the assets and liabilities of a company, which is sometimes called net worth, or just "equity."


Shareholder of Record  A shareholder whose name is registered in the records of a company whose shares he or she holds. Dividend payments and rights issues are announced as being payable to shareholders of record.

Shark Repellents  Legal anti-takeover mechanisms devised by management to deter potential takeovers.

Shelf Registration  A procedure that allows firms to file one registration statement covering several future issues of the same security.

Shogan Bond  Dollar-denominated bond issued in Japan by a non-resident.

Short Interest  The total number of shares of a security that have been sold short by customers and securities firms. (See Short Selling)

Short Sale (Selling)  Sale of an asset that the investor does not own or any sale that is completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading strategy. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short.   The sale of a security which the seller does not own. This is a speculative practice done in the belief that the price of a stock is going to fall and the seller will then be able to cover the sale by buying the security back at a lower price. The profit would be the difference between the initial selling price and the subsequent purchase price. It is illegal for a seller not to declare a short sale at the time of placing the order.

Short-term Bond  A bond or debenture maturing within three years.


Short-term Debt  Company borrowings repayable within one year that appear in the current liabilities section of the company's balance sheet. The most common short-term debt items are bank advances or loans, notes payable, debentures and bonds due within one year.

Short Term Gain (Loss)  The gain (loss) realized from the sale of securities or other capital assets held six months or less.

SIC Code Standard Industrial Classification (SIC) code. A numbering system established by the Office of Management and Budget that identifies companies by industry. It is used to promote the comparability of economic statistics from various facets of the U.S. economy.  

Sinking Fund  A requirement specified in a bond indenture that obligates the firm to annually retire a specified portion of the debt.  A fund set up by a company to retire, over a period of time, the major part of a preferred share issue, or a debt issue prior to maturity. The fund helps to "pay off" the debt issue over the term of the issue and can be compared to principal payments made by a mortgage holder. Even though the issue is outstanding until maturity, the small incremental payments made under a sinking fund can make the maturity of the bond issue less onerous on the company. Instead of having to re-fund the entire issue, there may only be a small outstanding balance. A sinking fund security is attractive to investors as there is more assurance that the debt will be repaid on maturity.

SIPC (Securities Investor Protection Corporation)  A non-profit membership corporation established by Congress that insures securities and cash in customer accounts up to $500,000 (up to $100,000 in cash) in the event of brokerage bankruptcy.

SML (Security Market Line)  Line representing the relationship between required return and beta.

Small Cap Stocks  Stocks of companies that have small capitalization, i.e., those that are small in terms of market value.

Special Dividend  See extra dividend.

Speculator  A speculator is one who is prepared to accept calculated risks in the marketplace for attractive potential returns. A speculator's objective is usually short to medium term capital gain, whereas regular income and safety of principal are the prime goals of the conservative investor.

Spread  1. The gap between the bid and ask prices in the quotation for a security. 2. The term can also be applied to certain strategies for options and commodities where the investor is trading on the differences in prices between two related securities.

Sole Proprietorship  A business owned by a single individual. The sole proprietor pays no corporate income tax but has unlimited liability for business debt and obligations.

SPDRs "Spiders"  The acronym for Standard & Poor's Depository Receipts. It is a basket of the 500 stocks in the S&P 500 index.

Spin-Off  A newly created company that used to be part of a parent company. Parent company shareholders receive a pro rata ownership in the new company.

Split Off  This occurs when equity shares of a subsidiary company are distributed to some of the parent company’s shareholders in exchange for their holdings in parent company.

Split Up  A diversion of a company into two or more parts through transfer of stock and parent company ceases to exist.

Spread The spread for a company's stock is influenced by a number of factors, including:

Standard and Poor’s 500 - $SPX The S&P 500 index - ($SPX), more formally known as the S&P 500 Composite Stock Price Index, is a European-style, capitalization-weighted index (shares outstanding multiplied by stock price) of 500 stocks that are traded on the New York Stock Exchange, American Stock Exchange and NASDAQ National Market. The advantage of "cap-weighting" is that each company's influence on index performance is directly proportional to its relative market value. It is this characteristic that makes the S&P 500 such a valuable tool for measuring the performance of actual portfolios.

Statement of Changes in Financial Position  A financial statement which provides information as to how a company generated and spent its cash during the year. It links the company's balance sheets for two successive years and provides a summary of the incoming and outgoing movement of a company's funds for the period. It explains changes in working capital (current assets less current liabilities) from one year to the next.

Statement of Material Facts  A document presenting the relevant facts about a company and compiled in connection with an underwriting or secondary distribution of its shares. It is used only when the shares underwritten or distributed are listed on a recognized stock exchange and takes the place of a prospectus in such cases.

Stock Consolidation  The opposite of a stock split. A number of existing shares are combined into a smaller number of shares, ie. turning every three shares into one.

Stock Dividend Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock dividends are not taxed until sold.  

Stock Exchange or Stock Market  An organized marketplace where buyers and sellers are brought together to buy and sell stocks and must follow certain rules, regulations and guidelines.

Stock Index A securities price indicator such as the NASDAQ-100, Standard & Poor's or Dow Jones series created to measure the relative value of the market.

Stock Split  An accounting transaction that increases the number of shares held by existing shareholders in proportion to the number of shares currently held.  Division of a company's outstanding common shares into a larger number of common shares. A three-for-one split by a company with one million shares outstanding would result in three million shares outstanding. Each holder of 100 shares before the three-for-one split would have 300 shares after the split, but his or her proportionate equity in the company would remain the same.

Stocks  Equity claims on the net income (NI) and assets of a corporation.

Stock (common or preferred) plus Warrants  An option is to offer stock with warrants attached. Warrants can be defined as an option to purchase additional shares of the company at a later date at a given price. Warrants can sometimes help induce investors to buy into an offering at an early stage due to the additional upside they can provide.

Stock Symbol A unique four- or five-letter symbol assigned to a NASDAQ security. If a fifth letter appears, it identifies the issue as other than a single issue of common stock or capital stock. A list of fifth-letter identifiers and a description of what each represents follows:

A - Class A

B - Class B

C - Issuer qualifications exceptions*

D - New

E - Delinquent in required filings with the SEC

F - Foreign

G - First convertible bond

H - Second convertible bond, same company

I - Third convertible bond, same company

J - Voting

K - Nonvoting

L - Miscellaneous situations, such as depositary receipts, stubs, additional warrants, and units

M - Fourth preferred, same company

N - Third preferred, same company

O - Second preferred, same company

P - First preferred, same company

Q - Bankruptcy Proceedings

R - Rights

S - Shares of beneficial interest

T - With warrants or with rights

U - Units

V - When-issued and when distributed

W - Warrants

Y- ADR (American Depositary Receipt)

Z - Miscellaneous situations such as depositary receipts, stubs, additional warrants, and units.

* The letter "C" as a fifth character in a security symbol, indicates that the issuer has been granted a continuance in NASDAQ under and exception to the qualification standards for a limited period.

NYSE or AMEX symbols are two to three letters.

Stock Ticker This is a lettered symbol assigned to securities and mutual funds that trade on US financial exchanges.

Stop Loss and Stop Buy Orders  Orders for certain securities when the price of a stock rises or falls to a specified price. A stop loss order is an order to sell when the price of the stock declines to, or below, a stated price. The purpose of this is to reduce the amount of loss that might occur. A stop buy order is an order to buy a stock when the price rises to a certain level. This is given by a person who has sold a security short and is an attempt to reduce loss or protect a profit should the price rise unexpectedly.

Street Certificate or "Street Name"  Most people who own securities today do not physically have possession of the stock or bond certificates. Their securities are kept on their behalf by their investment dealer, which is called keeping securities in "street name." All interest payments and dividends are passed onto the client by crediting their account with the dealer.

Strike Price  Exercise price of an option.  The price at which the underlying stock of a call option can be purchased, or the price at which the underlying stock of a put option can be sold. Also referred to as the exercise price.

Strip Bonds or Zero Coupon Bonds  Usually high quality federal or government bonds originally issued in bearer form, where some or all of the interest coupons have been detached. The bond principal and any remaining coupons trade separately from the strip of detached coupons, both at substantial discounts from par.

Stripped Debentures  Debentures which have been separated from other securities, such as warrants, which were originally issued together as a unit.

Student Loan Marketing  A privately owned, government-sponsored corporation that provides a secondary market for government-guaranteed student loans. It issues bonds to raise funds necessary for the purchase of student loans from financial institutions.

Subject Bid, Subject Offer  A bid or offer made for a security that indicates the buyer's interest, in the case of a bid, or the seller's interest, in the case of an offer, but does not commit the buyer or seller to the purchase or sale of the security at that price or time.

Subordinated Debt (Junior debt)  Debt whose holders, in the event of liquidation, get paid only after senior debt is paid off in full. (Also see senior debt)

Subsidiary  A company which is controlled by another company, usually by owning the majority of the first company's shares.

Sunk Cost  Cost that has been incurred and cannot be recoverable.

Surplus  Contributed surplus is a balance sheet figure which originates from sources other than earnings, such as the initial sale of stock above par value. Earned surplus, or retained earnings, is the amount of accumulated earnings retained in the business after the payment of all expenses and dividends.

Surprise (Earnings Surprise) A company earnings report that differs, (either positively or negatively) from what analysts were expecting (consensus forecast). This often causes movement in the stock's price.
Consensus Rating: Special symbols are used for negative actual or expected earnings as follows:

N+ : Negative actual earnings with positive surprise

N- : Negative actual earnings with negative surprise

-+ : Negative consensus earnings with positive actual earnings

-0 : Negative consensus earnings with zero actual earnings

-VL: Very large negative percent surprise

+VL: Very large positive percent surprise

NA : Not available (data necessary for calculation are not available)

Surtax  An additional income tax over and above the regular income tax amount. Usually used as a temporary measure to raise funds for short-term needs.

Sushi Bond  Eurodollar bonds issued by Japanese corporation.

Swallowing Poison Pills Strategy The target company might issue convertible securities which are converted into equity to deter the efforts of offeror and such conversion dilutes the bidder’s shares and discourages acquisition. Or the target company might raise borrowings distorting normal debt: equity ratio.

Swap Ratio An exchange rate of the shares of the companies that would undergo a merger. This is calculated by the valuation of various assets and liabilities of the merging companies.

Sweetener  A feature included in the terms of a new issue of debt or preferred shares to make the issue more attractive to initial investors. Examples of sweeteners include warrants, or convertible, extendible or retractable features.

Switching  Selling one security and buying another.

Syndicate  A group of investment bankers who together underwrite and market a new issue of securities or a large block of an outstanding issue.

Syndicate Bid A Syndicate Bid can be entered in the NASDAQ System to stabilize the price of a NASDAQ security prior to the effective date of a registered secondary offering. This activity is permissible under SEC Rule 10b-7.

Systematic Risk. See market risk

- T -

T-Bill (Treasury Bill)  Common term for a government treasury bill, which is a short-term government debt issue.  Debt issued by the U.S. Treasury with maturity less than a year.

T-Bond (Treasury Bond)  US Treasury debt with maturities of more than 30 years.

T-Note (Treasury Note)  Debt issued by the US Treasury with maturity between a year and 15 years.

Takeover This is similar to acquisition. Takeover differs with merger in approach to business combinations ie., the process of takeover, transaction involved, determination of share exchange. for ex: process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of the takeover is less than that in the merger.

Takeover Bid  It is the intention of the acquirer reflected in the action of acquiring the shares of the Target company.  An offer made to security holders of a company to purchase their voting securities which, together with the offering individual's already owned securities, will total over 20% of the outstanding voting securities of the company. For federally incorporated companies, the equivalent requirement is more than 10% of the outstanding voting shares of the target company.

Tax-Advantaged  Having other tax benefits that typically result in tax savings.

Tax Bracket  Although income tax is paid by most wage or income earners, the rate of income tax paid increases as income exceeds certain amounts, called brackets.

Tax Credit  Tax credits reduce taxes payable to the same extent for all taxpayers, regardless of their income level and marginal tax rate.  Deductions from taxable income, however, are more valuable as your income and tax rate increases.

Tax-Deferred  A technique that allows an investment to legally delay or be deferred federal, state, and local taxes to varying degrees.

Tax Shelter  A technique that allows an investment to be legally exempt from federal, state, and local taxes to varying degrees.

Technical Analysis   A mathematical method of market and security analysis that studies investor attitudes and psychology as revealed in charts of stock price movements and trading volumes in a time period. This analysis may be used to assist one's assessment of possible future price action.  

Tender Offer  Offer made directly to a firm's shareholders to buy their shares.

Ten-Year Treasury Constant Maturity  An index published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a 10-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.  This figure is used as a reference point to establish the price of other securities such as corporate bonds. Treasury securities are considered risk-free since they are backed by the U.S. government. This figure, and an added margin based upon the risk involved, is used in pricing various debt securities.

Term Deposit Receipt  A deposit instrument most commonly available from chartered banks requiring a minimum investment at a predetermined rate of interest for a stated term. The interest rate varies according to the amount invested and the term to maturity, but is competitive with comparable alternative investments. A reduced interest rate usually applies if funds are withdrawn prior to maturity.

Term Structure of Interest Rates  See yield curve.

Thin Market  A market in which there are comparatively few bids to buy or offers to sell, or both. The phrase may apply to a single security or to the entire stock market. In a thin market, price fluctuations between transactions are usually larger than when the market is liquid. A thin market in a particular stock may reflect lack of interest in that issue, or a limited supply of the stock.

Tick  This refers to a change in the price of a security. An uptick occurs when the last trade in a security takes place at a higher price than the prior trade. A downtick occurs when the last trade in a security takes place at a lower price than the prior trade. An indicator may be fashioned from the difference between the number of NYSE issues showing upticks on the last trade and the number of NYSE issues showing downticks on the last trade. This indicator is known as the TICK, and is found on many quote screens. A TICK of +236 means 236 more NYSE issues last traded on upticks than those trading on downticks.

Ticker Symbol  An abbreviation of a stock or mutual fund name that is used to identify it.

Time Limit Order  A client order that specifies the time during which it can be executed.

Time Value or Extrinsic Value  The amount that the current market price of a right, warrant or option exceeds its intrinsic value. Intrinsic value is the amount by which the market price of a security exceeds the price at which the warrant, right or option may be exercised. The intrinsic value of a put is calculated as the amount by which the market price of the underlying security is below the exercise price.   

Timely Disclosure  The obligation for companies to promptly release to the news media any favorable or unfavorable corporate information which is of a material nature. This obligation is imposed by the securities administrators on companies. Broad dissemination of this news allows all investors to trade the company's securities with the same knowledge about the company as insiders.

Today's High  The intra-day high trading price.

Today's Low  The intra-day low trading price.

Tombstone  Advertisement listing the issuing firm, type of security, its issuing price, number of securities to be issued, and names of underwriters of a new issue.

Trader  1. Employee of an investment dealer who executes buy and sell orders for the dealer and its clients either on a stock exchange or the over-the-counter market. 2. The term is also used to describe a client who buys and sells frequently with the objective of short-term profit.

Trading Halt  The temporary suspension of trading in a NASDAQ security, usually for 30 minutes, while material news from the issuer is being disseminated over the news wires. A trading halt gives all investors equal opportunity to evaluate news and make buy, sell, or hold decisions on that basis. NASDAQ or the SEC may also impose a trading halt for purely regulatory reasons.

Transaction Date  The date on which the purchase or sale of a security takes place.

Treasury Bonds-30-Year T-Bonds  Bonds issued by the Treasury that have a maturity of 30 years at time of issue.

Treasury Bond 30 Year - TYX The Treasury Bond index - (TYX) is based on 10 times the yield-to-maturity on the most recently auctioned 30-year Treasury bond

Treasury Bill 13 Week-IRX  The T-Bill index - (IRX) is based on the discount rate of the most recently auctioned 13-week U.S.Treasury Bill. The new T-bill is substituted weekly on the trading day following its auction, usually a Monday.

Treasury Bills-90-Day T-Bill  Bills issued by T (Treasury), with maturity of 90 days at time of issue.

Treasury Notes  Debt issued by the US Treasury with maturity between a year and 15 years.

Transaction Costs  The cost of buying or selling financial securities.

Ticker Symbol  An abbreviation of a stock or mutual fund name that is used to identify it.

Treasury Stock  Shares that are re-purchased by the issuing company. They are equivalent to un-issued stock.

Triple Witching Hour  Slang used for the last hour of trading before the simultaneous expiration of stock options, index options, and index futures. This occurs four times a year on the third Friday of each quarter's end.

Trustee  1. Usually a trust company appointed by the company to protect the security behind the company's bonds and to make certain that all covenants of the trust deed relating to the bonds are honored. 2. A person who holds property and securities in trust for another person.

TSE  Tokyo Stock Exchange or the Toronto Stock Exchange.

Two Sided Market The obligation imposed by the NASD that NASDAQ Market Makers make both firm bids and firm asks in each security in which they make a market. 

Two-Year Treasury Constant Maturity  An index published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a two-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.  This figure is used as a reference point to establish the price of other securities such as corporate bonds. Treasury securities are considered risk-free since they are backed by the U.S. government. This figure, and an added margin based upon the risk involved, is used in pricing various debt securities. It is also used in establishing certificate of deposit (CD) yields.

- U -

Unallocated Gain Fund distributions that are not categorized as short, medium or long term.

Underlying Securities  The specific security that is bought or sold by exercising an option.

Under-Perform  A security whose expected (average) return is below its required return. Also called over-priced, over-valued, or under-rewarded.

Under-Rewarded  A security whose expected (average) return is below its required return. Also called overpriced

Undervalued  An asset that is selling at a price below its intrinsic (theoretical or formula) value.  Perceived to be below its value.

Under Pricing  Issue of securities below their market value.

Underwriter (Investment Banker)  The investment banking firm that brought the company public. The primary Underwriter, called the Lead Manager and the Co-Manager.  The firm that buys an issue from a company and resells it to investors; a primary market activity.

Underwriter Discount  Underwriters buy the to be issued securities at a reduced (discounted) price. This discount is usually measured as a percent of the price of the issue.

Undiversifiable Risk  See Market Risk.

Unfriendly Takeover  See hostile takeover.

Unlisted  A security not listed on a stock exchange but traded on the over-the-counter market.

- V -

Valuation  Assessed or appraised value or price of an asset or company.

Value-Added  Pertaining to something added to products and services to enhance value or price for customers.

Value of a Firm  See Valuation.  An objective opinion of financial worth.  Social value may be subjective.

Variance  A measure of a variable's volatility relative to its average.

Venture Capital  Capital supplied to particularly high-risk projects, such as start-ups or to companies denied conventional financing.

Vertical Integration Merger between a supplier and its customers. An example would be when an oil-refining firm acquires a firm that owns oil fields.

Vertical Merger This would give backward integration to the company to assimilate the sources of supply and forward integration towards the market. ie., the merging undertaking would be a buyer or a supplier using its product as intermediary material for final production.

Visible Hand  The phrase comes from Adam Smith's "Invisible Hand," whereby markets alone do the job of resource allocation. With "visible hand" the government intervenes in the market, which suggests a belief in the market's failure in that particular area.

Volatility The rate at which the price of a security moves up and down.  The range of possible outcomes. A measure of risk of an individual asset when held in isolation, i.e., not as part of a portfolio.

Volume  The number of shares or contracts traded in a security or an entire market during a given period, typically a day.

Voluntary Winding Up  The original company which has split into several companies after division could be wound up voluntarily.

Voting Right  The stockholder's right to vote in the affairs of the company. Most common shares have one vote each and preferred stock usually only has the right to vote when its dividends are in default. The right to vote may be delegated by the stockholder to another person, called voting by proxy. Voting rights give the stockholder a say in the company's affairs and such rights can increase the value of the stock.

Voting Trust  A device to place the control of a company in the hands of certain managers for a given period of time, or until certain results have been achieved. This is done by shareholders surrendering their voting rights to a trustee for a specified period of time.

- W -

Warrant  A financial asset, issued by the firm, which gives its holder the right to purchase a fixed number of shares of common stock at a predetermined price.

WEBS World Equity Benchmark Shares — WEBS Index Shares represent a new approach to international investing, offering passive index management and facilitating targeted portfolio exposure. There's a WEBS Index Series for each of 17 countries. Each WEBS Index Series seeks to track the performance of a specific MSCI Index. Many of these indices have been used by investment professionals for more than 25 years. WEBS are listed on the American Stock Exchange and trade like any other stock.  

WSJ Prime Rate  The initials stand for the Wall Street Journal, which surveys large banks and publishes the consensus prime rate. It's the most widely quoted measure of the prime rate, which is the rate at which banks will lend money to their most-favored customers. The prime rate will move up or down in lock step with changes by the Federal Reserve Board.  The prime rate is an important index used by banks to set rates on many consumer loan products, such as credit cards or auto loans. If you see that the prime rate has gone up, your variable credit card rate will soon follow.

White Knight  A firm that comes to the rescue of a corporation that is being taken over.  Enters the fray when the target company is raided by a hostile suitor. A White Knight may offer a higher price than the predator to avert the takeover bid. (With the higher bid offered by the white knight, the predator might not remain interested in acquisition and hence the target company is protected from the raid.)     

Wilshire 5000  An equity index comprising more than 6000 US listed stocks. The index originally included only 5000 companies, thus the number in the name.

Working Capital. Current assets minus current liabilities.  This figure shows the company's liquidity and ability to meet its short-term debts.

Working Capital Ratio  Current assets of a company divided by its current liabilities. This is a measure of a company's liquidity.

Working Control  Theoretically, ownership of 51% of a company's voting stock is necessary to exercise control. In practice, and this is particularly true in the case of a large corporation, effective control sometimes can be exerted through ownership, individually or by a group acting in concert, of less than 50%.

Wrap Account  A type of fully discretionary account (in which a client has given specific written authorization to a partner, director or qualified portfolio manager of an investment dealer to select securities and execute trades for him or her). A single annual fee, based on the account's total assets, is charged instead of commissions and service charges being levied separately for each transaction. The account is then managed separately from all other wrap accounts, but is kept consistent with a model portfolio suitable to clients with similar objectives. This is also known as a wrap fee program.

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Yankee Bond  A dollar-denominated bond issued in the US by a non-U. S. borrower.

Year-to-Date (YTD)  For the period starting January 1 of the current year and ending at the current date.

Yelling Markets  Also referred to as "public outcry", refers to markets where transactions involve the yelling of prices and quantities, just as in the movies.

Yield In general, a return on an investor's capital investment. For bonds, the coupon rate of interest divided by the purchase price, called current yield. Also, the rate of return on a bond, taking into account the total of annual interest payments, the purchase price, the redemption value, and the amount of time remaining until maturity.

Yield Curve The return on debt securities with different maturities, for a level of default risk.  A graphic representation of the relationship among yields of bonds of the same quality, but with different maturities.

Yield to Maturity (YTM) The market interest rate on a bond. It is the yield an investor would receive in the bond is held to maturity.

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Zero Coupon Bond  A bond that has no coupon payments. It pays only a single cash flow at maturity. May be taxable outside a qualified retirement vehicle.  Usually high quality federal or government bonds originally issued in bearer form, where some or all of the interest coupons have been detached.  The bond principal and any remaining coupons trade separately from the strip of detached coupons, both at substantial discounts from par. Also called strip bonds.

M & A FINANCE GLOSSARY  A B C D E F G H-I J-K-L M N O P Q-R S T U-V W-X-Y-Z 

 Contact FEC to expand definitions or for definitions not included in this glossary. 

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