Financial Glossary

Analyst

A person in a brokerage house, bank trust department, or mutual fund group who studies a number of companies and makes buy or sell recommendations on the securities of particular companies and industry group. Most analysts specialise in a particular industry, but some investigate any company that interests them, regardless of its line of business. Top

Angel

A private investor or group of private investors who are keen to invest in business ventures in various stages of maturity. In summary, this definition signifies individuals investing their personal funds and often syndicating the remaining financing amount with other private investors. Top

Annual Meeting

Once-a-year meeting when the managers of a company report to shareholders on the year's results, and the board of directors stands for election for the next year. The chief executive officer usually comments on the outlook for the coming year and, with other senior officers, answers questions from shareholders. Top

Annual Report

A document that a company publishes each year, containing the financial statements, a description of the company and its operations, an audit report, a management letter, footnotes to the financial statements, and other financial and non-financial statements. Top

Arbitration

This is a dispute resolution mechanism designed to help aggrieved parties recover damages. In arbitration, an impartial person or panel hears all sides of the issues as presented by the parties, evaluates the evidence, and decides how the matter should be resolved. Top

Auditor's Report

A letter written and signed by a CPA that indicates the extent of the audit and whether or not the financial statements fairly reflect the financial position and operations of a company and have been prepared in conformance with generally accepted accounting principles. Top

Authorised Shares

The number of shares a company is entitled to issue, as stated in the corporate charter. Top

Balance Sheet

A financial statement that indicates the financial condition of a business as of a given point in time, it includes assets, liabilities, and stockholders' equity, and it represents a statement of the basic accounting equation. Top

Bond

A debt security usually issued by a corporation to a large number of investors to raise a large amount of cash. A bond involves a formal commitment that requires the issuing company to make cash interest payments to the bondholder and a principal payment when the bond matures, usually between five and thirty years after the bond is issued. Top

Book Value (of company/shares)

The book value of a company is equal to the balance sheet value of stockholders' equity, which is sometimes referred to as net assets or net worth. The book value of a share of outstanding stock is the book value of the company divided by the number of outstanding shares. Top

Business Acquisition

An event by which an investor company acquires a controlling interest (51 percent or more of the voting stock) in another (investee) company. The investor company is called the parent and the investee company is called the subsidiary. Top

Business combination (see merger)

A business combination whereby two or more companies combine to form a single legal entity. In most cases the assets and liabilities of the smaller company are merged into those of the larger company, and the stock of the smaller, merged company is retired. Top

Business Plan

A comprehensive analysis of all aspects of a business enterprise relevant to its viability, including its history, management, competitive position, market, activities, products, policies, finances and projected finances. Its purpose is usually to attract financing or investment capital. Top

Business Plan Diagnostic

Review and analysis of entrepreneur's business plan by financial advisers or private placement agents in order to assess its completeness and compliance with investors' expectations. Top

Buyout

Purchase of at least a controlling percentage of a company's stock to take over its assets and operations. A buyout can be accomplished through negotiation or through a tender offer. Top

Capital Markets

Markets where capital funds-debt and equity-are traded. Included are private placement sources of debt and equity as well as organized markets and exchanges. Top

Capital Requirements

a) Permanent financing needed for the normal operation of a business; that is, the long-term and working capital.
b) Appraised investment in fixed assets and normal working capital. Top

Capital Turnover

Annual sales divided by average stockholder equity (net worth). When compared over a period, it reveals the extent to which a company is able to grow without additional capital investment. Generally, companies with high profit margins have a low capital turnover and vice versa. Top

Cash Flow

a) In a larger financial sense, an analysis of all the changes that affect the cash discount during an accounting period. The statement of cash flows included in annual reports analyses all changes affecting cash in the categories of operations, investments, and financing.
b) In investments, net income plus depreciation and other non-cash charges. In this sense, it is synonymous with cash earnings. Investors focus on cash flow from operations because of their concern with a firm's ability to pay dividends. Top

Collateral

Assets designated to be paid to a creditor in case of default on a loan by a debtor. Often referred to as security on the loan. Top

Cost of good sold

An account on the income statement that indicates the cost of the inventory sold during the period. Top

Covenant

An agreement between a company's creditors and its managers that often restricts the managers' behaviour in some way. These restrictions are usually designed to protect the creditor's investment, and they are often written in terms of accounting numbers and ratios. Top

Debenture

General debt obligation backed only by the integrity of the borrower and documented by an agreement called INDENTURE. An unsecured bond is a debenture. Top

Debenture Stock

Stock issued under a contract providing for fixed payments at scheduled intervals and more like preferred stock than a Debenture, since their status in liquidation is equity and not debt. Top

Debt-to-Equity Ratio

1. Total liabilities divided by total shareholders' equity. This shows to what extent owner's equity can cushion creditors' claim in the event of liquidation. Usually called Debt Ratio.
2. Total long-term debt divided by total shareholders' equity. This is a measure of Leverage-the use of borrowed money to enhance the return on owners' equity. Top

Default

Failure of a debtor to make timely payments of interest and principal as they come due or to meet some other provision of a bond indenture. In the event of default, bondholders may make claims against the assets of the issuer in order to recoup their principal. Top

Deficit

1. Excess of liabilities and debts over income and assets. Deficits usually are corrected by borrowing or by selling assets.
2. In Finance, an excess of expenditures over budget. Top

Equity

Ownership interest in a corporation, usually represented by the shares of stock, which are held by individuals or corporations. Also, it's the excess of balance-sheet assets over liabilities. Top

Equity Financing

Raising money by issuing of shares of common or preferred stock (Also see Initial Public Offering and Private Placement) Top

Equity Funding

Type of investment combining a life insurance policy and a mutual fund. The fund shares are used as collateral for a loan to pay the insurance premiums, giving the investor the advantages of insurance protection and investment appreciation potential. Top

Escrow

Money, securities, or other property or instruments held by a third party until the conditions of a contract are met. Top

Face Value

Value of a bond, note, mortgage, or other security as given on the certificate or instrument. Top

Factoring

Type of financial service whereby a firm sells or transfers title to its accounts receivable to a factoring company, which then acts as principal, not as agent. The receivables are sold without recourse, meaning that the factor cannot turn to the seller in the event accounts prove uncollectible. Top

Financing Activities

The activities of a company by which it generates capital to pay for its operations. The financial effects of the financing activities of a given period are summarized on the statement of cash flows and typically involved the management of borrowings and equity issuances. Top

FOB (free on board) destination

Freight terms indicating that the seller is responsible for the freight until it is received by the buyer. Top

FOB (free on board) shipping point

Freight terms indicating that the seller is responsible for the freight only to the point from which it is shipped. Top

General Accepted Accounting Principles (GAAP)

Conventions, rules, and procedures that define accepted accounting practice, including broad guidelines as well as detailed procedures. Top

General Partner

A partner in a partnership who has unlimited personal liability and the right to participate in management. Top

General partnership

A partnership in which the parties carry on all their business for the joint benefit and profit of all the parties concerned without attention to the capital being limited or not, or the contributions being equal or unequal. The partners of a general partnership are liable for all debts and obligations of the partnership. Top

Going Concern Assumption

An assumption of financial accounting holding that the life of an economic entity is indefinite, i.e, the entity will not be discontinued in the current period. Top

Grey Market

a) Consumer goods: sale of products by unauthorized dealers, frequently at discounted prices.
b) Securities: sales of securities that have not officially been issued yet by a firm that is not a member of the underwriting syndicate. Such trading in the when-issued, or gray, market can provide a good indication of the amount of demand for an upcoming new stock or bond issue. Top

High-Low Index

Moving average of the number of stocks that reach new highs and lows each day. Used as a technical analysis tool for measuring the strength of the overall market. Top

Historical Cost

The dollar amount paid for an asset when it was acquired. Many assets on the balance sheet are carried at historical cost. Top

Hold back

A contractual condition in which money is withheld until a specified event occurs. Top

Human Capital

The value of a company's human resources. Such valuations do not fall within the scope of generally accepted accounting principles and, accordingly, are not reflected on the financial statements. Top

Hurdle Rate

Term used in the budgeting of capital expenditures, meaning the Required Rate of Return in a discounted Cash Flow analysis. If the expected rate of return on an investment is below the hurdle rate, the project is not undertaken. The hurdle rate should be equal to the incremental cost of capital. In short, it refers to the critical minimum rate of return of an investment required by an investor. Top

Initial Public Offering (IPO)

Occurs when a company registers its stock with a public recognized Stock Exchange and can sell equity ownership in the company to the public. Access is gained to a source of capital, which did not previously exist. There are numerous reporting and compliance issues to deal with from this point forward which could involve a considerable expense. Stock that is publicly traded on a Stock Exchange provides the owner with an established price and a market in which to buy or sell. Top

Insider

A person who through employment, function or other relation has access to non public available knowledge and information about a company and its securities which has influence on the price of such securities. Top

Insider trading

Insiders who trade in securities based on insider knowledge and information. Top

Institutional investor

An institution such as an investment company, mutual fund, insurance company, pension fund or endowment fund, which generally has substantial assets and experience in investment. In many countries, securities laws do not protect institutional investors as fully because it is assumed that they are more knowledgeable and better able to protect themselves. Top

Issuer

Legal entity that has the power to issue and distribute a security. Issuers include corporations, municipalities, foreign and domestic governments and their agencies, and investment trusts. Issuers of stock are responsible for reporting on corporate developments to shareholders and paying dividends once declared. Issuers of bonds are committed to making timely payments of interest and principal to bondholders. Top

Joint Liability

Mutual legal responsibility by two or more parties for claims on the assets of a company or individual. Top

Joint Ownership

Equal ownership by two or more people, who have right of survivorship. Top

Joint Venture

Agreement by two or more parties to work on a project together. Top

Letter of Intent

Non-binding letter from the underwriter to the issuer, confirming the underwriter's intent to proceed with an offering and the general terms of the underwriting. Top

Leveraged Buyout or LBO

The buyout of a company's existing ownership using borrowed funds. The funds borrowed by the investors purchasing the target company are generally secured by the assets of the target company. Top

Limited Liability Company

A non-incorporated association that resembles a corporation in some ways and a partner ship in others. Top

Limited Partnership

Organisation made up of a 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 cannot lose more than their capital contribution. Top

Lock-up Agreement

Agreement between an underwriter and certain stockholders of a company requiring the stockholders to refrain from selling their shares in the public market for a specified period after a public offering. In the USA this period is customary 180 days after an IPO and 90 days after subsequent offerings, but may range from as little as 30 days to as much as one year. Top

Make a Market

Maintain firm bid and offer prices in a given security standing ready to buy or sell Round Lots at publicly quoted prices. The dealer is called a market maker in the over-the-counter market and a specialist on the exchanges. A dealer who makes a market over a long period is said to maintain a market. Top

Management Buyout

Purchase of all of a company's publicly held shares by the existing management, which takes the company private. Usually, management will have to pay a premium over the current market price to entice public shareholders to go along with the deal. If management has to borrow heavily to finance the transaction, it is called a Leveraged Buyout (LBO). Top

Market

A brokerage term for the trading of stock and the industry associated with the trading of stock. Top

Market Cap or Market Capitalisation

The value of a corporation as determined by the market price of its issued and outstanding common stock. It is calculated by multiplying the number of outstanding shares by the current market price of a share. Top

Market Conditions

The strength of the market or a market segment, like the interest in computer or airline stocks. Market conditions are good in a bull market. They are bad in a bear market. Top

Market Maker

A broker-dealer who has indicated that they will make a market in the shares of a specific company. The indication does not necessarily mean the broker-dealer will make a market in the company's shares. In theory, a market maker is a wholesaler of the company's shares. You must have at least three market makers to list your shares on the Bulletin Board. You must have at least five market makers to list your shares on NASDAQ. Top

Materiality

Any issue related to a business that would influence an investor in their decision to buy or sell the securities of that business. Top

Merchant Bank

A firm investing its own fund for its own account, often acquiring controlling interest in a company. Top

Mergers

Combination of two or more companies, where the amount paid over and above the acquired company's book value is carried on the books of the purchaser as goodwill; or a consolidation, where a new company is formed to acquire the net assets of the combining companies. Where an acquisition takes place by the purchase of assets or stock using cash or a debt instrument for payment, the merger is a taxable capital gain to the selling company or its stockholders. Top

Motherhood statement

This is a motherhood statement. Top

Near Money

Cash equivalents and other assets that are easily convertible into cash. Some examples are government securities, bank time deposits, and money market fund shares. Bonds close to redemption date are also called near money. Top

Negative Cash Flow

Situation in which a business spends more cash than it receives through earnings or other transactions in an accounting period. Top

Negative Working Capital

Situation in which the current liabilities of a firm exceed its current assets. Top

New Money

Amount of additional long-term financing provided by a new issue or issues in excess of the amount of a maturing issue or by issues that are being refunded. Top

Non Disclosure Agreement (NDA)

A non disclosure agreement is a contract in which the parties promise to protect the confidentiality of secret information that is disclosed during negotiation or another type of business activity. Top

On-Line Broker

In general, any broker that provides trading services to its customers over the Internet, which includes established full-service brokers such as Merill Lynch as well as a range of discount-and deep discount brokers. Top

On-Line Trading

Buying and selling securities using the Internet or broker-provided proprietary software that works through the Internet. Top

Options

A right to buy stock at a specific share price. The specific share price is called the exercise price. Usually, investors purchase options at a very low price betting the share price will appreciate above the exercise price. Top

Over-the-Counter or OTC

a) Security that is not listed and traded on an organized exchange
b) Market in which securities transactions are conducted through a telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange. Top

Placement Agent

A person or entity that acts as agent for the issuer in privately placing securities, typically a broker-dealer. Top

Pre-emptive rights

The right of an investor to participate in a financing to the extent necessary to ensure that, if exercised, its percentage ownership of the company's securities will remain the same after the financing as it was before. Top

Preferred Stock

A class of capital stock of a corporation sometimes paying dividends at a specified rate and receiving preference over subordinate classes of capital stock, such as common stock, in the payment of dividends or liquidation. Preferred stock ordinarily does not carry voting rights and may have various other features, which either restrict its residual rights to corporate profits or enhance the rights. Top

Private Investor

See Angel. Top

Private Placement

Sale of stocks, bonds, or other investments directly related to an institutional investor like an insurance company. Top

Private Placement Memorandum

A document used to describe securities being offered in an offering exempt from the registration requirements of national competent authorities. Top

Pro Forma

Latin for "as a matter of form"; refers to a presentation of data, such as a Balance Sheet or Income Statement, where certain amounts are hypothetical. For example, a pro forma balance sheet might show a debt issue that has been proposed but has not yet been consummated. Top

Quality of Earnings

A concept measuring how much the profits companies publicly report diverge from true operating earnings. Top

Quick Ratio

Cash plus marketable securities plus short term receivables, divided by current liabilities; often used as an indication of a company's solvency position. Top

Rating

Credit and Investments: evaluation of securities investment and credit risk by rating services such as Fitch Ratings, Moody's Investors Service, and Standard & Poor's Corporation. Top

Recapitalisation

Alteration of a corporate's capital structure such as exchange of bonds for stock. Top

Receiver

Court appointed person who takes possession of, but not title to, the assets and affairs of a business or estate that is in a form of bankruptcy called receivership or is enmeshed in a legal dispute. The receiver collects rents and other income and generally manages the affairs of the entity for the benefit of its owners and creditors until a disposition is made by the court. Top

Redemption

Repayment of a debt security or preferred stock issue, at or before maturity, at PAR or at premium price. Top

Refinancing

Issuing a note payable to satisfy another outstanding note payable. Top

Statutory Merger

Legal combination of two or more corporations in which only one survives as a legal entity. It differs from statutory consolidation, in which all the companies in a combination cease to exist as legal entities and a new corporate entity is created. Top

Takeover

A situation where another company, investor, or group of investors purchases enough of the outstanding stock to gain a controlling interest (50 percent or more of the voting stock) in the purchased company. Top

Treasury Stock

Previously issued stock that has been repurchased by the issuing company and held in treasury. Treasury stock is often reissued at a later date. Top

Turnaround

Favourable reversal in the fortunes of a company, a market, or the economy at large. Stock market investors speculating that a poorly performing company is about to show a marked improvement in earnings might profit handsomely from its turnaround. Top

Undercapitalisation

Situation in which a business does not have enough capital to carry out its normal business functions. Top

Underwriter

Insurance: company that assumes the cost risk of death, fire, theft, illness, etc., in exchange for payments called premiums.

Securities: Investment banker / a member of an underwriting group of syndicate, aggress to purchase a new issue of securities from an issuer and distribute it to investors, making a profit on the underwriting spread. Top

Venture Capital

Important source of financing for startup companies or others embarking on new or turnaround ventures that entail some investment risk but offer the potential for above average profits; also called risk capital. Sources of venture capital include wealthy individual investors; subsidiaries of banks and other corporations as small business investment companies. Top

Venture Capitalist

A firm incorporated for the purpose of investing in private companies. The infusion of capital is expected to take the private company to the point of qualifying to do an Initial Public Offering, Usually; venture capitalists expect a high percentage equity interest in the private companies in which they invest. Top

Warranty

An agreement by which a seller promises to remove deficiencies in the quantity, quality, or performance of a product sold to a buyer. Top

Yield

The rate of return on a debt instrument if the full amount of interest and principal are paid on schedule. Current yield is the interest rate as a percentage of the initial investment. Top