American Depository Receipts (ADRs): A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.
Balance Sheet: Simply an accounting “picture” of a company’s financial condition or position consisting of Assets: Cash, inventory, accounts receivable, plant and equipment etc., Liabilities: Accounts payable, debts, etc. and Equity: Capital stock, retained earnings from prior years, etc. A “strong” balance sheet has characteristics of ample cash, manageable inventories and receivables and low debt vs. the total equity.
Basis Points: A term used to state changes in percentages to points, primarily used in rates of changes in bond yields. A basis point is equal to 0.01% therefore 100 basis points are equal to 1.0%. For example, if a yield on a bond or a certificate of deposit increases from 4.0% to 4.5% that would be equal to an increase in 50 basis points.
Beta: A stock with a beta of 1.0 will tend to move in line with the market as a whole over the same period of time. A beta over 1.0 will move at a higher rate of return than the market and conversely a beta under 1.0 will fall further on a percentage basis than the overall market. Not to be confused with volatility.
Buybacks: The program whereby a company’s board of directors engage in buying back outstanding shares from the existing float (see, also) in the open market. These shares are then considered Treasury Stock on the balance sheet. Dividends are not paid on these shares and are not used in calculating “earnings per share”. Therefore, with less outstanding shares on the market, there is more earnings left over for the shareholders.
Cash Flow: Net profit plus non cash expenses such as depreciation, depletion, amortization. This figure can also be expressed on a per share basis (see Earnings per Share). Free Cash Flow takes into account reductions in working capital and funds used for capital expenditures.
Closed-End (Mutual) Fund: Unlike the more common “open-end” mutual fund (see, also), a closed-end fund as a fixed number of shares and trades like a listed stock. It is actively managed (as opposed to an Exchange Traded Fund (see, also) and focuses on a particular investment theme (general equity, special situations, income, market sectors, etc.). Since its price is dictated by market dynamics it will trade at either a premium or discount to the net asset value per share of its portfolio.
Dividend: At the discretion of the board of directors, a distribution of a portion of a company’s earnings in cash. The dividend is most often quoted in terms of the dollar amount each share receives on a quarterly and annual basis. It can also be quoted in terms of a percent of the current market price referred to as the dividend yield. (See also, Yield, Payout Ratio and Total Return)
Dividend Reinvestment Plan (DRIP): A program offered by a listed corporation that allows investors to reinvest their cash dividends by purchasing additional shares on the payment date of the cash dividend. (See also July 11, 2012 posting for more details and discussion).
Earnings per Share: In basic terms the total profits of a company before dividends divided by average number of outstanding shares. If a company has net profits of $1 billion and 300 million shares outstanding, it will have earnings per share of $3.33. These calculations are usually made on a quarterly basis. (See also, Price Earnings Ratio).
EBIDTA: Is a measure of a company’s earnings that adds the interest expense (the cost of borrowed money), depreciation (decrease in value of tangible assets), taxes and amortization (decrease in value of intangible assets) back to the net income number. Another metric – EBIDA does not exclude taxes. (See also Cash Flow.)
Exchange Traded Fund (ETF): A hybrid of a closed-end and open-end mutual fund, an ETF contains a basket of securities or other instruments that tracks an index such as the S&P 500 or a particular sector of the market and is not managed, per se. Therefore one participates in the “good” and “bad” securities within the index, but it has lower investment advisory fees than that of a mutual fund. There are literally thousands of such funds which have come to market over the past decade.
Exchange Traded Note (ETN): A senior, unsecured obligation (or note) that offers returns on investments based on exposure to different underlying assets and is “guaranteed” by the credit rating of the issuer. The purpose of ETNs is to create a type of security that combines both the aspects of bonds and exchange traded funds (see also, ETF). However, investors can also hold the debt security until maturity. ETNs are also traded on a major exchange, such as the NYSE, during normal trading hours.
Ex-Dividend: A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock trades ex-dividend on or after the ex-dividend date. At this point, the person who owns the security on the ex-dividend date will be awarded the payment, regardless of who currently holds the stock. After the ex-date has been declared, the stock will usually drop in price by the amount of the expected dividend. (See also Dividend)
Float: The total number of outstanding shares of a company that are publicly owned and available for trading.
Free Cash Flow: See “Cash Flow”
Limit Order: An order placed with a broker to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.
Market Cap(italization): The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying the current shares outstanding by the current market price per share. For example, if a company has 100 million shares outstanding and today’s price is $25, it would have a market cap today of $2.5 billion. The investment community often uses this figure in determining a company’s size vs. revenue or assets.
Master Limited Partnership (MLP): An ownership unit in a publicly traded limited partnership. The MLP collects cash flows from tangible assets and gives the unit holder a stake in the partnership company. A MLP often distributes all or most (90% by law) of available cash flow from operations to unit holders after deductions for capital expenditures.
Mutual (Open-End) Fund: The more common type of fund, it is a managed investment vehicle that owns a diversified portfolio of common equities, preferred stocks, bonds and/or other instruments and is priced daily based on the total value of the portfolio divided by the total shares outstanding. Mutual funds are offered by their distributors through a prospectus (see, also) in several classes that have different fee structures and terms.
Payout Ratio: The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings. Too high and a company may not be able to sustain this payout. I like to see this figure under 60% (depending on the industry). When looking at yields, you can’t ignore payout ratios.
Portfolio: Simply, a group of financial assets such as stocks, ETF’s, mutual funds, bonds, cash equivalents, etc. This grouping varies by an individual’s tolerance for risk vs. ultimate rewards. For example, thebuttonwoodproject focuses on three portfolio risk/reward profiles: Conservative, Aggressive and Income.
Price Earnings Ratio: A valuation of a company’s current per share earnings vs. its current price. For example: If a company will earn $5.00 a share next year and currently trades at $50.00, it has an estimate forward Price Earnings (PE) ratio of 10. I will indicate the period of time (projected earnings vs. trailing last year’s earnings) I use when indicating the PE.
Prospectus: A legal document, which is required by and filed with the Securities and Exchange Commission (SEC), providing details about an investment offering for sale to the public. In the case of a mutual fund which continuously offers shares for sale to the public, the prospectus contains details on its investment objectives and strategies, risks, historical performance, distribution policy, fees and expenses and fund management.
Pure Play: A company devoted to one line of business whose stock price is highly influenced by the dynamics of that specific industry, market or line of business.
Real Estate Investment Trust (REIT): Any corporation, trust or association that acts as an investment manager specializing in real estate under IRS Code Section 856 and required to distribute at least 90% of their taxable income to its investors. REITS generally own, and in most cases, operate income-producing real estate properties ranging from office and apartment buildings to public storage, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate and other forms of businesses approved by the IRS.
Return on Equity: Simply calculated – ROE = Net Income/Shareholder’s Equity (see, also). Return on equity measures a company’s profitability relative to how much money shareholders have invested in the company. ROE is a well-regarded measure of a company’s performance especially when compared to other companies in its industry. A figure higher than 20% would be on average better than the market as a whole. Often, investors pay a premium (i.e. higher PE) for shares of these companies.
Shareholder’s Equity: The capital received from investors plus all of the future earnings retained by the company after dividends paid.
Stock Dividend: A dividend payment made in the form of additional shares, rather than cash (See also Dividend).
Stock Split: A corporate action whereby a company’s existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the share price is reduced by the multiple. For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds. 100 shares at $50.00 becomes 200 shares at $25.00.
Stop-Loss Order: An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor’s loss on a security position. Also known as a “stop order” or “stop-market order”.
Total Return: A combination of capital appreciation and dividend income. For example, if a stock moves higher by 4% in a year and provides an annual dividend yielding 3%, it will have a total return that year of 7%. (See also Dividend)
Technical Analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
Tracking Stock: A common stock issued by a parent corporation that “tracks” the performance of a division or subsidiary of the parent. The parent company still controls the operations of the subsidiary business, but it allows investors to directly participate in the performance of the secondary operation.
Volatility: The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily changes in price. If the price of a stock moves up and down rapidly over a short period of time it is said to have high volatility. If the price changes more slowly or little at all, it has low volatility.
Watch List: A list of securities being monitored for potential investing opportunities. An investor may have a watch list of several “stocks to watch” as a basis for future selections to a portfolio. Also, a negative watch list for existing holdings that are possible candidates for sale.
Yield: The income return on an investment. In this blog it will be the dividends (see, also) received from a security and are expressed annually as a percentage based on the investment’s current market value. Example: Stock trades at $100.00 and pays a $.25 dividend a quarter ($2.00 year) will have a current yield 2% ($2 divided by $100).