Some common terms like 'common stock' to help novices learn the lingo
The investment business, like any other discipline, has its own lingo or jargon. Some of the terms are fairly straightforward, but others seem designed to separate the novices from the ''in'' crowd. Here is a glossary to help move you out of the novice territory:
Common stock in a corporation has exclusive claim to the net assets and the profits of the corporation if no other class of stock or bonds is issued. The shares have no fixed dividend rate, and they rank after bondholders and preferred shareholders if a company is liquidated. Although assuming the greater risk, common shareholders generally exercise greater control in the company's affairs.
Preferred stock is not always issued by a corporation when it makes its initial stock offering. When issued, it takes precedence over common stock on the company's earnings (in the form of dividends) and on assets in the event of liquidation. Preferred holders usually receive dividends at a specified rate, as opposed to common stockholders, who are guaranteed no dividend. There are several classes of preferred stock. Two are as follows:
Cumulative preferred is the most prevalent of this type. Here, any dividends not paid when due accumulate and must be paid before a dividend on common can be paid.
Convertible preferred gives an investor the right to exchange these shares for a given number of shares of the company's common stock.
Price/earnings ratio, or P/E, is a measure of a stock's value. Also known as the multiple, it is the price of a share divided by the company's current earnings per share. This tells what you are paying for each dollar of earnings, so it is a good measure of whether the stock is over- or underpriced. It is widely used as a barometer of a company's financial condition. And, averaged over a group of stocks like the Standard & Poor's 500, it can be an indicator of the current investment climate. If a stock is selling at $40 and earnings are $5 a share, the P/E is 8 ($40 divided by $5).
Dividends are paid by the company to the investor, usually every three months. They can be paid by check or reinvested to purchase additional shares.
Yield, or return, measures the income that an investment generates. It is expressed as a percentage, so that stock selling for $40 and paying a dividend of perhaps $2.50 gives it a yield of 6.25 percent.
Beta is a measure of how much a stock moves in relation to the market as a whole. A stock that tends to go up or down at the same rate as the market has a beta of 1. If it goes up or down 50 percent more than the market, it has a beta of 1.5, making it highly volatile. If you have a high-beta stock and it's doing well in a bull market, you'll enjoy the ride; if it starts to fall, you can quickly lose all your gains, and then some.
Listed stocks are traded the New York and American Stock Exchanges and regional exchanges. The stocks are traded through a broker who brings together the buyer and seller.
Over-the-counter stocks are traded directly between buyers and sellers, often through dealers who sell stocks from their own inventories. They are not listed on any US stock exchange, although a listing of many can be found in the business pages of major city newspapers and the Wall Street Journal.
Averages like the Dow Jones industrial average are convenient ways to measure stock market performance. While the Dow gets the most attention, another average , or index, the Standard & Poor's 500, is widely used by professionals, because it represents 500 New York Stock Exchange stocks, while the Dow only includes 30 of the most prominent companies.
Bonds, or certificates of long-term debt, are issued by the Treasury, corporations, and municipalities. Bond buyers lend money in return for regular interest payments and a promise of repayment of principal, the dollar amount stated on the bond.
Maturity is the date of a bond's expiration, usually more than 10 years from the issuing date. Medium-term borrowings, between one and 10 years, are called notes. If a corporation is liquidated, bondholders' claims on assets take precedence over stockholders'. There are many kinds of bonds, depending on whether and how they are secured, who issues them, how long they run, how and when principal and interest are paid, the currency of payment, the purpose of their issue.
Commercial paper consists of the promissory notes, IOUs, of top-rated businesses. These notes are unsecured, not backed by collateral, but often backed by unused lines of credit. They are issued for short-term credit needs - 90 days or less. Because of the excellent credit ratings of the companies issuing them, these notes are easily sold in the money market. Along with certificates of deposit, they are one of the main investments of money market mutual funds.
Leverage is the power to earn a great deal of money by putting up only a portion of the value of the investment. Of course, you can also lose a great deal of money this way, too. A common use of leverage is the margin account at a brokerage, which permits you to buy shares on credit.
But if the stock falls, you could get a ''margin call'' from the broker requiring you instantly to make additional payments into the account so as to bring the proportion of loan to equity back into line with legal requirements or the brokerage firm's policy.