Glossary of Financial Terms
Annual Report – A Corporation’s official statement put out each year summarizing its financial situation and often including additional information about the company’s performance.
Asset – One of the many different forms of property that contributes to the asset owner’s overall wealth.
Balance Sheet – A financial statement that provides an overall financial view of a company. It shows a company’s net worth by looking at both its assets and outstanding debts.
Bear Market – A description of the stock prices tend to be falling over a significant period of time.
Beta – A measure of how volatile a stock is. The higher the beta value, the more likely the stock is to rise or fall in value. This indicator may be useful in selecting stocks.
Book Value – A company’s total assets minus its total liabilities. This provides an idea of the company’s net assets that can be useful in determining whether its shares are overpriced.
Bond – A debt issued by either the government or a private company where the issuer agrees to pay back the principal when due. A bond is a legal obligation.
Bull Market – A description of the stock market during a significant period of time when stock prices tend to be increasing.
Cash – Holding money in cash form or in the bank. Many investors choose to hold a small amount of their savings in cash as a precaution against trouble that wipes out the value of other assets.
Certificate of Deposit – Also known as a CD, this fixed-income bank or savings and loan association certificate allows you to invest money at a set interest rate and maturity date. When a CD matures, you receive the principal and interest earned.
Commission – The fee or amount of money you have to pay to brokers for the their services in helping you purchase stocks or other assets.
Commodity – Something of value that can be sold commercially. Some investors choose to put money in the commodities markets, investing in products such as grains, other foods, and metals.
Common Stock – Regular shares in a company that gives you ownership of a fraction of the company.
Compounding – The process of money being earned over a period of time by earning interest on the principal and then earning interest on previously earned interest.
Credit Union – An alternative to a regular commercial bank that brings together investors in a collective savings institution and offers its members a range of financial services including loans at low interest rates than commercial banks.
Dividend – A corporation’s payment of profits to its shareholders in the form of money, stock, or other property.
Finance – The management of money, including all assets. Also includes banking and investing.
Financial Planner – A trained professional who helps people with a variety of financial tasks and aids in making investment decisions to plan for the future.
Futures contract – An agreement to buy or sell a commodity at a set price that will be delivered at a set time in the future. Investors might purchase futures if they think the price will change.
Individual Retirement Account – A tax-deferred account in which one places at most $3,000 per year for future retirement. Depending on an individual’s income and, in accordance with U.S. tax policy, the contribution may be fully tax deductible, partially tax deductible, or not tax deductible.
Investment – Cash or property that one uses to purchase stocks, bonds, or any other type of asset with the expectation that the asset will be worth more money in the future.
Investment Manager – An individual who specializes in investing the money of many individuals. For example some investment managers invest the assets held in a trust for the benefit of pension plan participants.
Issuer – The company or level of government, either federal or local, that has the authority to issue a stock, bone, or other security to a buyer.
Liquidity – The ability of an investment to be easily converted to cash.
Margin – The fraction of your investment that you actually own. The rest of the margin account investment is purchased with borrowed money. There is a margin rate that limits how much you can borrow set by the Federal Reserve.
Money Market – The market for short-term securities such as certificates of deposit and U.S. Treasury notes. This market is low-risk but offers a relatively low rate of return.
Mutual Fund – An extremely popular form of investment where many individual investors let a company pool together their money, hire an investment advisor to manage their money, and invest with the goal of achieving specific financial objectives. This benefits individual investors because it enables them to diversify their portfolios and have a professional mutual fund manager invest their money.
Options – A contract that allows you to make a transaction in the future with conditions set now. You set the price and are entitled to buy or sell a security at that price within a set period of time.
Portfolio – Your collection of assets that you have chosen to invest in.
Precious Metals – Materials such as gold, silver, and platinum that offer an alternative form of investing. If investors are worried about the stock market, they might invest in precious metals to be more secure.
Preferred Stock – Similar to common stock in that it gives the owner partial ownership of the company, but different in that it gives the holder priority over common stock regular investors in receiving dividends.
Price/Earnings Ratio – The market price of a share of stock divided by the earnings of a share of that particular stock. This number allows investors to see how highly valued a company currently is, which is a factor that could affect an investment decision.
Principal – The amount you initially invest.
Prospectus – A document that companies are required by law to make available to potential investors detailing the firm’s business plans.
Real Estate – Homes, offices, or other land or buildings that you can invest in. An investor might choose to invest in a house if he thinks it is in a market where property values will rise in the near future.
Security – Shares of stock representing ownership in a company; an asset such as a bond indicating that one has loaned money to an institution like a bank, government, or company, or the right (such as an option) to acquire ownership of a particular asset.
Shareholder – An owner of stock in a company.
Split – A company’s decision to increase the number of shares of stock outstanding without affecting the shareholders’ percentage of ownership in the company. A stock split causes a decrease in the price of each individual share. For example, in a two-for-one split, a company might give each investor twice as many shares as he or she currently has.
Stockbroker – A person who, for a fee, helps individual investors buy and sell stocks.
Stock Market – A market for the buying and selling of stocks, such as the New York Stock Exchange.
Treasury Bill – A very short-term loan to the government from an individual investor. T-bills are sold by the U.S. Treasury and mature (become due) within a year or less.
Treasury Bond – Different from a Treasury bill in that it matures after 10 years or longer, but similar in that it represents a loan to the federal government.
U.S. Savings Bonds – Bonds issued by the U.S. government that offer investors the advantage of not having to pay state and local taxes on the interest earned from the bonds. In addition, investors do not have to pay federal taxes on the increase in value of series E or EE U.S. Savings Bonds until the bonds are redeemed.
Yield – This represents the gain earned on an investment and usually is expressed as a percentage. For example, the yield earned on a bond is the amount of interest paid by the bond divided by its price. The yield earned on a share of stock is the amount of the annual dividend paid per share of stock divided by its price.