Mac Murray

Investor Glossary

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Absolute-performance:  Evaluating investment results by measuring one’s investment performance against an absolute standard, e.g., the risk-free rate of return

Annuity:  A stream of cash in perpetuity

Arbitrage:  The practice of investing in risk-free transactions to take advantage of pricing discrepancies between markets (see risk arbitrage)

Arbitrageur:  Investor in risk-arbitrage transactions

Asked price (offer):  The price at which a security is offered for sale (see bid price)

Asset:  Something owned by a business or individual

Average down:  Buying more of a security for less than one’s earlier purchase price(s), resulting in a reduction of the average cost

Balance sheet:  Accounting statement indicating a company’s assets, liabilities, and net worth

Bankruptcy:  A legal state wherein a debtor (borrower) is temporarily protected from creditors (lenders); under Chapter 11 of the federal
bankruptcy code, companies may continue to operate (see Chapter 11)

Bear market:  Market conditions characterized by generally declining share prices (see bull market)

Beta:  A statistical measure used by some academics and market professionals to quantify investment risk by comparing a security’s or portfolio’s historical price performance with that of the market as a whole

Bid price:  The price a potential buyer is willing to pay for a security (see asked price)

Blocking position:  The ownership of a sufficient percentage of a class of securities to prevent undesirable actions from occurring (e.g., a creditor owning one-third or more of a class of bankrupt debt securities is able to “block” approval of a plan of reorganization not to his or her liking)

Bond:  A security representing a loan to a  government or business entity

Book value:  The historical accounting of shareholders’ equity–what’s left over after  liabilities are subtracted from assets

Bottom-up investing:  Strategy involving the identification of specific investment opportunities on a company by company basis via fundamental or technical analysis

Breakup value:  The expected proceeds if the assets of a company were sold to the highest bidder, whether as a going concern or not
(see liquidation value)

Bull market:  Market conditions characterized by generally rising share prices (see bear market)

Callable bond:  A bond that may be retired by the issuer at a specified price prior to its contractual maturity (see puttable bond)

Call option:  A contract enabling the owner to purchase a security at a fixed price on a particular date (see put option)

Cash flow:  The cash gain or loss experienced by a business during a particular period of operations

Catalyst:  An internally or externally instigated corporate event that results in security holders realizing some or all of a company’s underlying
value

Chapter ll:  A section of the U.S. federal bankruptcy code whereby a debtor is reorganized as a going concern rather than liquidated (see bankruptcy)

Closed-end mutual fund:  Mutual fund having a fixed number of outstanding shares that trade in the Market at prices not necessarily equal to underlying net asset value (see open-end mutual fund)

Collateralized bond obligation (CBO):  Diversified investment pools of junk bonds that issue their own securities (usually in several tranches) each of which has risk and return characteristics that differ from those of the underlying junk bonds themselves

Commercial paper:  Short-term loans from institutional investors to businesses

Commission:  A charge for transacting in securities

Convertible arbitrage:  Arbitrage transactions designed to take advantage of price discrepancies between convertible securities and the securities into which they are convertible

Convertible bonds:  Bonds that can be exchanged for common stock or other assets of a company at a specified price

Coupon:  The interest payment on a bond expressed as a percentage

Covered-call writing:  The practice of purchasing common stocks and then selling call options against them

Cram-down security:  Security distributed in a merger transaction, not sold by an underwriter

Credit cycle:  The cyclical fluctuations in the availability of credit

Debtor-in-possession:  Financing-loan to a bankrupt company operating in Chapter 11

Debt-to-equity ratio:  The ratio of a company’s outstanding debt to the book value of its equity; a measure of a company’s financial leverage

Default:  The status of a company that fails to make an interest or principal payment on a debt security on the required date

Default rate of junk bonds:  Calculated by many junk-band-market participants as the dollar volume of junk-bond defaults occurring in a
particular year divided by the total volume of junk bonds outstanding

Depreciation:  An accounting procedure by which long-lived assets are capitalized and then expensed over time

Discount rate:  The rate of interest that would make an investor indifferent between present and future dollars

Diversification-ownership of many rather than a small number of securities; the goal of diversification is to limit the risk of company specific
events on one’s portfolio as a whole

Dividend:  Cash or stock distributed by a company to its shareholders based on after-tax earnings

Earnings before interest, taxes, depreciation, and amortization (EBITDA):  a nonsensical number many investors have been led to believe represents the cash flow of a business

Earnings per share:  A company’s after-tax earnings divided by the total number of shares outstanding

Efficient-market hypothesis:  Implausible notion that all information about securities is disseminated and becomes fully reflected in security
prices instantaneously

Employee Retirement Income Security Act of 1974 (ERISA):  Legislation that requires institutional investors to act as fiduciaries for future
retirees by adopting the “prudent-man standard” (see prudent-man standard)

Exchange offer-an offer made by a company to its security holders to exchange new, less-onerous securities for those outstanding

“Fallen angels”-bonds of companies that have deteriorated beneath investment grade in credit quality

Financial distress-the condition of a business experiencing a shortfall of cash to meet operating needs and scheduled debt-service
requirements

Friendly takeover-corporate acquisition in which the buyer and seller both support the transaction enthusiastically

Fulcrum securities-the class of securities whose strict priority bankruptcy claim is most immediately affected by changes in the
debtor’s value

Full position-ownership of as much of a given security as an investor is willing to hold

Fundamental analysis-analyzing securities based on the operating performance (fundamentals) of the underlying business

Going long-buying a security (see short-selling)

Goodwill amortization-the gradual expensing of the intangible asset known as goodwill, which comes into existence when a company is
purchased for more than its tangible book value

Hedge-an investment that, by appreciating (depreciating) inversely to another, has the effect of cushioning price changes in the latter

Holding company-a corporate structure in which one company (the holding company) is the owner of another

Illiquid security-a security that trades infrequently, usually with a large spread between the bid and asked prices (see liquid security)

Income statement-accounting statement calculating a company’s profit or loss

Indexing-the practice of buying all the components of a market index, such as the Standard and Poor’s 500 index, in proportion to the
weightings of that index and then passively holding them

Initial public offering OPO)-underwriting of a stock being offered to the public for the first time

Inside information-information unavailable to the public, upon which it is illegal to base transactions

Institutional investors-money managers, pension fund managers, and managers of mutual funds Intangible asset-an asset without physical presence; examples include intellectual property rights (patents) or going-concern value (goodwill)

Interest-payment for the use of borrowed money

Interest-coverage ratio-the ratio of pretax earnings to interest expense

Interest-only mortgage security (IO)-interest payments stripped from a pool of mortgages which, for a given change in interest rates,
fluctuates in value inversely to conventional mortgages (see principal only mortgage security)

Interest rate reset-a promise made by an issuer to adjust the coupon on a bond at a specified future date in order to cause it to trade at a
predetermined price

Internal rate of return (IRR)-calculation of the rate of return of an investment that assumes reinvestment of cash flows at the same rate
of return the investment itself offers

Investment-an asset purchased to provide a return; investments, in contrast to speculations, eventually generate cash flow for the benefit
of the owners (see speculation)

Investment banking-profession involving raising capital for companies as well as underwriting and trading securities, arranging for the
purchase and sale of entire companies, providing financial advice, and opining on the fairness of specific transactions

Investment grade-fixed income security rated BBB or higher Junk bond-fixed-income security rated below investment grade

Leveraged buyout (LBO)-acquisition of a business by an investor group relying heavily on debt financing

Liability-a debt or other obligation to pay

Liquidating distribution-cash or securities distributed to shareholders by a company in the process of liquidation

Liquidating trust-an entity established to complete a corporate liquidation

Liquidation value-the expected proceeds if the assets of a company were sold off, but not as part of an ongoing enterprise

Liquidity-having ample cash on hand

Liquid security-a security that trades frequently and within a narrow spread between the bid and asked prices

Making a market-acting as a securities dealer by simultaneously bidding for and offering a security

Margin of safety-investing at considerable discounts from underlying value, an individual provides himself or herself room for imprecision,
bad luck, or analytical error (i.e., a “margin of safety”) while avoiding sizable losses

Market price-the price of the most recent transaction in a company’s publicly traded stock or bonds

Maturity-the date on which the face value of a debt security is due and payable

Merchant banking-an activity whereby Wall Street firms commit their own capital while acting as principal in investment-banking
transactions

Merger-a combination of two corporations into one

Mutual fund-a pooled investment portfolio managed by professional investors

Net asset value (NAV)-the per share value of a mutual fund calculated by dividing the total market value of assets by the number of
shares outstanding

Net-net working capital-net working capital less all long-term liabilities

Net operating-loss carryforward (NOL)-the carryforward of past losses for tax purposes, enabling a company to shield future income
from taxation

Net present value (NPV)-ealculation of the value of an investment by discounting future estimates of cash flow back to the present

Non-cash-pay securities-securities permitted to pay interest or dividends in kind or at a later date rather than in cash as due (see cashpay
securities, pay-in-kind, and zero-coupon bond)

Nonrecourse-the lender looks only to the borrowing entity for payment

Open-end mutual fund-mutual fund offering to issue or redeem shares at a price equal to underlying net asset value

Opportunity cost-the loss represented by forgone opportunities

Option-the right to buy (call) or sell (put) specified items at specified prices by specified dates

Over-the-counter (OTC)-the market for stocks not listed on the Philippine Stock Exchange

Par-the face amount of a bond; the contractual amount of the bondholder’s claim

Pay-in-kind (PIK)-a security paying interest or dividends in kind rather than in cash

Plan of reorganization-the terms under which a company expects to emerge from Chapter 11 bankruptcy

Portfolio cash flow-the cash flowing into a portfolio net of outflows

Portfolio insurance-a strategy involving the periodic sale of stockindex futures designed to eliminate downside risk in a portfolio at a
minor up-front cost

Preferred stock-an equity security senior in priority to common stock with a specified entitlement to dividend payments

Prepackaged bankruptcy-a technique whereby each class of creditors in a bankruptcy agree on a plan of reorganization prior to the
bankruptcy filing

Pre petition interest-interest accruing from the most recent coupon payment up to the date of a bankruptcy filing
Price/earnings (P/E) ratio-market price of a stock divided by the annualized earnings per share

Price-to-book-value ratio-market price of a stock divided by book value per share

Principal-the face amount or par value of a debt security

Principal-only mortgage security (PO)-principal payments stripped from a pool of mortgages which, in response to changes in interest
rates, fluctuate in value in the same direction as conventional mortgages but with greater volatility

Private-market value-the price that a sophisticated businessperson would be likely to pay for a business based on the valuation multiples
paid on similar transactions

Pro forma financial information-earnings and book value adjusted to reflect a recent or proposed merger, recapitalization, tender offer, or
other extraordinary transaction

Proxy contest-a fight for corporate control through the solicitation of proxies or the election of directors

Prudent-man standard-the obligation under ERISA to restrict one’s investments to those a “prudent” (conservative) person would make
(see Employee Retirement Income Security Act of 1974 (ERISA)

Put option-a contract enabling the purchaser to sell a security at a fixed price on a particular date

Puttable bond-bond with embedded put features allowing holders to sell the bonds back to the issuer at a specified price and time (see
callable bond)

Recapitalization-financial restructuring of a company whereby the company borrows against its assets and distributes the proceeds to
shareholders

Relative-performance orientation-the tendency to evaluate investment results by comparing one’s investment performance with that of
the market as a whole

Return-potential gain

Rights offering-a financing technique whereby a company issues to its shareholders the preemptive right to purchase new stock (or
bonds) in the company or occasionally in a subsidiary company

Risk-amount and probability of potential loss

Risk arbitrage-a specialized area involving investment in far-fromrisk- free takeovers as well as spinoffs, liquidations, and other extraordinary
corporate transactions

Secured debt-debt backed by a security interest in specific assets

Security-a marketable piece of paper representing the fractional ownership of a business or loan to a business or government entity

Self-tender-an offer by a company to repurchase its own securities

Senior-debt security-security with the highest priority in the hierarchy of a company’s capital structure

Sensitivity analysis-a method of ascertaining the sensitivity of business value to small changes in the assumptions made by investors

Share buybacks-i-corporate stock repurchases

Shareholder’s (owner’s) equity-the residual after liabilities are subtracted from assets

Short-selling-the sale of a borrowed security (see going long)

Short-term relative-performance derby-manifestation of the tendency by institutional investors to measure investment results, not
against an absolute standard, but against broad stock market indices resulting in an often speculative orientation

Sinking fund-obligation of a company to periodically retire part of a bond issue prior to maturity

Speculation-an asset having no underlying economics and throwing off no cash flow to the benefit of its owner (see investment)

Spinoff-the distribution of the shares of a subsidiary company to the shareholders of the parent company

Stock-a marketable piece of paper representing the fractional ownership of an underlying business

Stock market proxy-estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market

Subordinated-debt security-security with a secondary priority in the hierarchy of a company’s capital structure

Tactical-asset allocation-eomputer program designed to indicate whether stocks or bonds are a better buy

Takeover multiple-multiple of earnings, cash flow, or revenues paid to acquire a company

Tangible asset-an asset physically in existence

Tax-loss selling-selling just prior to year-end to realize losses for tax purposes

Technical analysis-analysis of past security-price fluctuations using charts

Tender offer-a cash bid to buy some or all of the securities of a target company

Thrift conversion-the conversion of a mutual thrift institution to stock ownership

Top-down investing-strategy involving making a macroeconomic forecast and then applying it to choose individual investments

Torpedo stocks-stocks for which investors have high expectations and which are therefore vulnerable to substantial price declines

Trader-a person whose job it is to buy and sell securities, earning a spread or commission for bringing buyers and sellers together

Trading flat-available for sale or purchase without payment for accrued interest

Treasury bills (T-bills)-non-interest-bearing obligations of the U.S. government, issued on a discount basis with original maturities ranging
from three months to one year; the interest income from Treasury bills is the difference between the purchase price and par

Treasury bonds (T-bonds)-U.S. government obligations with original maturities of ten years or more; interest is paid semiannually

Treasury notes (T-notes)-U.5. government obligations with original maturities ranging from one to ten years; interest is paid semiannually
Value-the worth, calculated through fundamental analysis, of an asset, business, or security

Value investing-a risk-averse investment approach designed to buy securities at a discount from underlying value

Value investment-undervalued security; a bargain

Volume–the number of shares traded

Window dressing-the practice of making a portfolio look good for quarterly reporting purposes

Working capital-current assets minus current liabilities

Writing call options-selling call options on securities owned

Yield-return calculated over a specific period

Zero-coupon bond-a bond that accrues interest until maturity rather than paying it in cash

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