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139 Equities-Trade jargon for conmion stoclcs. The term "equity" refers to the fact that the holder has a share in the equity of the issuing company (compare debt securities). Event Trigger-An event that initiates a change in investors perceptions of a company, an industry, or die market itself, such a positive eamings surprise on an unfavored stock, or a negative surprise on a favored stock. Event triggers cause large changes in stock price (compare reinforcing events). Expense Ratio-The expense ratio of a mutual fund is the annual chaiges the fund deducts for expenses, including management fees, expressed as a percentage of total investment. This comes right out of the investors pockets. The lower the expense ratio for a fund the more favorable it is to the investor. Fundamental Analysis-The practice of valuing stocks based on their underlying "fundamentals": balance sheet and financial measures such as eamings, cash flow, capital structure, etc. Fundamentalist-One who beheves in and practices fundamental analysis. GARP (Growth At a Reasonable Price)-A relatively low P/E ratio, in respect to a companys above-average sales and eamings growth prospects. This is expected to result in the stock outperforming the market even if the P/E remains constant, as well as the possibility of significant additional appreciation if the P/E multiple expands. Growth Stock-A stock whose price reflects the markets expectation of bet-ter-than-average future growth prospects; normally a higher P/E stock. Heuristics, or Judgmental Heuristics-Mental shortcuts, or leaming and simplifying strategies people use to manage laie amounts of information. Most of these judgmental shortcuts normally work well in allowing -people to process large amounts of data that would otherwise overwhelm them. However, tiiese simphfying processes that are usually efficient time- savers often lead to systematic mistakes in investment decisions, because of their shortfalls in processing statistical and market information. Hindsight Bias-Peoples mistaken belief that past errors could have been seen much more clearly, if only they hadnt been wearing dark or rose-colored glasses. This heuristic seriously impairs proper assessment of past errors and significandy limits what can be leamed from experience. Holding Period Return (HPR)-The retum on a portfolio (appreciation and dividends) that is bought and held for a specified period of time without any additional trading or rebalancing. Hyperinflation-A spell of inflation that is so high, ranging well above normal levels (sometimes in excess of 100% per year), that it results in the total erosion of a countrys currency. Index Fund-A mutual fund tiiat is not actively managed but instead mirrors the same holdings as one of the major market indices (most commonly the S&P 500) in order to match its retum.
Indexing-The practice of managing a portfolio as an index fund. Also known as "passive management." Inflation Risk-The risk that a debt security may lose a significant portion of its value due to inflation eroding the underlying principal. Initial Public Offering (IPO)-Stock in a company being sold to the public for the first time. Junk Bonds-High-yield bonds rated BB or lower by the major credit agencies. These bonds provide higher retums than "investment quality" bonds. Large Cap-Short for large capitalization, the market value of the shares of a large company. Large cap stocks are generally considered to have market values above $5 billion. See also market capitalization. Law of Small Numbers-Not an actual law, but a tongue-in-cheek reference to the tendency to overstate the importance of findings taken from small samples, which often leads to erroneous conclusions. This fallacy contrasts with the statisfically vahd, tme law of large numbers. Leveraged Buyout-In a leveraged buy-out, the buyer borrows from banks and/or other third parties (for example, by issuing junk bonds) to raise cash to purchase the conunon stock of a target company. The target companys resources are often utilized (divisions sold off, cash reserves used, etc.) to finance the takeover. Liquidity-The ease with which a reasonable number of shares of a stock can be bought or sold with only a minor change to the market price. Stocks trading with large bid/ask spreads and at low volume are said to be "illiquid." Load-The sales charge on a mutual fund, usually 1% to SA% of the initial investment. Long-Term Bond-A Treasury bond with a maturity of 10 years or more. "The long bond" usually refers to the 30-year Treasury bond. Margin-Money deposited with a broker in partial payment of a stocks purchase. Typically, margin requirements are 50%, that is, the investor must put up at least 50% of the purchase price of stocks bought "on margin." The Great Crash of 1929 was blamed in part on the speculative bubble caused by investors buying on margins as low as 10%. Market Capitalization-The total dollar value of all of a companys outstanding shares of common stock. It is equal to the price per share dmes the number of shares outstanding. Also called the "market value," or simply "market cap." Market Timing-The attempt to time purchases and sales to the phases of the market. If this could be done successfully, money would grow on trees. Market Value-Same as market capitalization. Mean-Also known as the average, the mean is simply the sum of a series of numbers divided by the number of numbers in the series. For example, the mean of the three numbers 2, 3, and 10 is (2+3+10)73 =15/3 = 5. Median-The middle value in a list of numbers. By definition, half of the numbers in the remainder of the list are greater than the median and half are
less than the median. (If there is an even number in the list the average of the two middle numbers is used.) For example, the median of 2, 3, and 10 is 3. The median can differ significandy from the mean, or average. Modem Portfolio Theory (MPT)-A large body of academic financial research, within the paradigm of efficient markets. MPT posits that retums on "risky" assets can be fully explained by volatility. The capital asset pricing model (CAPM) is a subset of modem portfolio theory. Momentum Investing-Buying stocks with rapid eamings growth or companies or industries that are outperforming the market in the expectadon that current trends will continue, and selling them when they lag. Mortgage Bonds-Debt securities that are secured by real collateral (such as property, buildings, machinery, etc.), as opposed to debentures, which are backed by the issuers credit rating. These are disdnct from mortgage-backed securities, which are normally secured by pools of home mortgages. Multiple-Short for P/E multiple, or P/E ratio. Net Worth-The value of all common stock and retained eamings. No-Load Fund-A mutual fund with no sales charges. Nominal Retum-A retum that has not been adjusted for inflation. P/BV Ratio-The ratio of a stocks current price to the latest fiscal years book value. P/CF Ratio-The ratio of a stocks current price to latest fiscal years cash flow. P/D Ratio-The ratio of a stocks current price to the current annual dividend; the reciprocal of the dividend yield. P/E Ratio-The ratio of a stocks current price to the latest 12 months eamings (before nonrecurring gains or losses). Paradigm-The working beliefs underlying all theory and research in a particular science. As the paradigm becomes widely accepted, its tools and methods become more deeply rooted in the solution of problems. Anomalies that contradict the basic tenets of the paradigm are a serious challenge to it. A paradigm must be able to explain the anomalies or it will eventually be abandoned for a new one that does provide explanations which the first one cannot. Preferred Stock-As opposed to common stock, stock in a company that pays a dividend but does not endow the holder with ownership or normally with voting rights in the company. In the event of bankruptcy or liquidation, preferred shareholders are fully repaid before common shareholders receive a penny. Preferred shares are often convertible into common shares. Proflt Margin-Income as a percentage of net sales. Quant-Short for "quantitative analyst," a Wall Street or academic statistician. Quintile-One of five equally-sized groups making up a full sample. The items are first ranked by some measure, such as P/E ratio, and then grouped by the highest 20%, the next highest 20%, and so on down to die lowest 20%.
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