Financial Terms

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401(k)

A 401(k) is an employer-sponsored retirement plan. Its name comes from Section 401(k) in the Revenue Act of 1978. This allows employers to offer tax-advantaged savings accounts to employees. Employees can set up contributions from their paychecks, and most employers offer contribution matching up to a certain amount.

403(b)

403(b) plans are offered to employees of certain tax-exempt groups (Code Section 501(c)(3)) and public education institutions.


A


Accounting

A process of recording, summarizing and communicating financial information. It provides means for recording transactions, keeping financial records, performing audits, reporting and analyzing information for management, and helping with taxes.

Accounting Period

The span of time covered by the financial statements is the accounting period. It defines the time frame of transactions included in financial statements.

Accounts Payable (AP)

These accounts represent a balance due for rent, salaries, funds owed to suppliers and any other accounts where money is owed. It is shown on a balance sheet as a current liability.

Accounts Receivable (AR)

These accounts represent sales made but not paid for by consumers. It is shown on a balance sheet as a current asset.

Accrual Basis Accounting

This accounting system is based on the accrual principle. Revenue is recognized and recorded when it’s earned, and expenses are recognized and recorded when incurred. These entries are made whether or not cash is received or paid.

Accrued Expenses

Any expenses that are incurred but not paid for in an accounting period. They are listed on the balance sheet as current liabilities.

Accrued Revenue

Revenue earned during the current accounting period that hasn’t yet been collected. This can also be referred to as “unrealized revenue.”

Annualized Return

The yearly rate of return for a given asset over a defined period of time. It is also known as the compounded annual growth rate (CAGR).

Annuity

A contractual agreement with an insurance company that provides a stream of income that’s paid out in regular intervals.

Asset

An entity’s property that was acquired or purchased and has value. This can be physical (cash, inventory), a claim (accounts receivable), a right (copyright, patent) or an assumption (goodwill).

Asset Allocation

Dividing investments among different asset classes, such as bonds and stocks, to balance risk and reward according to personal investment needs.

Asset Classes

A category or grouping of investments. Some examples are equities, fixed income (e.g., bonds), and real estate.

Audit

An examination and evaluation of an organization’s financial records and statements to inspect and verify transaction accuracy.

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B


Bad Debt Expense

A cost that is recognized when an entity is unable to collect a receivable due to a customer being unable to pay.

Balance Sheet

A statement showing a company’s financial position with respect to its assets, liabilities and shareholders’ equity. It shows what a company owns and owes, as well as shareholders’ ownership.

Bear Market

A bear market is a period of falling stock prices, usually by 20% or more. It’s often tied to a recession and it’s the opposite of a bull market (investment term defined below).

Beta Coefficient

A measure of a stock’s volatility in relation to the overall market. If a stock moves less than the market, its beta coefficient is less than 1.0. If it moves more than the market, its beta coefficient is greater than 1.0.

Blue Chip Stock

A common name for big companies with a long-standing reputation as steady, “low-risk” investments.

Board of Directors

Elected by stockholders, they work for the stockholders by protecting their interests. This is done by voting on decisions. For example, whether or not to merge with another company.

Bonds

Loans given from an investor to a borrower with promises to pay a specified amount on a given date or when a certain condition is met. In addition to the loan amount due from the borrower, interest payments are usually included in the bond details.

Book Value

If you take all the liabilities a company has, and subtract them from the assets and common stock equity of the company, what you would have left is the book value. Most of the time, the book value is used as part of an evaluative measure, rather than being related to a company’s market value.

Broker

An entity that buys and sells investments on behalf of the investor. There’s often a fee for this service.

Bull Market

A market where values and prices are in an upward trend. The opposite of a bear market.

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C


Call Option

An option contract where the buyer expects the value of an underlying security to rise above the option’s strike price by a given expiration date, otherwise the contract expires worthless.

Capital Gain or Loss

The difference between what you bought an investment for and what you sell it for. If the result is positive, it’s a gain. If the result is negative, it’s a loss.

Cash Basis Accounting

A method where income and expenses are recorded only with the payment of cash to the business or from the business. Though not the best method for accurate records, it’s a simple practice suitable for small businesses with mainly cash transactions.

Cash Flow

The amount of money transferred in and out of an entity, representing the organization’s activities.

Cash Flow Statement

A summary of the entity’s cash flow over a specific accounting period.

Certified Public Accountant (CPA)

Professionals certified by the American Institute of Certified Public Accountants after passing the CPA examination and fulfilling all required education and work experience.

Closing Entry

A journal entry made at the end of an accounting period to zero out temporary accounts and shift their balances to permanent accounts. These temporary accounts can be revenue, expenses and dividends, all of which can be closed out at the end of the fiscal year.

Consumer Price Index (CPI)

A commonly used measurement of inflation that tracks price changes for a basket of consumer goods.

Corporation

An entity that meets certain legal requirements to be separate from its owners who share in both losses and profits produced by the business’ operations.

Cost of Goods Sold (COGS)

The amount of direct material, direct labor and overhead used to produce goods sold by a business.

Covered Calls

When an investor sells call options on a security they already own in order to collect additional income from premiums paid by the buyer.

Current Assets

A company’s assets used in normal business operations and expected to be sold or used for less than one year.

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D


Deflation

In monetary policy, it can refer to the overall shrinkage of the money supply or the decrease in the cost of consumer goods and services.

Depreciation

Depreciation (straight-line, double-declining balance, sum-of-years digits) – The gradual decrease of value of a tangible asset over the span of its estimated useful life.

Discount Broker

A brokerage firm that offers its services for less than traditional brokerage fees.

Diversification

The practice of entering funds or company activity into a variety of investments or markets, such as technology, real estate, etc. This can lower risk and allow for higher long-term returns.

Dividend

The distribution of after-tax profit of an entity paid to shareholders depending on the class and number of shares held.

Dividend Payout Ratio

A measure of dividend payments as a percentage of a company’s earnings. Calculations vary depending on the earnings metric used.

Dividend Reinvestment Plan (DRIP)

Allows you to automatically reinvest dividend payments back into buying more of the stock.

Dividend Yield

A stock’s annual dividend payout per share expressed as a percentage of its share price.

Dow Jones Industrial Average (DOW)

The most common indicator of stock market performance, the Dow is an average of 30 actively traded blue chip stocks and is used to analyze the health of the overall market.

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E


Enrolled Agent

A tax professional authorized and licensed by the U.S. government to represent taxpayers in matters against the Internal Revenue Service (IRS).

Equities

Company-issued shares representing ownership in the company.

Ex-Dividend Date

Also called “Ex-Date” for short, it is the cutoff date for dividend eligibility. A stockholder must own the stock prior to the ex-date in order to be eligible for its upcoming dividend payout. Typically a stock’s price falls on this date to reflect the value of the upcoming dividend payment.

Exchange-Traded Fund (ETF)

A listed security that tracks an index consisting of a portfolio of individual securities. They are similar to mutual funds but trade on stock exchanges during the day like stocks.

Exit Strategy

A pre-planned set of conditions for exiting a position based on one’s investment goal.

Expense Ratio

A measure of the total fees and costs associated with buying investment funds.

External Audit

An audit performed by an independent (external) accountant.

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F


Face Value

The amount of money the bond will be worth at maturity. In other words, it’s the contractual amount that is to be repaid to the lender. It is also known as par value.

Financial Accounting

A branch of accounting focusing on keeping record of all financial transactions of an organization to measure economic performance and the organization’s financial position. Financial accounting is responsible for summarizing and preparing all financial reports.

Financial Statement

A report summarizing the written financial records to show the company’s financial performance and position. There are three statements that make up the financial statement: balance sheet, income statement and cash flow statement.

Fiscal Year

Also known as a financial year, a time period consisting of 12 consecutive months at the end of which books are closed, profit or loss is calculated, and financial reports are prepared and filed.

Fixed Asset

A fixed asset is a long-term piece of equipment or property owned and used in operations to help generate revenue.

Fixed Cost

A cost that doesn’t change with the increase or decrease of goods or services produced or sold.

Forecasting

The analysis of data trends from the past and present to predict and determine the uncertain future. These estimates affect important financial decisions.

Fund

Money put together by a group of investors to buy securities.

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G


General Ledger

The records of accounting information to organize and summarize all financial transactions. It provides all data for financial statements of the organization.

Generally Accepted Accounting Principles (GAAP)

Methods, rules and practices to provide guidelines and procedures, as well as objective standards for financial data and statements.

Goodwill

An intangible, long-term asset from the acquisition of one company by another. Goodwill is the excess amount paid over the net worth of the acquired company.

Gross Margin

Gross income represented as a percentage of net sales.

Gross Profit

Revenue minus the cost of producing goods or the services sold.

Growth Investing

Investment practice focusing on stocks with quickly growing earnings that are anticipated to continue growing in the future.

Growth Stock

Shares of companies that expect to increase their revenue and overall growth ahead of the current market pace.

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H


Hedge Fund

Headed by a manager (typically a registered investment advisor), these funds are for eligible qualified investors to pool their money and invest.

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I


Income Statement

A summary of a company’s performance determined by the organization’s profitability over a period of time. Also known as the profit and loss statement.

Index

An investment index measures the performance and price movements of many investments to determine the overall performance of a specific investment type or sector. The S&P 500 and Dow are two of the most common indexes.

Index Fund

A fund that contains a basket of securities belonging to a particular index.

Individual Retirement Account (IRA)

A tax-advantaged investing tool used to mark funds for retirement savings.

Inflation

An increase in the price of goods and services and a decrease in the purchasing value of money.

Initial Public Offering (IPO)

The process of issuing shares of a private company to the public market, transitioning the company from private to public.

Insolvency

Liabilities outweigh assets, and debt can’t be paid off.

Interest

The charged fee for borrowing money, often a percentage of the amount borrowed.

Internal Audit

An audit performed by an entity’s own accountants.

Investment Mandate

Rules and objectives used in the management of a specific portfolio or fund.

Investment Portfolio

A collection of investments owned by an individual or entity. In a portfolio, all investments are managed collectively to meet specific goals and objectives.

Investor

A person or entity who allocates capital with the expectation of receiving future financial returns.

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J


Journal Entry

The recording of financial information related to transactions of the business or organization. This provides an audit trail to look back at and analyze to determine the financial position of an entity.

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L


Large Cap

Typically a stock with a market cap between $10 billion and $200 billion.

Limited Liability Company (LLC)

A corporate structure that’s a separate entity. It also requires the owners to report the company’s profits and losses on their personal income tax returns. However, the owners cannot be personally held liable for the company’s losses or debts.

Liquidity

In accounting, the ability for current assets to meet current liabilities, often by being converted to cash. Also refers to the amount of trading volume for a particular asset.

Long Position

A trade or investment held with the expectation that it will appreciate in value.

Long-Term Anticipation Securities (LEAPS)

These are special options with longer-term expiration dates of up to one, two, or three years in advance.

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M


Margin

Borrowed money provided by a brokerage firm for the sake of investing.

Market Capitalization

The market cap of a company is calculated by taking its current share price and multiplying it by the number of shares outstanding.

Maturity Date

The date on which the bond contract ends. On that date the borrower or issuer must pay the bondholder the face value of the bond.

Mega Cap

Typically a stock with a market cap above $200 billion.

Micro Cap

Typically a stock with a market cap between $50 million and $300 million.

Mid Cap

Typically a stock with a market cap between $2 billion and $10 billion.

Money Market Account

A type of deposit account that comes with higher interest rates than most savings accounts. In many ways money market accounts are similar to standard savings and checking accounts

Municipal Bonds

Bonds issued by state and local governments to fund important operations. Sometimes called “munies” for short.

Mutual Fund

A basket of assets operated and managed by an investment company that is priced and sold to the public on a daily basis.

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N


Naked Call Selling

When an investor sells call options without owning the underlying security.

Naked Put Selling

When an investor sells put options without owning the underlying security.

NASDAQ

A computerized marketplace for the buying and selling of securities traded over the counter and even some NYSE listings. It is an acronym for National Association of Securities Dealers Automated Quotations system.

Net Income

The total revenue earned in a period (e.g., fiscal year) after all expenses incurred during the same period are deducted.

Net Margin

The percentage of revenue after operating expenses, preferred stock dividends, interest and tax are subtracted from the total revenue.

New York Stock Exchange (NYSE)

Located in New York City, the New York Stock Exchange is the largest equities-based exchange. It trades stocks from both U.S. and international companies.

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O


Operating Expense

A cost that is ongoing and associated with the cost of running and maintaining a business or organization. Some examples of this are rent, insurance and property taxes.

Option Premium

The income earned from selling call or put options.

OTC (Over-The-Counter)

A stock exchange for small companies that don’t qualify to be listed on major exchanges.

Overhead

An indirect expense related to the whole company or operation that doesn’t directly contribute to the end-product or service and can’t be traced to a specific unit of output.

Owner's Equity

The amount of money that, if all assets were liquidated and all debt was paid off, would be returned to a company’s shareholders.

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P


Partnership

An entity in which two or more individuals or parties agree to operate and manage a business together. This can be between individuals, companies, or an individual and a company.

Payroll

Records of wages, deductions and net pay for all workers and employees.

Penny Stock

A term used for high-risk (sometimes illiquid) stocks with a market price typically below $5. They are typically very small companies and trade on over-the-counter markets.

Preferred Stock

Hybrid securities with the properties of both stocks and bonds. They generally carry no voting rights but have a dividend that has priority over the common stock.

Present Value (PV)

The current value of a future sum of money.

Price-to-Book (P/B) Ratio

The ratio between the price of a company’s share and its book value per share.

Price-to-Earnings (P/E) Ratio

The ratio between the price of a company’s share and its earnings per share (EPS).

Price-to-Sales (P/S) Ratio

The ratio between the price of a company’s share and its sales per share.

Profit and Loss Statement (P/L)

A financial statement summarizing revenues, costs and expenses incurred during a given period, such as the fiscal year.

Prospectus

A legal document provided to investors who are interested in a financial security and need to make an informed decision. It contains business operations, financial statements, operations results, risk factors and management. Audited financial statements must also be included. This information is required by the SEC.

Put Call Ratio

A ratio comparing put option volume to call option volume. Often use as a guage of broad market sentiment.

Put Option

An option contract where the buyer expects the value of an underlying security to fall below the option’s strike price by a given expiration date, otherwise the contract expires worthless.

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R


Recession

A period of decline in economic activity and often defined by a continuous decline in gross domestic product (GDP) for two consecutive quarters. Recessions can potentially lead to high unemployment and market crashes.

Registered Investment Advisor (RIA)

An individual who has undergone financial investment training, completed certification, and agreed to adhere to certain rules in order to ensure recommendations and trades are made on the customer’s behalf and in the customer’s best interest to properly meet their investment goals.

Return on Assets (ROA)

A way to measure how much profit a company generates with the assets on its books. It is calculated by dividing net income by a total assets.

Return on Equity (ROE)

A way to measure how much profit a company generates with the money shareholders have invested. It is calculated by dividing net income by a shareholder’s equity.

Return on Investment (ROI)

A way to measure profitability, indicating if a company is efficiently using its resources. It is a ratio of net income to the average equity capital.

Revenue

Income from the sale of goods or services.

Risk Tolerance

The amount of volatility you allow in your investments and portfolio.

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S


S&P 500

An index that tracks the performance of the 500 largest publicly traded companies on U.S. stock exchanges.

Salvage Value

The estimated book value of a depreciable asset at the end of its expected useful life.

Sector

A group of similar securities in a specific industry. The stock market has 11 major sectors, each representing a key area of the economy. Some examples are healthcare, technology and finance.

Securities and Exchange Commission (SEC)

Created by the Securities Exchange Act in 1934, the SEC is a federal organization that governs and enforces the laws of the security industry to protect investors and maintain efficient markets.

Share

A unit of investment that represents ownership in an entity, such as a share of a stock or a mutual fund. Shares are usually issued when companies or funds want to raise capital.

Shareholder

Any person, company or organization that owns one or more shares of a company.

Short Position

A trade or investment held with the expectation that it will depreciate in value, and by so doing generate a gain.

Short Selling

Short selling occurs when an investor borrows shares of an asset. They then sell the shares – pocketing the money – with the promise of returning the same number of shares in the future. Short sellers hope prices decrease so they can buy back the shares at a lower price and keep the difference. It should be noted that this is an advanced practice that carries high risk.

Sole Proprietorship

The simplest and most common form of business ownership, a sole proprietorship is owned by an individual, and the individual is responsible for all debts of the business. It is not a separate entity from the owner.

Special Purpose Acquisition Company (SPAC)

These are also known as blank-check companies. They’re companies with no business operations. Instead, they raise funds in initial public offerings (IPOs). The SPACs then use that money to acquire a private company.

Stock

Often used interchangeably with share or equity, stock represents an investors ownership in a company.

Stock Exchange

A stock exchange is an entity that hosts a market for buyers and sellers. Exchanges are usually open for trading during specified hours. The New York Stock Exchange is the biggest stock exchange in the world. Companies that want their shares listed must meet strict criteria and are constantly at risk of being de-listed if they fail to do so.

Stop-Loss

A stop-loss order is a command to sell a security at a certain price. The goal is to limit an investor’s loss on a security’s position. The investor will set a price below the purchase price. If the security falls on or below that price, the order to sell will be executed.

Straight-Line

Straight-line is calculated by subtracting the salvage value from the asset’s cost and dividing it by the number of years estimated for its useful life.

Sum-of-Years Digits

Sum-of-years digits is another accelerated depreciation method that applies a percentage of depreciation based on the number of years left in the asset’s useful life.

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T


Tax-Advantaged Accounts

Investment accounts that allow you to reduce taxes on your income. For example, a traditional IRA is tax-deferred, and a Roth IRA is tax-exempt.

Taxable Accounts

Investment accounts that are taxed at a standard rate. They’re not tax-advantaged.

Trailing Stop

A stop-loss policy where a sell order is executed once the stock’s price drops by a specified percentage. The stop price is calculated based on the stock’s highest price since being purchased.

Treasury Bills

Fixed-income securities issued by the U.S. Treasury with maturities of less than one year. They are sold at a discount from their face value and therefore don’t pay interest before maturity.

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V


Value Stock

A stock that’s trading below its fair or intrinsic value.

Variable Cost

This cost is periodic and varies depending on the level of output or sales of a company. These costs can include labor, raw material, distribution costs and more.

Volatility

The amount of uncertainty or risk about the degree of changes in an asset’s market value. The higher an asset’s volatility, the wider its potential range of market values over a short period of time.

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