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Key Terms In Investing

The first thing a beginner investor needs to do is learn the “market talk.” The following are common investment terms used when referring to stocks and the stock market.

Analyst: A person with expertise in evaluating financial investments; he or she performs investment research and makes recommendations to institutional and retail investors to buy, sell, or hold; most analysts specialize in a single industry or business sector.

Ask Price (or “offer” price): The price at which a Market Maker is willing to sell a security.

*Assets: Any possessions that have value on an exchange. Assets include tangible items such as inventories, equipment, or real estate, as well as intangible items such as property rights or goodwill.

Bear Market: A bear market is one in which prices are low or declining.

Blue-chip stocks: A term generally applied to stocks of well-established companies that are known for their long-standing track records.

Bid Price: The price a prospective buyer is prepared to pay at a particular time for trading a unit of a given security.

Broker: An individual or a firm that brings together buyers and sellers but does not take a position on the asset to be exchanged.

Bull Market: A bull market is one in which stock prices are high or rising.

Date of Record: The date on which a shareholder must officially own shares in order to be entitled to a dividend.

Dividend: Distribution of earnings to shareholders, prorated by the class of security and paid in the form of money, stock, scrip, or, rarely, company products or property. The amount is decided by the Board of Directors and is usually paid quarterly. Mutual fund dividends are paid out of income, usually on a quarterly basis from the fund’s investments.

Debt to Equity Ratio: Long-term debt divided by shareholders’ equity, showing relationship between long-term funds provided by creditors and funds provided by shareholders; high ratio may indicate high risk, low ratio may indicate low risk.

Dow Jones Industrial Average (DJIA): The Dow Jones Industrial Average index is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials but including American Express Co. and American Telephone and Telegraph Co. Prepared and published by Dow Jones & co., it is the oldest and most widely quoted of all the market indicators. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks. The DJIA is calculated by adding the closing prices of the component stocks and using a divisor that is adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers. The average is quoted in points, not in dollars.

Earnings: Income of a business (revenue minus expenses).

*Earnings per share or EPS: Income (or earnings) for a specific period (usually a quarterly or a fiscal year period) divided by the average number of shares outstanding during that period.

EBITDA: Earnings before interest, taxes, depreciation, and amortization.

IPO: A company’s first sale of stock to the public. Companies making an IPO are seeking outside equity capital and a public market for their stock.

Limit Order: A Limit Order is an order to buy or sell a stock at a customer specified price.

Market Order: A Market Order is an order to buy or sell a stock at the market’s current best displayed price.

Market Maker: A broker/dealer that maintains a firm bid and offer price in a given security by standing ready to buy or sell at publicly quoted prices.

Money Market Fund: Open-ended mutual fund that invests in commercial paper, banker’s acceptances, repurchase agreements, government securities, certificates of deposit, and other highly liquid and safe securities, and pays money market rates of interest. The fund’s net asset value remains a constant $1 a share, only the interest rate goes up or down.

Stock: Ownership of a company or corporation, represented by “shares” of stock that claim ownership on the company’s earnings and assets.

Dividend: Distribution to shareholders of cash or stock declared by the company’s board of directors

Stock Split: The division of outstanding shares of a corporation into a larger number of shares. For example: in a 3-for-1 spilt, each holder of 100 shares before would now have 300 shares, although the proportionate equity in the company would remain the same.

Return on Equity: Net income divided by shareholders’ equity – a measure of the net income that a firm is able to earn as a percent of stockholders’ investment.

*Reverse Stock Split: A proportionate decrease in the shares of stock held by stockholders. For example, a 1-for-3 split would result in the stockholders owning 1 share for every 3 shares owned before the split. A company generally institutes a reverse split in order to increase the market price of its stock.

Warrant: A certificate issued by a company giving the holder the right to purchase securities at a stipulated price within specific time limits or perpetually. A warrant is sometimes offered by a company as an inducement to buy an offering of common stock or other securities.

Sources: * denotes that definition was abstracted from Wall Street Words. The remainder of the definitions were taken from Glossary of Investing Terms by NASDAQ.

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