Glossary

A

Accredited Investor

An accredited investor is a person or a business entity who is allowed to deal in securities that may not be registered with financial authorities. They are entitled to such privileged access if they satisfy one (or more) requirements regarding income, net worth, asset size, governance status or professional experience.

Acquisition

An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s shareholders.

Accrual Bond

An accrual bond is a bond that does not pay periodic interest to bondholders. Instead, interest is added to the principal balance of the bond and is either paid at maturity or, at some point, the bond begins to pay both principal and interest based on the accrued principal and interest to that point.

Acid-Test Ratio

The acid-test ratio uses a firm’s balance sheet data as an indicator of whether it has sufficient short-term assets to cover its short-term liabilities. This metric is more useful in certain situations than the current ratio, also known as the working capital ratio, since it ignores assets such as inventory, which may be difficult to quickly liquidate.

Actuary

An actuary is a professional who assesses and manages the risks of financial investments, insurance policies and other potentially risky ventures.

Administrator

An administrator is a court-appointed individual who handles all remaining financial matters for a decedent during probate. A decedent is a person who has died. The administrator organizes all the pieces of the decedent’s estate and then settles outstanding debt, expenses and other obligations.

Advisor

An advisor is any person or company involved in advising or investing capital for investors. Registered investment advisors (RIAs) and investment advisory companies (IACs) are two main entities that investors look to for investment management. Also known generally as investment advisors or financial advisors.

Alternative Investment

An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk.

Annual Report

An annual report is a publication that public corporations must provide annually to shareholders to describe their operations and financial conditions. The front part of the report often contains an impressive combination of graphics, photos, and an accompanying narrative, all of which chronicle the company’s activities over the past year.

Annuity

An annuity is a financial product that pays out a fixed stream of payments to an individual, and these financial products are primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals.

B

Balance Sheet

A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

Bond

A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.

Bear Market

A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.

Bull Market

A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies and commodities.

C

Credit Rating

A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money—an individual, corporation, state or provincial authority, or sovereign government.

Credit Risk

Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection.

D

Debt Ratio

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.

Debt-to-Income (DTI) Ratio

The debt-to-income (DTI) ratio is a personal finance measure that compares an individual’s monthly debt payment to his or her monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.

Derivative

A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset.

E

Equity

Equity is typically referred to as shareholder equity (also known as shareholders’ equity) which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off.

F

Forex

Forex (FX) is the marketplace where various national currencies are traded. The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).

I

Income Statement

An income statement is one of the three important financial statements used for reporting a company’s financial performance over a specific accounting period, with the other two key statements being the balance sheet and the statement of cash flows.

Insurance

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

Interest

Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate (APR). Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.

M

Mutual Fund

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.

O

Option

Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.

P

Principal

The principal is a term that has several financial meanings. The most commonly used refers to the original sum of money borrowed in a loan or put into an investment. Similar to the former, it can also refer to the face value of a bond.

Prospectus

A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public. A prospectus is filed for the stock, bond, and mutual fund offerings. A prospectus is used to help investors make a more informed investment decision.

Pyramid Scheme

A pyramid scheme is an illegal investment scam based on a hierarchical setup of network marketing. The most famous kind of pyramid scheme is, perhaps, the Ponzi scheme.

R

Return

A return, also known as a financial return, in its simplest terms, is the money made or lost on an investment over some period of time.

A return can be expressed nominally as the change in dollar value of an investment over time.

Rights Offering (Issue)

A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings. These are considered to be a type of option since it gives a company’s stockholders the right, but not the obligation, to purchase additional shares in the company.

Risk

Risk is defined in financial terms as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.

S

Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Physical paper stock certificates have been replaced with electronic recording of stock shares, just as mutual fund shares are recorded electronically.

Stock

A stock (also known as “shares” or “equity”) is a type of security that signifies proportionate ownership in the issuing corporation. This entitles the stockholder to that proportion of the corporation’s assets and earnings.

Security

The term “security” is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation—via stock—a creditor relationship with a governmental body or a corporation—represented by owning that entity’s bond—or rights to ownership as represented by an option.

Superannuation

A superannuation is an organizational pension program created by a company for the benefit of its employees. It is also referred to as a company pension plan. Funds deposited in a superannuation account will grow, typically without any tax implications, until retirement or withdrawal.