FINANCE VOCABULARY


 

 

ABC
Stands for the motto "Always Be Closing," from David Mamet´s Glengarry Glen Ross, a bible of bad behavior for the boiler room set.
 
Arbitrage
The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist, but, arbitrage opportunities are often precluded because of transactions costs.
 
Boiler room*
Used to describe place or operation in which unscrupulous salespeople call and try to sell people speculative, even fraudulent securities.
 
Capital gain
When a stock is sold for a profit, the capital gain is the difference between the net sales price of the securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.
 
Clayton Act
The Clayton Act regulates general practices that potentially may be detrimental to fair competition. Some of these general practices regulated by the Clayton Act are: price discrimination; exclusive or tying agreements, mergers and acquisitions in violation of concentration ratios; and predatory pricing.
 
Cold Call
A sales call to a customer who does not know you or your product; the initial pitch to reel the customer in.

Cover
The act of purchasing securities in order to close an open short position. This is done by buying the same type and number of securities that were sold short. Most often, traders cover their shorts whenever they speculate that the securities will rise. In order to make a profit, a short seller must cover the shorts by purchasing the security below the original selling price
 
Diversification
Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security.
 
Dividend
A portion of a company's profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.
 
Fraud*
Intentional deception resulting in injury to another, as when a person makes false statements knowingly, without believing it to be true, or carelessly stated, without regard for the truth. Fraud consists of intention, actual misrepresentation or nondisclosure of pertinent facts, and intent to profit. 

Fundamental Analysis
The analytical method by which stock market activity may be predicted by looking at the relative sales, data and earnings of a stock as well as the management of the company in question.
 
Golden parachute
Compensation paid to top-level management by a target firm if a takeover occurs.
 
Greenmail
The holding of a large block of stock of a target company by an unfriendly company, with the object of forcing the target company to repurchase the stock at a substantial premium to prevent a takeover.

Growth Investment
A style of investing which emphasizes long term capital gains from increases in the values of a company's stock based on an increase in the real asset value of the corporation.
 
Hostile takeover
A takeover of a company (usually made by an open tender offer to shareholders) against the wishes of the current management and the Board of Directors by an acquiring company or raider.
 
In Play
Often used in risk arbitrage. Company that has become the target of a takeover, and whose stock has now become a speculative issue.
 
Initial Public Offering
IPO; a company´s first offering of stock to the public, often followed by a rapid rise in price in the case of a "hot" stock.
 
Insider Information
Material information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.
 
Insider Trading
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock. Insider trading consists of having pertinent information, acting on that information, and profiting from the act.
 
Insider Trading Sanctions Act of 1984
Act imposing civil and criminal penalties for insider trading violations.
 
Insider Trading & Securities Fraud Enforcement Act of 1988 (ITSFEA)
Federal legislation that greatly increased the penalties for trading on material inside information.
 
Investor
The owner of a asset who intends to hold the asset for the long run with the expectation of dividends.
 
Leverage
The use of debt financing, or property of rising or falling at a proportionally greater amount than comparable investments. For example, an option is said to have high leverage compared to the underlying stock because a given price change in the stock may result in a greater increase or decrease in the value of the option.
 
NASD
The National Association of Securities Dealers, the self-regulation body of the securities industry, which develops trading rules and conducts reviews of members´ activities.
 
Opener
Usually a junior broker or trainee who "opens" the customer with a cold call, before a senior broker comes in for the hard-sell close.
 
Option
Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Buyers of call options bet that a stock will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the stock's price will drop below the price set by the option. An option is part of a class of securities called derivatives, which means these securities derive their value from the worth of an underlying investment.
 
Piker
A coward, a chicken, a spoil sport - in the boiler room, it refers to a customer who commits to a buy but then doesn´t send a check.
 
Poison pill
Anti-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret government agents are said to be instructed to swallow if capture is imminent.
 
Proxy
Authorization, whether written or electronic, that shareholders' votes may be cast by others. Shareholders can and often do give management their proxies, delegating the right and responsibility to vote their shares as specified.
 
Proxy fight
Often used in risk arbitrage. Technique used by an acquiring company to attempt to gain control of a takeover target. The acquirer tries to persuade the shareholders of the target company that the present management of the firm should be ousted n favor of a slate of directors favorable to the acquirer, thus enabling the acquiring company to gain control of the company without paying a premium price. Competition of outside group with management for stockholders' proxies in order to accumulate votes to elect a new board of directors.

Qualitative Analysis
Part of fundamental analysis for investment purposes; some qualitative factors affecting the value of a company are its management, business model, industry and brand name

Quantitative Analysis
Part of fundamental analysis for investment purposes; when a company is evaluated on it's financial statements and balance sheet. In other words, a company should be worth all of its assets and future profits added together.
 
Raider
Individual or corporate investor who intends to take control of a company (often ostensibly for greenmail) by buying a controlling interest in its stock and installing new management. Raiders who accumulate 5% or more of the outstanding shares in the target company must report their purchases to the SEC, the exchange of listing, and the target itself. See: takeover.
 
Rip
The broker´s commission for making a stock trade.
 
Rule 13-d
Often used in risk arbitrage. Requirement under Section 13-d of the Securities Act of 1934 that a form must be filed with the SEC within ten business days of acquiring direct or beneficial ownership of 5% or more of any class of equity securities in a publicly held corporation. The purchaser of such stock must also file a 13-d with the stock exchange on which the shares are listed (if any) and the company itself. Required information includes the way the shares were acquired, the purchaser's background, and future plans regarding the target company. The law is designed to protect against insidious takeover attempts and to keep the investing public aware of information that could affect the price of their stock. See: Williams Act.

Securities and Exchange Commission
SEC, federal agency that regulates the securities industry.

Series 7
A standardized course of study that certifies a person to become a stockbroker.
 
Sherman Act
The Sherman Antitrust Act is a Federal law prohibiting any contract, trust, or conspiracy in restraint of interstate or foreign trade. The Sherman Act also provides that no person shall monopolize, attempt to monopolize or conspire with another to monopolize interstate or foreign trade or commerce.

Short Selling
The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.
 
Speculator
One who attempts to anticipate price changes and, through buying and selling contracts, aims to make profits through capital gains. A speculator does not use the market in connection with the production, processing, marketing, or handling of a product. See: Trader.
 
Standstill agreement
Contract by which the bidding firm in a takeover attempt agrees to limit its holdings of another firm.
 
Takeover
General term referring to transfer of control of a firm from one group of shareholders to another group of shareholders. Change in the controlling interest of a corporation, either through a friendly acquisition or an unfriendly, hostile, bid. A hostile takeover (with the aim of replacing current existing management) is usually attempted through a public tender offer.

Technical Analysis
A form of market analysis that studies demand and supply for securities and commodities based on trading volume and price studies. Using charts and modeling techniques, technicians attempt to identify price trends of a stock in the market.
 
Tender offer
General offer made publicly and directly to a firm's shareholders to buy their stock at a price well above the current value market price.

Value Investing
A style of investing which emphasizes the long term accumulation of consistent annual dividends from owning shares in a profitable corporation.

Whale
A customer with a large net income who invests a substantial amount in the market.

White knight
A friendly potential acquirer sought out by a target firm that is threatened by a less welcome suitor.
 
Wood
A cold call that gets no results for the senior broker.

 

Definitions from http://www.duke.edu/~charvey/Classes/wpg/glossary.htm
Copyright © 2003, Campbell R. Harvey. All Worldwide Rights Reserved.