Blue Chip Stocks Glossary
Arbitrage: Profiting from differences in price when the same security is traded on two or more markets.
Balance Sheet: The financial statement of a business or institution that lists the assets, debts, and owner’s investment as of a specific date.
Bear: Person who believes that stock prices will drop.
Bear Market: An extended period of a downturn in the prices of securities. It does not necessarily mean that all prices of stocks or all industries fall.
Beta: A mathematical measure of the sensitivity of rates of return of a portfolio as compared with rates of return on the market as a whole. A high beta (over 1) indicates moderate or high price volatility. A beta of 1.5 forecasts a 1.5% change in the return on an asset for every 1% change in the return on the market. A beta of 1 means that the stock price will likely move with the market. No matter what the beta is, by itself it is not a reason to buy (or not buy) any stock.
Big Board: Trader’s term for the New York Stock Exchange.
Blue Chip: A very high-quality investment involving a lower-than-average risk of loss of principal or reduction in income. The term generally refers to securities of companies having a long history of sustained earnings and dividend payments.
Book Value: Common shareholders’ equity on a per-share basis. Calculated by subtracting liabilities from assets and dividing the remainder by the number of outstanding shares of stock. In other words, the book value is what the stock is worth regardless of its market price.
Bull: Person who believes that stock prices will rise.
Bull Market: An extended period of time when prices generally increase in value. It does not necessarily mean that all prices of stocks in all industries rise.
Business Cycle: The somewhat irregular, recurring periods of change in economic activity. It is usually divided into four stages: expansion, prosperity, contraction, and recession. Firms that experience large swings in sales and profits are most severely impacted by business cycles.
Call Option: The right of a buyer to purchase a specified quantity of a security interest at a fixed price at any time during the life of the potion.
Callable: The option of a company to call in a security and redeem it for cash.
Chief Financial Officer (CFO): The person responsible to the company’s board of directors for carrying out its financial policies.
Common Stock: A class of capital stock that has on preference to dividends or any distribution of assets. Common stockholders are the residual owners of a corporation in that they have a claim to what remains after every other party has been paid.
Conversion Price: The price per share at which common stock will be exchanged for a convertible security (a warrant or an option).
Convertible Security: Bond or share of preferred stock that can be exchanged into a specified amount of common stock at a specified price.
Corporation: A business that is granted a state charter, which recognizes it as a separate legal entity with its own rights, privileges, and liabilities distinct from those of the individuals forming the business. Shareholders are part-owners of corporations.
Current Assets: Cash, or an asset expected to be converted into cash within one year. Assets include cash, marketable securities, accounts receivables, inventories, and prepaid expenses. They tend to add liquidity and safety to a firm’s operation.
Current Ratio: A measure of a firm’s ability to meet its short-term obligations. It is calculated by dividing current liabilities into current assets. A high ratio usually indicates high liquidity as well as conservative and good management. A 5:1 or 6:1 ratio is excellent; 10:1 or 20:1 is even better. If you find a ratio of anything less than 1:1, that company has greater liabilities than assets and is therefore not viable as an addition to your portfolio.
Cyclical Stock: Common stock of a firm whose profits are heavily influenced by cyclical changes in general economic activity.
Deficit: A negative retained-earnings balance. A deficit is the result of a company’s accumulated losses and dividend payment exceeding earnings.
Discount Rate: Rate of interest charged by the Federal Reserve to member banks.
Discretionary Account: A brokerage account in which the customer permits the broker to act on the customer’s behalf when buying and selling securities. The broker has discretion as to the choice of securities, prices, and timing, subject to any limitations specified in the agreement. Because of their riskiness, discretionary accounts should be avoided.
Diversification: The acquisition of a group of assets in which returns on the assets are not directly related over time. Proper investment diversification, requiring a sufficient number of different assets, reduces the risk in particular securities.
Dividends: Payments made by a corporation to its stockholders.
Earnings: Income of a business; the term usually refers to after-tax-income.
Earnings Per Share (EPS): Net income for a given period divided by the average number of common shares outstanding during that period.
Economic Growth: Increased production levels of goods and services.
Emerging Growth Stock: The common stock of a relatively young firm operating in an industry with very good growth prospects. Although such stock offers unusually large returns, it could be risky if the expected growth does not occur.
Federal Reserve Board: Seven members of the Federal Reserve who oversee the formulation of monetary policy and control of the money supply.
Financial Leverage: Acceleration effect of debt on financial returns.
Financial Ratios: Indicators of a company’s financial performance and position.
Financial Risk: The risk that a firm will be unable to meet its financial obligations. This is primarily a function of the relative amount of debt that the firm uses to finance its assets.
Fundamental Analysis: Process of estimating a security’s value by analyzing the basic financial and economic facts about the company that issues the security.
Golden Parachute: Lucrative compensation packages guaranteed to executives in the event of a takeover. (Mergers, buyouts, etc., are included as well.)
Greenmail: Purchase by a corporation of its own stock from a potential acquirer at a price substantially greater than the market price. In exchange, the acquirer agrees to drop the takeover bid.
Growth Stock: The stock of a firm that is expected to have above-average increases in revenues and earnings. These firms normally retain most earnings for reinvestment and therefore pay a small dividend, if any.
Hedge Against Inflation: An investment whose growth outpaces inflation.
Hedging: Actions taken by investors to reduce a possible loss.
Incentive Stock Option: An option permitting an employee to purchase shares of the employer’s stock at a predetermined price.
Income Statement: Financial statement showing a firm’s revenues and expenses over a prescribed period of time.
Inflation: A general increase in the price of goods and services. Unexpected inflation tends to be detrimental to security prices primarily because it forces interest rates higher.
Interest Rate Risk: The risk that interest rates will rise and reduce the market value of an investment and the value of stocks. Long-term fixed income securities, such as bonds and preferred stock, subject their owners to the greatest amount of interest rate risk. Short-term instruments are influenced less by interest rate movements.
Intrinsic Value: The value of a security, such as a warrant. The price of a stock less the conversion price of the warrant equals the intrinsic value of the warrant.
Investment Advisor: A person who offers professional investment advice for a fee.
Investment Banking: Industry that specializes in assisting business firms and governments in marketing new securities.
Junk Bond: A high-risk, high-yield bond with less than an S&P rating of BBB. (S&P rates bonds according to various risk factors and gives them an AAA for the strongest, AA for the nest strongest, A, then BBB and so forth, to D, which is the lowest rating, meaning the bond is in default.) It is generally issued by either a new company or by an established company to fund a corporate takeover.
Leverage: The ability to control something larger with something smaller. Leverage is utilized as an attempt to get more bang for your buck.
Leverage Buy Out: Process of buying a corporation’s stock with borrowed money, then repaying at least part of the debt from the corporation’s assets.
Liquidity: When a large portion of one’s holdings are in cash or in assets that can be converted into cash quickly.
Load Fund: Type of mutual fund where the buyer must pay a sales fee or commission on top of the price.
Loss of Purchasing Power: When inflation rates increase faster than wages, earnings, and the values of investments.
Managed Account: An investment account managed by a broker or other professional. Managed accounts are designed for investors who lack the time or expertise to make their own decisions.
Margin Account: A brokerage account that permits an investor to purchase securities by borrowing the cash value out of securities already held in an account. Usually they offer a lower interest rate on the loan as well as tax deductions on the interest paid. A margin account gives you leverage and, in good markets, can enhance your returns; the risk is that in bad markets you could lose most or all of your money.
Margin Risk: The risk that general market pressures will cause the value of an investment to fluctuate. It may be necessary to liquidate a position (sell) during a volatility (such as common stock), and lowest for stable securities (such as Treasury bills). Market risk is of little consequence to a person who purchases securities with the intention of holding them for a long period of time.
Margin Trading: Using borrowed funds for trading; also known as trading on credit. Margin trading is governed by Federal Reserve and stock exchange regulations.
Market efficiency: Description of how prices in competitive markets react to new information.
Merger: Combination of two or more firms into one.
Monetary Policy: Actions outlined by the Federal Reserve to control the money supply, bank lending, and interest rates.
NASDAQ (National Association of Securities Dealers Automated Quotations): A computerized communications network that provides quotations (bid and asked prices) on stocks.
Net Income: Income after all expenses and taxes have been deducted. It’s used to calculate various profitability and stock performance measures including price/earnings ratio, return on equity, and earnings per share.
No-load Fund: One type of mutual fund for which no commission is charged to make a purchase.
OTC Market (Over-the-counter market): In this market investors trade securities through a centralized computer telephone network that links dealers across the U.S.
Poison Pill: Tactic used by corporations to defend against unfriendly takeovers, generally by making a takeover more expensive.
Portfolio: An investor’s collection of securities.
Price/Earnings Ratio: The current price of a stock divided by the current earnings per share of the issuing firm. As a rule, a relatively high P/E ratio is an indication that the firm’s earnings are likely to grow or the stock price is likely to fall.
Prospectus: Formal written offer to sell securities, including audited financial statements and other information about the company.
Put Option: Right of a buyer to sell a specified quantity of a security interest at a fixed piece anytime during the life of the option.
Recession: An extended decline in general business activity. Usually defined by three consecutive quarters of falling gross domestic product.
Registration Statement: Contains a firm’s financial statements and other information. This is filed with the Securities and Exchange Commission each time a new security is offered to the public.
Revenue: The inflow of assets resulting from the sale of goods and services as well as earnings from dividends, interest, and rent. It is usually received either as cash or as receivables that can be turned into cash at a later date (also referred to as sales of a company).
Reverse Stock Split: A proportionate decrease in the shares of stock held by stockholders. For example, a 1-for-3 split results in the stockholder owning one share for every three shares owned before the split. A company usually institutes a reverse split to increase the market price of the stock b decreasing the number of shares outstanding. See stock split, which is the opposite.
Risk: The variability of returns from an investment; the greater the variability, the greater the risk.
Secondary Offering: Public sale of previously issued securities owned by large investors.
Short Sale: Sale of a borrowed security with the intention of purchasing it later at a lower price.
Short Term: Designating a gain or loss on the value of an asset that has been held less than a specified period of time.
Special Situation: A currently undervalued stock that can suddenly increase in value because of potentially favorable circumstances. Special situations are quite risky.
Statement of Cash Flows: Financial statement showing a firm’s cash receipts and cash payments over a period of time.
Stock Dividend: Pro rata distribution of additional shares of stock to stockholders.
Stock Market Averages: Average of the market prices of a specified number of stocks.
Stock Split: When a corporation reduces the market price of its stock (by splitting its stock) to make the shares more attractive to investors. The share price is reduced proportionally with the percentage of increased outstanding shares.
Stock Table: Summary of the trading activity of individual securities.
Technical Analysis: Process of predicting future stock price movements by analyzing the historical movement of stock prices and the supply and demand forces that affect those prices.
Tender Offer: Offer by one firm to the stockholders of another firm to purchase a specified number of shares at a specified price within a specified time period.
Uptick Trade: Transactions executed at a price higher than the previous trade.
White Knight: Person or corporation who saves a corporation from a hostile takeover by taking it over on more favorable terms.
Yield: The percentage return on an investment. For example, if a stock is selling at a price of $30 and pays a $1 dividend, then the stock yields 3.3% ($1 divided by its stock price of $30). There are many types of yields but the preceding example is used only for illustrative purposes in this site