Glossary-FEC-M&A

Mergers & Acquisitions

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Asset Transfer Consultants

FINANCIAL EXCHANGE CORP.

Established 1989

M & A FINANCE GLOSSARY

Business Plan Review

Business Brokers

Finance

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11th District Cost of Funds A monthly cost-of-funds index (COFI) reflecting the weighted-average interest rate paid by 11^th Federal Home Loan Bank District savings institutions for savings and checking accounts. The 11^th district covers Arizona, California and Nevada. The index is published on the last day of the month and reflects the cost of funds for the prior month. It’s an index that is used to set the cost of variable-rate loans, such as an adjustable-rate mortgage. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn’t vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. COFI usually lags market interest rates in both up and down markets. That means loans tied to this index rise and fall more slowly than rates in general.

91-day T-bill Auction Average Discount Rate The U.S. government issues short-term debt at a discount at a competitive auction, usually on a weekly basis. At a discount means the note is sold at a discount from face value and then redeemed at maturity at the full face value. The difference between the discounted price and the face value determines the yield. The yield on 91-day Treasury bills is the average discount rate. The rate is used as an index for various variable rate loans, particularly Stafford and PLUS education loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up.

182-day T-bill Auction Average Discount Rate The U.S. government issues short-term debt at a discount at a competitive auction, usually on a weekly basis. At a discount means the note is sold at a discount from face value and then redeemed at maturity at the full face value. The difference between the discounted price and the face value determines the yield. The yield on 182-day Treasury bills is the average discount rate. The rate is used as an index for various variable rate loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up.

Accounts Receivable (A/R or Receivables) Money owed by customers to a business.

Accounts Receivable Aging Report Analysis of accounts receivables broken down into categories by length of time outstanding.

Acquiree, Transferee, Victim, Offeree, Target Company The company which is being merged or taken over by another company.

Acquirer, Predator, Offeror, Corporate Raider The company which is making a bid for the merger or takeover of another company.

Acquisition The purchase of the controlling interest or ownership of another company. This can be affected by:

Acquisition Loans Debt instruments used to finance the purchase of a business, a merger or other business acquisition transaction.

Acquisition of Assets Acquirer may purchase only assets or some specific assets and not all the assets and liabilities of the company.

ACRS (Accelerated Cost Recovery System) Schedule of depreciation rates allowed for tax purposes.

Adjusted Yield - Mutual fund Represents what a fund's yield would have been if the fund's manager had not agreed in advance to waive all or a portion of the fund's management fees and/or to reduce expenses. The fund's manager may terminate such agreement at any time upon notice to the fund's Board.

ADR (American Depository Receipts) A security, created by a U.S. bank, that evidences ownership to a specified number of shares of a foreign security held in a depositary in the issuing company's country of domicile. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities. U.S. investors often prefer ADRs to direct purchase of foreign shares because of the ready availability of price information, lower transaction costs, and timely dividend distribution. Certificates that represent a given number of shares in a foreign corporation, held on deposit in a U.S. bank that has overseas branches. They can be bought and sold directly in the U.S. market, offering U.S. investors an easy way to participate in individual foreign stocks.

After Hours Low The after hours low represents the lowest price a person purchased this security during the After Hours trading session. Investors may trade in the After Hours Market (4:00-6:30 p.m. ET for NASDAQ stocks and 4:00-8:00 p.m. ET for NYSE and Amex stocks). Participation by Market Makers and ECNs is strictly voluntary and as a result may offer less liquidity and inferior prices. Stock prices may also move more quickly in this environment. Investors who anticipate trading during these times are strongly advised to use limit orders.

Agency Costs Costs to the firm associated with the potential for conflict of interest between management and shareholders when these two groups are different.

Agency Theory Theory concerning the relationship between a principal (shareholder) and an agent of the principal (company's managers). It involves the nature of the costs of resolving conflicts between the principals and agents.

Airport Finance Reference to books on finance that you might find at airports, with titles like "How To Buy a House with Zero Down," or "All you need is $5,000 to Make a Million in One Year," or "Which Investments are Best in 1990's."

Alpha -Mutual Fund the difference between a fund's actual returns versus its expected performance, given its level of market risk as measured by beta. A positive alpha indicates the fund performed better than its beta would predict while a negative alpha indicates the fund's underperformance given the expectations by the fund's beta.

Amalgamation It is blending of two or more companies. The shareholders of each company would become the shareholders of the company which is undertaking the activity. It is similar to a merger.

AMEX Composite - XAX The AMEX Composite Index - (XAX) The American Stock Exchange introduced a new AMEX Composite Index with a new ticker symbol, XAX, on January 2, 1997. The XAX is a market capitalization-weighted, price appreciation index, and replaces the AMEX Market Value Index (XAM) which, since its inception, has been calculated on a "total return basis" to include the reinvestment of dividends paid by AMEX companies. The new AMEX Composite Index is more comparable with other major indexes, which reflect only the price appreciation of their respective components.

Amortization - Amortized Loans For loan purposes, the systematic process by which a lender calculates loan payments so as to liquidate a debt over time. Payments are made at specific time intervals to reduce the outstanding debt to zero at the end of the loan period. Loans that are paid off in equal periodic payments.

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.

Announcement Date The date on which the company first made news of the split public.

Annual Report (10-K) A report that all public companies must file annually with the SEC

Annuity Investment that generates a stream of equal cash flows. A contract between the contract owner and an insurance company guaranteeing that in return for a purchase payment(s), a series of fixed or variable income payments will be paid for the life of the annuitant or for a specified period of time, beginning right after purchase (immediate annuity) or after an accumulation period (deferred annuity).

Antitrust Laws Laws that prohibit companies from working as a group to set prices, restrict supplies or stop competition in the marketplace.

Appraisal A professional opinion of the value of a business or other property. See also valuation.

Appreciation When an investment increases in value, it appreciates. For example, a stock whose price goes from $20 a share to $25 a share, it has appreciated by $5. An increase in an asset’s value

Arbitrage (risk arbitrage) Simultaneous purchase of a security and sale of another to generate a risk-free profit.

Arrearage An overdue payment, generally referring to omitted preferred stock dividends.

Asset Allocation The process of determining the optimal division of an investor's portfolio among different assets. Most frequently this refers to allocations between debt, equity, and cash. Dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to balance the risks of investing. Asset allocation models vary based on an individual’s specific financial goals and situation. Investment strategy that diversifies assets among stocks, bonds and money market instruments to help reduce investment risk.

Assets Anything that the firm owns. Any possessions of value in an exchange.

Asset-based Analysis A valuation methodology utilizing the fair market value, rather than book value, of items on a company's balance sheet. This method is most useful for asset-intensive companies.

Asset Purchase A type of transaction in which the buyer purchases assets from the target company, rather than a stock purchase in which the buyer purchases the shares of the target company. The existing entity itself is not transferred in an asset purchase.

Asset Utilization Ratios Ratios that measure the speed at which a company is turning over or utilizing its assets, for example inventory turnover ratio.

Asymmetric Information One group has more information about, say, on the well being of the company, than another. An example would be managers having more intimate knowledge about the company than a typical shareholder.

Average Annual Total Return (Standardized) An SEC standardized calculation that represents the average annual change in value of an investment over specified periods and assumes reinvestment of dividends and capital gains.

Automatic Investment Plan Any plan in which an investor can automatically accumulate shares of a fund or company on a regular basis.

Average Daily Share Volume The number of shares traded per day, averaged over a period of time, usually one year.

Average Maturity The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.

Average Tax Rate The rate calculated by dividing the total tax liability by the entity's taxable income.

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Balance Sheet A basic accounting statement that represents the financial position of a firm on a given date. Provides a snapshot of a company's financial condition at one point in time. It shows assets, including investments and liabilities as of a certain date. It also states a company's equity.

Balanced Mutual Fund This is a mutual fund that buys common stock, preferred stock and bonds.

Bankers' Acceptance A draft drawn on a specific bank by a seller of goods to obtain payment of goods that have been sold to a customer. The customer maintains an account with that specific bank.

Basket Generally an amount either above or below which claims may not be made for breaches of an agreement. It is used so that either claims are capped or minor breaches do not lead to claims.

Bear Market General decline in security prices. A falling market, or a market in which prices are generally decreasing. A bear market in stocks is usually brought on by the anticipation of declining economic activity while a bear market in bonds is usually caused by rising interest rates.

Beginning Net Asset Value The market value of a fund share on a predetermined start date.

Best Ask The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time.

Best Bid The highest quoted bid of all competing Market Makers to buy a particular stock at any given time.

Best Effort Purchase A method of selling newly issued securities whereby the underwriters are expected to sell as many securities as possible. They are not obligated to sell the entire subscription. Also see "firm commitment."

Beta A relative (to a benchmark) measure of risk. Measures of an asset's non-diversifiable -- market-- risk. See also systematic risk. Mutual Fund - a measure of a fund's volatility in relation to the stock market, as measured by a stated index. By definition, the beta of the stated index is 1; a und with a higher beta has been more volatile than the market, and a fund with a lower beta has been less volatile than the market.

Bid The lowest price anyone wants to sell the security for at a given time. (See: Ask, and Bid-Ask Spread)

Bid-Ask Spread The difference between the bid and the ask for a security at a given time.

Blue Chip Stocks of well-established companies that have a history of earnings and of paying dividends and increasing profits. These companies have reputations for sound management and quality products. The stock prices tend to rise and fall in conjunction with the overall market. These stocks are also known as large-cap stocks. The stocks in the Dow Jones Industrial Average. Common stock of a nationally known company that has a long record of profit, growth, and dividend payment, and a reputation for quality management, products, and services.

Book Value Net asset value of a company's securities. Book value can be a guide in selecting underpriced stocks and is an indication of the ultimate value of securities in liquidation.

Bond Long-Term IOU whereby the holder (lender or buyer) is promised to receive fixed payments over a pre-specified time period. Corporate bonds are one of the available instruments that companies can resort to for their financing needs.

Bond Par Value The face value ($1,000) that is to be returned to a bondholder at maturity.

Book to Bill This is the semiconductor book to bill ratio. It reports on the amount of semiconductor chips that are booked for delivery as compared with those that companies already have billed for.

Book Value The depreciated value of a company's assets (original cost less accumulated depreciation) less the outstanding liabilities. A company's book value is its total assets minus intangible assets and liabilities, such as debt. A company's book value might be more or less than its market value. Also known as net worth.

Broker A person who facilitates transactions (buy and sell) in the secondary market.

Brokerage Commission The amount of money your brokerage house would charge for a given transaction (buy/sell). This is how these firms make their living.

Broker/Dealer An individual or firm that is in the business of buying and selling securities. Broker/dealers are registered with the Securities and Exchange Commission (SEC).

Brokers Calls Individuals who buy stocks on margin borrow part of the funds to pay for the stocks they buy from their broker. The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests it. The rate paid on such loans is usually about 1% higher than the rate on short-term Treasury bills.

Bull Market A market with the general prices advancing. A rising market, or a market in which prices are generally increasing for stocks, bonds, or commodities. Term used to describe a prolonged rise in the price of securities.

Business Cycle A recurring pattern of expansion and contraction in the economy. The average cycle is three to four years..

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Call Premium The difference between then call price and the security's value.

Call Provision A provision that entitles the corporation to repurchase its bonds or preferred stock from their holders at stated prices over specified periods.

Callable Bond A bond that the issuing company has the right to buy back at a pre-specified price.

Cafeteria Plans An employee benefits plan that allows employees to customize their benefit package. Employees receive a fixed amount of dollars that can be allocated between several fringe benefits.

Capital The amount of money you have invested. When your investing objective is capital preservation, your priority is trying not to lose any money. When your investing objective is capital growth, your priority is trying to make your initial investment grow in value.

Capital Appreciation- Increased market value of an asset as measured by share price.

Capital Asset All property used in conducting a business other than assets held primarily for sale in the ordinary course of business or depreciable, and real property used in conducting a business.

Capital Asset Pricing Model (CAPM) An equation relating an asset's relative riskiness (beta) to its required return. An element of modern portfolio theory. A mathematical model showing an "appropriate" price, based on relative risk combined with the return on risk-free assets.

Capital Budget List of planned investment projects, usually prepared annually.

Capital Budgeting The decision-making process with respect to investment in fixed-assets. It involves measuring the additional cash flows associated with investment proposals and evaluating the viability of those proposed investment.

Capital Gain Profit from a sale of an investment constitutes a capital gain. For example, if you bought a share of stock for $5 and later sold it for $7.50, you would have a capital gain of $2.50. The profit made when an asset is sold for more than the purchase price is a capital gain.

Capital Gains Distribution Payments to mutual fund shareholders of profits from the sale of securities in a fund's portfolio. Capital gains distributions (if any) are usually made annually.

Capital Gains Tax Tax on the gain realized from the sale of capital assets such as stock, mutual funds, business interests, or other asset. Long-term capital gains tax rates apply to assets held longer than 12 months.

Capital Loss Amount by which the proceeds from the sale of a capital asset are less than its cost basis. If the sale price is less than the purchase price, this is a capital loss.

Capital Rationing. Shortage of funds that forces a company to choose between projects.

Capitalization A company's amount of permanent capital. Usually measured as the sum of a company's market value of long term equity and debt.

Capitalization Ratio Measurement of the company’s debt component of the company’s capitalization. Measures the extent of debt used in relation to the company’s permanent capital. Determined by dividing long-term debt by long-term debt plus equity.

Cash Budget A detailed plan of future cash flows. This budget is composed of four elements: cash receipts, cash disbursements, net change in cash for the period, and new financing needed.

Cash Flow The amount of cash a company generates and uses during a period, calculated by adding non-cash charges (such as depreciation) to the net income after taxes. Cash Flow can be used as an indication of a company's financial strength. It is also sometimes referred to the "money value" of trades in a stock during a trading day. Cash flow measures real money flowing into, or out of, a company’s bank account. Unlike reported earnings, there is little a company can do to overstate their bank balance. Every company filing reports with the Securities and Exchange Commission (SEC) is required to include a cash flow statement within their quarterly and annual reports.

CD (Certificate of Deposit) Receipts for funds deposited in bank or S&L for a fixed period. The funds earn a fixed interest rate.

Change This shows the change in price of a security from the previous day's closing price. For instance, -1 means the security has fallen $1.00.

Characteristic Line The line of "bet fit" through a series of historical returns for the firm's stock relative to the market returns. The slope of this line, called beta, represents the average movement of the firm's stock returns in response to a change in the market's returns.

Cheap An asset is said to be cheap when it is worth (intrinsic value) more than its market value.

Circular Merger Companies producing distinct products seek amalgamation to share common distribution and research facilities and promoting market enlargement. The acquiring company benefits by economies of resource sharing and diversification.

Clandestine Takeover (or) Creeping Takeover An entity may buy up to 5% stake in a company without any prior permission. After 5%, one is to inform the stock exchange.

Class “A” Property- Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility, and a definite market presence.

Class of Stock A type of share with particular rights and privileges such as the right to vote on corporate matters. The most common classes of stock are common stock, voting preferred stock, and non-voting preferred stock

Closed-End Fund An investment fund that does not stand ready to purchase its own shares from its owners. Its shares can trade on an exchange.

Closing Price (alternatively close) The price at which the last trade took place on a given day in a particular security.

Collar An upper and lower limit on the interest rate on a floating-rate note.

Commercial Paper Unsecured debt (IOU), issued by large corporations, with maturities (at time of issue) less than a year. They can be traded on OTC.

Commodity A commodity is food, a metal or another physical substance that investors buy or sell, usually via futures contracts.

Common Shares - Common Stock Securities that represent equity ownership in a company. Common shares topically allow an investor to vote on such matters as the election of board of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. When people talk about a company's stock, they usually mean common stock. When you own common stock in a company, you share in its success or failure. As part owner, you vote on important policy issues, such as picking the board of directors. If the company prospers, you may get part of the profits, called a dividend. Also, the value of your share of the company many go up; common stock generally has the most potential for growth. However, that value also can drop if the company does poorly, and if it goes bankrupt common stockholders are the last to receive any payment.

Common Shares Outstanding The number of common shares of stock outstanding at the end of the year, including stock held by the company in its treasury.

Competitive Bid A mechanism to select a lead investment bank in which investment banks submit a bid representing their compensation. The issuing firm solicits bids on the underwriting and chooses the underwriter who offers the most favorable terms.

Compounding The process of determining the future value of a payment or a series of payments when applying the concept of compounding interest. This process is the opposite of discounting.

Consensus Rating The average of analysts recommendations for a single entity. As many brokers have different ratings systems, their recommendations must be standardized so that a consensus can be calculated. The I/B/E/S ratings are calculated using a standard set of recommendations, maintained by I/B/E/S, each with an assigned numeric value:

1. Strong Buy
2. Buy
3. Hold
4. Under-perform
5. Sell

Each recommendation received from the analysts is mapped to one of the I/B/E/S standard ratings. Assigning a numeric value to the broker text enables I/B/E/S to calculate a consensus recommendation. This consensus recommendation appears as the mean (average) of the assigned values.

Consol A perpetual bond issued by the British government. Sometimes used as a general term for perpetuity.

Consolidation The fusion of two companies in which both the companies loose their identity and form a new company. Share holders receive the shares of the new company.

Consumer Price Index (CPI) The CPI measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S. Department of Labor publishes the CPI every month.

Continuing Operations Term used in an income statement to denote recurring income as opposed to income generated by sales of assets or discontinued operations.

Conversion Price The price paid for a common stock that is obtained by converting either convertible bonds or preferred convertible stock.

Conversion Ratio The number of shares of common stock for which a convertible security can be exchanged for.

Convertible Bond Bond that can be converted to equity at a pre-specified conversion ratio.

Convertible Preferred Stock Preferred shares differ from common shares in three main respects. First, unlike common shares, preferred shares generally have no voting rights in the company. Second, preferred shares have preference over common shares if in the unfortunate event that the company is forced to liquidate its assets. Third, and most important for seed capital investors, most preferred shares carry provisions for guaranteed rates of return paid to the preferred shareholders. Convertible preferred shares are preferred shares that are convertible, either at the option of the company or the shareholder, to common shares. Convertible preferred shares give a potential investor the comfort level of guaranteed income on their investment, along with the option to convert to common shares when the company becomes profitable.

Core Investor A shareholder or a group of investors that holds enough shares to be able to influence management decisions.

Corporation A legal entity that functions separate and apart from its owners. A corporation is a legal "person" created separately from those who own & operate it. As an artificial "person", the corporation's debts and taxes are separate from its owners (founders), thereby, offering personal liability protection of all business structures. Because the corporation continues to exist even after the death of a founders, it offers estate planning advantages. Raising capital to finance expansion, equipment, or development; without borrowing, is another fundamental reason for incorporating. Many companies that were unable to secure traditional financing as a sole proprietorship, have been literally "born" overnight by stock offerings.

Cost Budgets Budgets prepared for every major expense category of the firm, such as administrative cost, financing cost, production cost, selling cost, and research and development.

Cost of Capital The rate that must be earned by the company to satisfy all the firm's providers of capital. It is based on the opportunity cost of funds.

Coupon Interest Rate The Interest to be annually paid by the issuer of a bond as a percent of par value, which is specified in the contractual agreement.

Coupon Rate A bond's coupon rate is stated on the bond. It tells how much interest the bond will pay every year based on the bond's face value. For example, if you buy a $1,000 bond with an 8% coupon rate, you'll get $80 a year in interest. Like a bond's face value, its coupon rate never changes.

Covenants Provisions in the legal agreements on loans, bonds, or lines of credit. Usually written by the lender to protect its position as a creditor of the borrowers. See Bond Covenants

Credit Scoring A procedure for assigning scores to companies or individuals on the basis of the risk of default.

Crown Jewels In some countries a company calls its precious assets as crown jewels to depict the greed of the acquirer under the takeover bid. These precious assets attract the raider to bid for the company’s control. The company sells these assets at its own initiative leaving the rest of the company intact. (Instead of selling the assets, the company may also lease them or mortgage them so that the attraction of free assets to the predator is suppressed.)

Cumulative Voting A shareholder may cast all his or her votes for one candidate for the board of directors. Also see majority voting.

Current Liability Liability that is expected to be paid in less than a year.

CUSIP (Committee on Uniform Securities Identification Procedures) The committee which supplies a unique nine-character identification, called a CUSIP number, for each class of security approved for trading in the U.S.

Custodian An organization which maintains and safeguards an individual's, mutual fund’s, or investment company’s assets for them.

Cyclical Stock The stock of a company whose fortunes are closely tied to the cyclical ups and downs of the economy in general. For example, General Motors is a cyclical stock since its business of selling autos is highly dependent on the general health of the economy.

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

Day High This is the highest price that a security has traded at during the day.

Day Low This is the lowest price that a security has traded at during the day.

Days to Cover Calculated as the aggregate short interest for the month divided by the average daily share volume traded for the period between short interest settlement dates. If days to cover is between 0 and 1, it is rounded up to 1 on Nasdaq.com

Dealer A person (or firm) who facilitates transactions in the secondary market. They make their living on the difference between the prices they pay for the assets in their inventory and what they sell them for.

Debt IOU, such as bank loans, bonds, commercial paper, government bonds and bills.

Debt Offerings Commonly known as a bond or note offering. Many investors and especially seed capital investors may prefer to invest in debt rather than in equity of a company. In return for their investment, the debt is secured by some or all of the assets of the company, and is traditionally structured as an installment note at a modest interest rate. This gives the investor the comfort of being a full-fledged creditor, rather than a last-in-line shareholder if the company folds. Further, the investor's payments come off the top, rather than off the bottom, of the profit and loss statement.

Declaration Date The date on which a firm announces a future dividend payment.

Default Risk Uncertainty of a firm's ability to meet its debt obligations on time and in full.

Default Risk Premium (DRP) The additional return lenders require to compensate them for default risk.

Defensive Merger The directors of a threatened company may acquire another company for shares as a defensive measure to forestall the unwelcome takeover bid. For this purpose, they put large block of shares of their own company in the hands of shareholders of friendly company to make their own company least attractive for takeover bid.

De-Merger or Corporate Split or Division This takes place when part of a company’s undertaking is transferred to a newly formed or an existing company. Some or that part of the shares of the first company are also transferred to the new company. The reminder of the first company’s undertaking continues to be vested in it and the share holders of the main company gets reduced by that extent.

De-Merger By Agreement In this, the de-merger takes place by an agreement with the shareholders and the creditors of the company. All the assets of the old company would be transferred to the new company and henceforth the new company would pay all the creditors.

Defined Benefit Plan This is a type of retirement plans that provides a fixed amount of money after you retire following a set number of years (in other words, the benefit is "defined" in advance). Once you retire, the amount you receive is fixed and usually does not increase with inflation.

Defined Contribution Plan This is a type of retirement plan in which the level of contributions and the benefits will vary, depending on the return from the investments. You don't owe any income taxes on the money or any earnings until you make a withdrawal.

Depreciation A decrease in value due to age, wear and tear, etc.-reduction in the book or market value of an asset; portion of an investment that can be deducted from taxable income.

Derivative Security A financial asset whose value is based on an underlying asset. Options and futures are examples.

Dilution (1) A decrease in the proportion of income to which each shareholder is entitled, (2) A decrease in the % ownership of individual shareholders.

Discontinued Operations Operations that have been or will be discontinued by the company. These items are reported separately on the income statement.

Discount (1) The amount by which a bond or preferred stock may sell below its par value. (2) The notion that market prices "takes into account@ or include all publicly available relevant information.

Discount Broker Brokerage services provided at a cost lower than full-service brokers.

Discounted Common Stock Many investors are going to be wary of committing to a seed capital investment unless they feel that they are really getting a good deal for their money. When offering common shares of a company to raise seed capital, particularly when a company is a start-up venture with little or no track record, it is often prudent to offer common shares at a substantial discount to what a selling price will be during the direct public offering. Offering discounted common shares will convince many potential investors to invest at the seed-capital stage, when their investment is most needed, rather than to wait for the direct public offering.

Discounting The inverse of compounding. This process is used to determine the present value of a cash flow.

Discount Rate (1) The interest rate used in calculating the present value of cash flows. The rate reflects the time value of money and risk of the cash flows. (2) The interest rate charged by the twelve Federal Reserve Banks for short-term loans made to member banks.

Distribution Date Date on which the payout of realized capital gains on securities in the fund portfolio occurred.

Diversifiable Risk The components of an asset's risk that can be eliminated when the asset is combined in a well-diversified portfolio.

Diversification The acquisition of a group of assets in which returns on the assets are not directly related over time. Proper investment diversification is intended to reduce the risk inherent in particular securities. An investor seeking diversification for a securities portfolio would purchase securities of firms that are not similarly affected by the same variables. For example, an investor would not want to combine large investment positions in airlines, trucking and automobile manufacturing because each industry is significantly affected by oil prices and interest rates. The act of not putting all your investments in only one or few assets.

Dividend Distribution of wealth by firm to shareholders based on number of shares owned.

Dividend Reinvestment Plan (DRIP) An investment plan that allows shareholders to automatically reinvest dividends and capital gains distributions, thereby accumulating more stock while avoiding brokerage commissions.

Diversification Similar to asset allocation, diversification is a strategy designed to reduce overall portfolio risk.

DJIA (Dow Jones Industrial Average) This is the best known U.S. index of stocks. It contains 30 stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing. These 30 companies are chosen from sectors of the economy most representative of our country's economic condition. There are three other Dow Jones Averages: the transportation, the utility, and the composite.

Dollar Cost Averaging This is a method of investing. Money is invested at regular intervals in the same investment. Because you invest the same amount each time, you automatically buy less of the investment when its price is higher and more when its price is lower. Though the method doesn't guarantee a profit or guard against loss in declining markets, the average cost of each share is usually lower than if you buy at random times. For dollar cost averaging to work you must continue to invest regularly over time and purchase shares in both market ups and downs.

DPO A company can sell stock directly to the public, and without the full registration and reporting required for IPO's. DPO's range in offerings from up to $1 million, all the way up to $25 million, depending on the type of offering made. Each different type of offerings has different requirements, restrictions and limitations. There are Federal and State DPO types.

Duration A measure of a bond price's sensitivity to a 100-basis point change in interest rates. A duration of 7 would mean that, given a 100-basis point change up/down in rates, a bond's price would move up/down by 7%.

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Earnings Per Share (EPS) Company's earnings divided by the number of shares outstanding.

Earnings Report A financial statement, also called Income Statement, issued by a company showing its earnings or losses over a given period.

ECN (ATS) Alternative trading systems, known as ECN's, have become integral to the securities markets, providing enhanced flexibility and reduced trading costs, as well as competition to the established securities exchanges and the NASDAQ Stock Market.

In 1999, ECNs account for approximately 30% of total share volume and 40% of the dollar volume traded in NASDAQ securities. ECN's account for approximately 3% of total share and dollar volume in listed securities. In contrast, in 1993, ECN's accounted for only 13% of share volume in NASDQ securities and only 1.4% of listed share volume.

The vast majority of ECN activity currently involves trading in NASDAQ securities during regular trading hours. In 1999, an average of 93% of ECN share volume was reported to be in NASDAQ securities. Approximately 96% of ECN share volume in NASDAQ National Market System ("NMS") securities was effected during the regular trading session from 9:30 a.m. to 4:00 p.m. The overall level of ECN activity in listed stocks remained relatively small in 1999, and around 26% of this share volume was effected in the after-hours market. In 2000 and continuing this year ECN's grew volume and market share even as consolidation has started to occur.

Initially, ECNs were not integrated into the national market system, serving primarily as closed trading systems available only to institutions and broker-dealers. As a result, posted prices on the ECNs were better than those prices posted on NASDAQ, fragmenting the market and making quotes disseminated to the public less reliable. Ultimately, this situation had its most severe impact on the individual investor. Spreads, the difference between the bid and ask price, were artificially wide in the public markets. The result for individual investors was inferior execution prices.

In response to the disparities in the market, the SEC adopted the Order Handling Rules in January 1997 - requiring market makers and specialists to reflect in their quote the price of any orders they placed in an ECN if the price was better than what they were displaying to the public.

Investors won this round as the Order Handling Rules caused spreads to narrow dramatically. However, loopholes are quite common in the securities markets, and the Order Handling Rules did not stipulate that all market participants had to display their ECN orders to the public. Soon enough, many institutional orders and non-market maker orders were not available to the public, impairing price transparency.

The SEC acted to eliminate the loopholes by adopting Regulation ATS, allowing alternative trading systems to either define themselves as a market participant and register as a broker-dealer or as a separate market and register as an exchange.

Economic Investment Investment in real assets: plant, equipment, and intangible assets.

EDGAR (Electronic Data Gathering, Analysis, and Retrieval) An electronic system implemented by the SEC that is used by companies to transmit all documents required to be filed with the SEC in relation to corporate offerings and ongoing disclosure obligations. EDGAR became fully operational mid 1995.

Efficient Market A market in which information is instantaneously reflected in the price.

Efficient Market Hypothesis (EMH) A hypothesis that U.S. equity markets are efficient.

Effective Annualized Seven-Day Yield Yield for 7 day period including the day reported, calculated by adding 1 to the base period return used in calculating the standard 7 day yield raising the total to the power of 365 divided by 7 and subtracting 1 (NOTE: To be reported on Wednesday only).

Ending Net Asset Value The market value of a fund share on a predetermined end date.

Equity Carved Out A type of divestiture and different to spin off. It resembles the IPO of some portion of equity stock of a wholly owned subsidiary by the parent company. Some of the subsidiary’s shares are offered for sale to general public for increasing cash inflow without losing control. This is also called a "split off IPO" (Initial Public Offering).

Estate All assets a person owns at the time of death, including securities, real estate, business interests, physical property, and cash, less outstanding liabilities. The estate is distributed to heirs according to the terms of the person's will or, if there is no will, by court ruling.

Estate Freeze Techniques or methods used to control the future appreciation of assets for the purpose of reducing estate taxes.

Estate Planning The process of developing and implementing a master plan that facilitates the distribution of your property after your death according to your goals and objectives.

Estate tax A tax imposed by the federal government and some state governments on the transfer of assets to heirs

Exercise Price The price at which a call option or put may be exercised. Also called strike price.

Exchange There are three main U.S. stock exchanges on which securities are traded. The American Stock Exchange (AMEX), Nasdaq is the National Association of Securities Dealers, and the New York Stock Exchange ( NYSE).

Exchange Rate Mechanism (ERM), or the currency grid, is a system that limits currency fluctuations to a range of 15 percent in either direction.

Ex-Dividend Date The date which determines ownership of stock for the purpose of paying dividends. Owners purchasing shares on or after the ex-dividend date do not receive the dividends. Only owners before this date would be registered to receive the declared dividend. The date is set at four business days prior to the record date. Also see dividend.

External Financing Financing projects through new issues of securities; debt and/or equity.

Face Value Value of security shown on certificate. Also called par value, which is typically $1,000.

Family of Funds Group of mutual funds managed by the same investment management company. Each fund typically has a different objective; one may be a growth-oriented stock fund, whereas another may be a bond fund or an index fund. Shareholders in one of the funds can usually switch their money into any of the family's other funds, sometimes at no charge.

Fed (Federal Reserve Bank) Refers to the U.S. Central Bank, whose functions include interest rate policy, regulation of banks, and "stabilization" of foreign exchange (FX).

Federal Discount Rate The interest rate at which an eligible financial institution may borrow funds directly from a Federal Reserve bank. Banks whose reserves dip below the reserve requirement set by the Federal Reserve's board of governors use that money to correct their shortage. The board of directors of each reserve bank sets the discount rate every 14 days. It's considered the last resort for banks, which usually borrow from each other. The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur. Raising the rate makes it more expensive to borrow from the Fed. That lowers the supply of available money, which increases the short-term interest rates. Lowering the rate has the opposite effect, bringing short-term interest rates down.

Federal Funds Non-interest-bearing deposits of banks with the Federal Reserve. Banks lend excess reserves out to each other.

Federal Funds Rate The interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis. The law requires banks to keep a certain percentage of their customer's money on reserve, where the banks earn no interest on it. Consequently, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth to maintain the proper level. Like the federal discount rate, the federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.

Federal Gift Tax A federal tax that is imposed on the transfer of securities, property, or other assets. The tax is based on the fair market value of the transferred assets and applies to transfers valued over $10,000 per individual per year (indexed for inflation).

Federal Home Loan Bank A Federally chartered, privately owned company charged with regulating the S&L industry.

Federal Reserve Board Seven-member board that supervises the banking system by issuing regulations controlling bank holding companies and federal laws over the banking industry. It also controls and oversees the U.S. monetary system and credit supply.

Fiduciary A person, company, or association that holds assets in trust for a beneficiary. The fiduciary is charged with the responsibility of investing the assets wisely for the beneficiary's benefit. Examples of fiduciaries include executors of wills and estates, trustees, and those who administer the assets of underage or incompetent beneficiaries.

Fiduciary Capacity A person is said to act in a fiduciary capacity when business is transacted, or money and property are handled for the benefit of another. The term is not limited to technical or express trusts, but may also apply to such offices or relations as attorneys, guardians, executors, brokers, and agents.

Fiduciary Income Tax Return An income tax return that is filed by the court representative or estate administrator for a decedent's estate, trust, or a bankruptcy estate to report income, deductions, gains, losses, distributions, income that is accumulated or held for future distribution, income tax liability of the estate or trust, and employment taxes on wages paid to household employees. The return is not required if the decedent's estate is not probated.

Financial Intermediaries Financial institutions that assist the transfer of savings from economic agents with excess savings to those that need capital for investments.

Financial Markets Markets or exchanges where financial assets are traded. The largest two in the U.S. are the NYSE and Nasdaq.

Financial Risk Additional risk borne by shareholders because of a firm's use of debt.

Firm Commitment Agreement between a company and its lead investment banker in which the latter is obligated to sell all the shares to be issued.

Firm Specific Risk Uncertainty in returns due to factors specific to the company. See diversifiable risk.

Fixed Assets (overhead) A cost that is fixed for a given period of time. It is not dependent on the amount of goods and services produced during the period. Tangible fixed assets include real estate, plant and equipment. Intangible assets include patents, trademarks, and customer loyalty.

Fixed Annuity A contract issued by an insurance company allowing for a fixed rate of interest in both the accumulation and income phases; periodically adjusted by the insurance company.

Fixed Income Securities These securities pay a fixed rate of return by investing in government, corporate, or municipal bonds, which pay such a fixed rate. These investments could offer you an advantage in times of low inflation, but are not likely to protect you against the declining buying power of your money during times of high inflation.

Float The float is the number of shares of a security that are outstanding and available for trading by the public.

Floatation Cost The underwriter's revenue associated with assisting a firm in issuing and marketing new securities.

FNMA "Fannie Mae" Federal National Mortgage Association. A publicly owned corporation sponsored by the federal government that provides liquidity in the mortgage market. It buys mortgages from mortgage underwriters financed by issuing bonds.

Free Cash Flow Value The value of a firm based on the cash flow available for distributing to any of the providers of long-term capital to the firm. The free cash flows equal operating cash flow less any incremental investments made to support a firm's future growth.

Friendly Mergers Mergers and acquisitions through the negotiations, willingness and consent of the acquiree company are called friendly mergers.

Five-Year Treasury Constant Maturity An index published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a five-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market. This figure is used as a reference point to establish the price of other securities such as corporate bonds. Treasury securities are considered risk-free since they are backed by the U.S. government. This figure, and an added margin based upon the risk involved, is used in pricing various debt securities. It is also used in establishing certificate of deposit (CD) yields.

Front Running A term that refers to situations when a manager who has private information about the direction of movement of an asset takes a private position in the asset before purchasing it for the fund.

Full-Service Broker Brokers who provide services in addition to assisting in buying and selling of securities in the secondary market. Services can include providing company profiles and investment strategy recommendations.

Fund Supermarkets Mutual fund "supermarkets," the likes of Charles Schwab and Fidelity Investments, are financial services companies that "sponsor" mutual funds, i.e., they provide investors with easy access to a broad range of mutual funds.

Futures Contract This is an agreement that allows an investor to buy or sell a commodity, like gold or wheat, or a financial instrument, like a currency, at some time in future. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying asset. These contracts trade on organized futures exchanges.

Futures Exchange Traded contracts specifying a future date of delivery or receipt of a specific product or asset. The assets include agricultural products like, pork bellies and oranges; metal; and financial instruments and indices. They are used by firms to hedge against potentially unfavorable price changes, and by speculators who hope to benefit from betting on the direction or magnitude of change.

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Gain The profit made on a property or securities transaction realized when property or a stock, bond, mutual fund, futures contract, or other financial instrument is sold for more than its purchase price. When business property or security has been held for more than one year, the gain is taxable at more favorable capital gain rates. If the asset is held for less than one year the gain is taxed at regular income tax rates.

Golden Parachute or First Class Passengers Strategy A plan devised by existing management stipulating that an acquiring company has to pay executives of the acquired company a substantial sum of money in the event of removing the former.

Government National Mortgage Association ("Ginnie Mae") A government-owned corporation that purchases mortgages and re-packages them as pass-through securities. The holder of a pass-through bond owns a portion of the underlying mortgages.

Greenmail In a typical greenmail, the acquiring firm has already purchased a number of shares of the target firm's stock. Management of the target company offers to buy back the stock, at a price higher than the market. A large block of shares is held by an unfriendly company, which forces the target company to repurchase the stock at a substantial premium to prevent the takeover. (This could prove to be an expensive deal to the raider.)

Grey Knight A friendly party of the target company who seeks to takeover the predator.

Growth Stocks Stocks of companies that have an opportunity to invest in projects that earn more that the required rate of return.

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Hedging The purchase or sale of a derivative security (such as options or futures) in order to reduce or eliminate risk associated with undesirable price changes of another security.

Holding Company A holding company would have more than 50% of the total voting power and has the control on the other company.

Horizontal Merger Merger between two companies that produce similar products. Also referred to as horizontal integration.

Horizontal Integration When firms in the same industry merge. Also referred to as horizontal merger

Hostile Takeover A merger or acquisition in which management resists the group initiating the transaction. Also called raids or takeover raids.

House of Issue The investment bank that underwrites and floats a security issue.

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Income Stocks Companies with high dividend yield or no NPV > 0 opportunities.

Incorporation The act of establishing a corporation. Personal financial liability, tax advantages, financial and estate planning, raising capital to finance expansion, equipment, or development; with or without borrowing, is a fundamental reason for incorporating. See Corporation.

Indenture The legal agreement between the firm issuing the bond and the bondholders, providing the specific terms of the loan agreement.

Index Funds Mutual funds whose objective is to replicate the performance of an index. The most popular equity index is the S&P 500.

Individual Retirement Account (IRA) A tax-deferred retirement account for an individual who does not participate in a pension plan at work or who does participate and meet certain income.

Inflationary Premium (IP) Additional compensation over the T-bill that levers require to compensation them for the risk of expected inflation.

Inflation-Indexed Bonds U. S. Government indexed bonds with inflation protection

Inside Market The highest bid and the lowest offer prices among all competing dealers in a NASDAQ security, i.e., the best bid and offer prices.

Insiders These are directors and senior officers of a corporation -- in effect those who have access to inside information about a company. An insider also is a shareholder who owns more than 10 percent of the voting shares of a company.

Insider Trading An illegal offence for an individual who is an insider by virtue of being connected with the company and has access to price sensitive information which other share holders do not have and uses this information for his/her or others personal gain

Intangibles All intangible assets like goodwill, patents, trademarks, unamortized debt discounts and deferred charges

Interlocking Directors When competing companies have a common Board of Directors. This is illegal in the US but is common practice in Japan.

Interlocking Shareholdings or Cross Shareholdings Two or more group companies acquire shares of each other in large quantity or one company may distribute shares to the share holders of its group company to avoid threats of takeover bids. (If the interlocking of shareholdings is accompanied by joint voting agreement then the joint system of defense is termed as "Pyramiding", which is the safest device or defense.)

Internal Rate of Return (IRR) The discount rate at which present value of the current cash flows of an investment equal the cost of the investment. When the IRR is greater than the required return, called the hurdle rate in capital budgeting, the investment is acceptable.

In-the-money Options An option that would be worth exercising if it expired immediately. Also see out-of-the-money options.

Investment Banks are firms that assist companies in initial sale of securities in primary market.

Investment Company A company that uses its capital to invest in other companies. There are two types: the closed-end and the open-end, or mutual fund.

IP (Inflationary Premium) Additional return required to compensate asset holders for inflation uncertainty.

IPO (Initial Public Offering) Securities are offered for the first time to the public.

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Joint Holding or Joint Voting Agreement Two or more major shareholders may enter into agreement to block voting or to block sale of shares or may sell the shares together. This agreement is entered into with the cooperation of Offeree Company’s management.

Joint Venture This is an agreement between two or more companies where there will be an agreed contribution and participation of the respective companies.

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Last Sale Reporting An electronic entry by NASD Members to The NASDAQ Stock Market of the price and the number of shares involved in a transaction in a NASDAQ security. The trade reported must be submitted to NASDAQ with 90 seconds of the execution of the trade.

LBO (Leverage Buyout) A corporate restructuring where the existing shareholders sell their shares to a small group of investors. The purchasers of the stock sue the firm's unused bet capacity to borrow the funds to pay for the stock. Typically the company becomes private. It is can be known as management buyout. Management may raise capital from the market or institutions to acquire the company on the strength of its assets.

LEAP A LEAP is a long-term option contract for a company's stock. They usually run for one year or more and are available on several U.S. exchanges.

LLC (Limited Liability Company) Also called Limited Liability Partnership (LLP) It a new type of partnership that is now permitted in many states. Unlike a regular and limited partnership, in an LLC, all partners enjoy limited liability with regard to business's liabilities, and, in that regard, they are similar to shareholders in a corporation.

Letter of Credit Letter from a bank stating that it has established credit in the company's favor.

Leveraged Buy Outs This is the acquisition of a company by its management personnel. It is also known as management buyout. Management may raise capital from the market or institutions to acquire the company on the strength of its assets.

LIBOR (London InterBank Offered Rate) The lending rate among international banks in London.

Limit Order When you instruct your broker to buy or sell a given security at a specific price.

Limited Liability Limitation of a shareholder's losses to the amount invested.

Limited Partnership Organization made up of General Partner, who manages a project, and limited partners, who invest money, but have limited liability, are not involved in day to day management, and usually can not lose more than their capital contribution.

Liquidity Refers to an investor's ability to convert an asset into cash. The faster the conversion the more liquid the asset. Liquidity is a risk in that an investor might not be able to convert the asset to cash when most needed. Moreover, having to wait for the sale of an asset can pose an additional risk if the price of the asset decreases while waiting to liquidate.

Liquidity Premium (LP) Additional return required to compensate investors for purchasing illiquid assets. Also see liquidity.

Liquidity Risk Premium (LRP) The additional return required by investors in securities that cannot be converted into cash at a reasonably predictable price or time.

Liquidation Value The amount that could be realized if an asset were sold independently of the going concern.

Load A commission paid by an investor to a broker for the purchase or sale of a mutual fund.

Long Investors who go "long" own stock or another financial security. It is a term that means the opposite of "short." See short selling.

Long-Term Gain A gain on the sale of a capital asset where the holding period was six months or more and the profit was subject to the long-term capital gains tax.