Glossary of Finance and Investment Terms

Glossary of Finance and Investment Terms

Accrued expenses These are expenses due but for which no invoice has yet been received. They may include expenses such as employee wages owed prior to payday, utility charges not yet billed, interest due but unpaid, etc.

Accumulated depreciation This represents the sums accounted for to reflect the decline in useful value of a fixed asset due to wear and tear from use, or obsolescence. This number is added to each period and thus is ‘accumulated’.

Administrative expense Management salaries, office staff payroll, office expenses, rent, phones, utilities, etc.

Asset Something of value that is owned by or owed to an organisation.

Asset turnover ratio The asset turnover ratio is a good measurement of how well the organisation uses its assets. This ratio is calculated by dividing total assets into net sales. The higher this ratio is, the better the organisation is at using assets to generate sales revenue.

Balance sheet A balance sheet shows the company’s financial condition at a specific point in time. The asset side is equal to the side containing liabilities and shareholders’ funds. The sides ‘Balance’.

Balance sheet equation The balance sheet equation states that the assets of the company must be equal to the claims against the company. The claims are what is owed plus what is left for the owners after deducting what is owed from the assets. Assets = Liabilities + Shareholders’ funds.

Bid The price being offered by a potential buyer for a share.

Blue chip The shares of stable, profitable, and well known companies that have a long history of steady revenues and dividend payments.

Bond A bond represents a debt that is owed by the issuer of the bond to the owner of the bond.

Broker An individual or firm that acts as an intermediary between a buyer and a seller.

Bull An investor who expects the price of a share or the general share market to increase in value.

Bull market A long period of rising share prices.

Buy-and-hold strategy Holding shares for long periods in the belief that the shares will appreciate in value in the long term. This strategy minimises transaction costs and avoids selling on temporary declines.

Buyback A business’s repurchase of its own shares.

Call An option that permits the owner of the call to purchase a certain asset at a specified price until a certain date.

Capital Wealth in the form of money or property, owned, used, or accumulated in business by an individual, partnership, or company. Wealth, in whatever form, used or capable of being used to produce more wealth.

Capital gain The amount by which the proceeds from the sale of an asset exceed the asset’s cost.

Capital gain tax A tax on the capital gain from assets that are sold.

Cash Notes and coins. Money readily available that will be accepted as a medium of exchange.

Cash flow statement A cash flow statement shows where cash comes from, what it is spent on during the reporting period and the net increase or decrease in cash owned by the company during this period.

Cash receipts All cash received by the company for the reporting period.

Cash receipts from borrowing Cash received from loans the company has received from lending sources like banks.

Close The last price at which a share trades or the last valuation of a stock price average during a trading session.

Company A business that has its own rights and obligations that are separate from the owners of the business. Sometimes called a ‘legal person’.

Convertible security A share that is convertible into a different security. For example convertible preferred share may be converted into ordinary shares.

Cost of sales What it costs to produce a product or service. The amount of material, labour and any other production costs directly attributable to producing the product or service.

Coupon The annual rate of interest paid on a debt security as calculated on the basis of the security’s face value.

Creditors The amount that the company has been invoiced but has not yet paid. This is money owed to its regular business creditors from whom it has bought goods and services.

Current assets Cash and those assets which will be turned into cash in the near future – within the next year.

Current liabilities All debts that are due within 12 months.

Current ratio The total current assets divided by the total current liabilities. This is a good measure of the company’s ability to pay its debts in the immediate future. 2 to 1 is considered a positive ratio.

Current yield The rate of return to be earned from an investment’s expected annual cash payment and the investment’s current market price.

Debt to equity ratio Total liabilities divided by total shareholders’ equity. The ratio of how much money is borrowed versus how much is invested. This is helpful in determining whether or not the company has too much debt to easily pay back.

Debtors Amount invoiced to customers and due from them but not yet collected.

Deed An official document which, when delivered, transfers ownership of an interest in property.

Deferred tax The amount of taxes that eventually must be paid despite temporary tax incentives given by the government.

Depreciation and amortisation Depreciation is the decline in value of an asset due to its being used. Amortisation is the decline in value of an intangible asset such as a patent.

Discount The amount by which the market value of shares or a company bond is below its par or face value.

Diversification Spreading money invested and risks among different and/or unrelated types of companies or investments. Thus if one investment or group of investments goes down in value the others need not necessarily follow and could even be increasing in value.

Dividend A payment from profits that is distributed to shareholders.

Earnings per share ratio Net income divided by the number of shares of a company participating in the profits. This gives a good indication of the earnings ability of a company.

Equity The financial interest that the shareholders own in the company.

Financial ratios Ratios constructed using the various numbers found on financial statements. They are used to estimate the financial strengths and weaknesses of a company.

Financial year A financial year is defined as a period consisting of 12 consecutive months, 52 consecutive weeks, 13 four week periods or 365 consecutive days after which the accounting period is closed. A financial year does not always start and end on a calendar year.

Fixtures and fittings The fixtures and fittings (e.g. signs, shelves, tables and chairs etc.) owned by a company.

Float The initial sale of shares to the public by a company that has been privately held.

Gross margin Sales minus cost of sales. It’s called ‘Gross’ because it does not take into account other types of expenses which must be calculated before ‘net profit’ is calculated.

Income tax This is the amount of money that the government charges the company for profits that it makes.

Income taxes payable Money owed to HMRC but not yet paid.

Increase or decrease in cash for the year The net increase or decrease in cash owned by the company from the beginning of the reporting period to the end. Cash receipts less cash payment.

Inflation An increase in the amount of money and credit in relation to the supply of goods and services.

Initial Public Offering A company’s first offering of shares to the broad public.

Institutional investor An organisation that invests large amounts of money. Examples are a bank trust department, an insurance company, or a venture capital or private equity fund.

Intangibles Assets having no physical substance yet having substantial value to the company. An example would be a patent or an exclusive.

Interest Money paid for the use of money and expressed as a percentage rate per unit of time. For example, 10 % per year paid for the use of £1,000 is £100 per year interest.

Investment Money or other forms of wealth or energy placed into a business, property, shares, bonds, etc. for the purpose of obtaining a return usually in the form of income or a profit.

Investment banker A firm that provides assistance to organisations who are in need of raising funds to finance their activities.

Investment company A firm that pools and then reinvests funds that have been invested by individuals.

Investor An individual or group that puts money into business, property, shares, bonds, etc. for the purpose of obtaining an income or profit. (Includes Angels and Angel Syndicates.)

Leverage The purchase or sale of shares using borrowed funds or credit with the expectation of earning substantial profits.

Leveraged buyout The acquisition of a company by a group of investors using mostly borrowed funds that are secured by the assets of the company being acquired.

Liabilities All the debts and legal obligations for which a business owes and must pay.

Liability Any debt or legal obligation that is owed and must be paid for or any claim on the assets of the organisation.

Liquidation Sale of all the assets of a company. This is done if and when the company becomes insolvent. The assets are sold and the proceeds used to pay off creditors.

Liquidity The degree to which there is a large amount of cash or assets that are readily converted into cash.

Long-term liabilities All debts owed that are due long-term (over one year).

Market price The price at which a share trades in the listed market.

Market value The price at which a share is bought or sold. The value of the investment at the time of purchase or sale as proven by the fact that the price asked results in a sale.

Mortgage The pledging of property to a creditor as security for the payment of a debt.

Net profit The amount of excess after all expenses have been deducted from sales. This is what is available to pay the company’s investors or re-invest in operations for expansion.

Net worth The value of all assets less the amount of money owed on the assets.

Opening The beginning of a share trading session.

Operating expenses This is the total of other expenses, other than the direct cost of sales, incurred in getting a product or service sold and delivered to the customer. It is usually divided into selling expenses and administrative expenses.

Operating profit Gross profit minus the operating expenses. This figure shows what the company is making or losing prior to expenses not directly involved with making and delivering the product or service, such as interest.

Option A contract that allows a person or group to either purchase or sell an asset at a specified price until a specified date.

Ordinary shares A class of shares that has a low priority to share in the assets of a company in the event of liquidation.

Other income/expense This is money earned or expenses incurred by the company with actions not directly involved in making or delivering the product.

Par value A share’s stated value as printed on the share certificate. Sometimes called face value.

Portfolio A group of investments held by an investor. For example, a mix of shares, bonds, property, gold etc., all taken together, would make up a portfolio of investment.

Pre-emption right The right of a shareholder to maintain proportional ownership of a firm by acquiring a portion of new shares that are being sold to others.

Preference shares Shares of business ownership that give the owner of the shares priority (over ordinary shareholders) with respect to dividends and to assets in the event of liquidation.

Premium The amount by which the market value of a preferred share exceeds its par value.

Prepaid expenses Payments for items that will not be immediately used and are therefore not charged immediately as an expense. For example, six months’ worth of office supplies are purchased and at the end of the reporting period only two months’ worth have been used. The additional four months’ worth are a prepaid expense.

Price/earnings ratio Current market price of a publicly traded company divided by the earnings per share. This is an indicator of how the company is valued by the stock market relative to its ability to earn.

Profit and loss account A financial statement that measures the performance of a business over a period of time.

Profit before tax This is the amount of excess of sales over expenses on which the company must pay taxes.

Property, plant and equipment Those assets that are used over and over again in order to manufacture a product, display it, warehouse it or transport it.

Prospectus A formal document containing relevant facts concerning an issue of shares.

Proxy Written authorisation to act or vote for a shareholder.

Public limited company (PLC) A business with shares of ownership that are traded on the stock market.

Put An option that gives the owner the right to sell a particular asset at a specified price until a given date.

Ratio A ratio is the relation in number or degree between two things. For example £200 in earnings related to 100 shares is 200 divided by 100 or £2 earned for each of the 100 shares. The earnings per share ratio is thus expressed as 2/1.

Redemption The realisation of a share by the shareholder’s issuer.

Retained earnings or reserves Retained earnings accumulate as the company earns profits and re-invests or ‘retains’ profits in the company.

Selling expenses Advertising, promotional materials, sales commissions, sales-related travel and entertainment, trade shows, etc.

Shares Shares of ownership of a company.

Speculator An individual who is willing to take large risks in order to earn above-average returns. Speculators generally hold shares for a relatively short period of time.

Spread The difference between the bid and the offering price for a share.

Stock is composed of three classes of materials: raw materials to be used in the product, goods in the process of being manufactured and finished goods ready for shipment to the customer.

Tender offer An offer to purchase shares from investors.

Title A right to ownership of property.

Total assets All the asset figures added together produce the balance sheet item called total assets.

Total equity Total value of the shareholders’ equity including share capital and retained earnings.

Total liabilities Current and long-term debt added together.

Voting shares Shares that give the owner of the share the right to vote.

Working capital Current assets less current liabilities. Called ‘working capital’ because it is the capital that has been put to work in the business and has taken the form of stock, debtors, cash, etc.

Yield The rate of return on an investment.

Zero coupon share A share that is issued at a large discount from face value and that makes no periodic interest payments.