Glossary
A
Assets
A resource having economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
B
Balance Sheet
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
Balanced Fund
A fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation.
Bond
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
Book Value
A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities.
Broker
An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
C
Certificate of Deposit (CD)
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination.
Commission
A service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security.
Commodity
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.
Common Stock
Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends.
Stock Correction
A reversal of the prevailing trend in price movement for a security. The term is most often used to describe a decline after a period of rising prices.
D
Day Order
Any order to buy or sell a security that automatically expires if not executed on the day the order is placed.
Discount Rate
The interest rate us by central bank in financing commercial banks.
Dividend
Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
E
Economic Growth
An increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
Equity
Stock or any other security representing an ownership interest.
G
Good till Cancelled Order (GTC)
An order to buy or sell a security at a set price that is active until the investor decides to cancel it or the trade is executed.
Gross Domestic Product (GDP)
The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis.
H
Holding Period
The real or expected period of time during...
L
Limit Order
An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.
Liquidity
The degree to which an asset or security can be bought or sold in the market without affecting the asset's price Liquidity is characterized by a high level of trading activity.
M
Maturity Date
The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.
Monetary Policy
The actions of a central bank, currency board or other regulatory committee, that determine the size and rate of growth of the money supply, which in turn affects interest rates.
N
Net Asset Value (NAV)
In the context of mutual funds, the total value of the fund's portfolio less liabilities The NAV is usually calculated on a daily basis.
No Load Fund
A mutual fund whose shares are sold without a commission or sales charge.
O
Operating Expense
A category of expenditure that a business incurs as a result of performing its normal business operations.
Operating Income
The amount of profit realized from a business's own operations, but excluding operating expenses (such as cost of goods sold) and depreciation from gross income.
P
Portfolio
The group of assets - such as stocks, bonds and mutual - held by an investor.
Preferred Stock
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
Price-Earnings, Current (P/E)
A valuation ratio of a company's current share price compared to its per-share earnings.
R
Recession
A significant decline in activity spread across the economy, lasting longer than a few months.
Risk
The chance that an investment's actual return will be different than expected.
Round Lot
The normal unit of trading for a security, which is generally 100 shares of stock.
S
Stock
A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
Stock Dividend
A dividend payment made in the form of additional shares, rather than a cash payout.
Stop Order
An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price.
Stop-Limit Order
An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached.
Understanding Stock
The common stock represents an ownership claim that has a par value, book value, and market value. The par value is shown on the stock certificate. The book value represents owner-equity that does not include preferred shares, but includes reserves, retained earnings, and capital surplus in addition to the par value of the stock divided by the number of outstanding shares.
Finally, the market value represents the price at which the stock is sold in the capital market, and may be higher or lower than the book value. Market participants know that the par value and the book value do not represent the intrinsic value of the stock.
This is because the intrinsic value of the common stock is its market value that depends on the expected return that is resulted from the capital gains and dividends. The common stockholder is not allowed to return the common stock for the company to reclaim its value. If the investor has to sell the stock, the only venue available is the stock market. In case of bankruptcy there is no guarantee that the investor will get the purchase price of the stock, and may get nothing. In addition, the investor is not entitled for dividends if the management does not decide to distribute profits. However, the common stockholder has many rights not available to other claimants. The investor is entitled to sell or donate the stock, and to receive proportionate share of dividends, whether cash or stock dividends. In case of stock dividends, the investor share is determined by his ownership of the company stock.
Since stock dividends increase the number of outstanding shares, without a corresponding increase in the company’s earning power in the short-run, the market value of owners’ equity remains constant, and the market value per share decreases. It should be noted that companies usually issue stock dividends to stop sharp increases in market value of the stock. Other shareholders rights include the right to vote in shareholders meetings. The investor’s ability to influence decisions depends on the number of shares owned. Usually an investor signs a proxy authorizing a member of the board of directors to vote on his/her behalf. Such action tends to deprive the investor from direct participation in running the company’s affairs. From the firm’s view, common stocks represent a permanent source of financing, since they are not redeemable and the company is under no obligation to issue dividends, even in profitable years. This is in addition to the fact that issuance of more common shares reduces the ratio of debt in the company’s capital structure. This increases the debt capacity of the firm, i.e., it increases the firm’s ability to obtain debt when needed, other things remain constant.
Understanding Mutual Funds
The advent of mutual funds has expanded the ability of individuals to participate in financial markets. A mutual fund is a mechanism by which a firm collects money from a large number of individual investors to form a pool, which can then be invested in various financial instruments.
Funds sponsors pursue specific objectives to satisfy the needs of the individual investors by offering funds with different risk characteristics and exposure to different kinds of securities. In the U.S. alone, well over 2,500 mutual funds exist allowing individual investors to choose specific funds to suit their investment needs. Mutual funds are becoming increasingly popular in Saudi Arabia with banks offering a range of different funds and kept increasing in number and diversity. Mutual funds present a number of advantages to the individual investor. Professional money management, the ability to participate in a large number of securities through pooling and lower transaction costs are some of the benefits.
Mutual funds levy a variety of fees that can lower the rate of return to the investor. Load funds apply an initial fee as a sales charge and sometimes an exit fee when funds are withdrawn. Unless there is good reason to believe that the fund manager can exhibit superior investment performance, the investor is better off choosing no load funds. Most funds incur operating expenses to cover costs of operating the fund such as administrative expenses, and salaries. Other charges represent costs passed on to the investor to cover advertising expenditures, commissions paid to brokers, and the costs of printing and distributing annual reports.
Investing in mutual funds is done by purchasing shares issued by the fund. The fund in turn uses the money to invest in securities in keeping with its stated objectives. The price at which the mutual fund shares can be purchased is called the NAV or Net Asset Value, which represents the total market value of the securities held by the fund divided by the number of shares outstanding.
If the fund carries a load, the investor pays the NAV plus the sales charge. The financial press such as the Wall Street Journal carries daily price information for a large number of mutual funds. In addition a number of publications, notably ‘Money Magazine’ and ‘Forbes’ present detailed analysis of the performance of individual funds annually. In Saudi Arabia, weekly prices and trading information are presented in major local newspapers.
Types of Funds by Objectives
Funds sponsors pursue specific objectives to meet the diverse needs of investors. These objectives are classified in terms of the degree of risk and the ability of the fund to generate income flows. Thus, stock, bond, and money market funds can be classified according to their stated objectives as follows
Stock Funds
Aggressive growth funds, which seek to maximize capital growth; current income is not a significant factor.
Growth funds, seek capital growth while dividend income is not a significant factor.
Growth and income funds, seek to combine long-term capital growth and current income.
International funds, seek to invest in stocks of companies located outside the country.
Global equity funds, which are portfolios invested in stocks traded worldwide.
Income-equity funds, which seek a high level of income by investing primarily in stocks of companies with good dividend-paying record.
