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Above par: Having a current price above face value. This would generally be the case if the
coupon paid on the bond exceeds the discount rate applicable, or if market interest rates fall
after the bond is bought. If the bondholder had bought at a price above par, then he/she will
suffer a capital loss upon maturity since the bond will only be redeemed at face value.
Account :
Definition 1 : A record of financial transactions for an asset or individual, such as at a bank,
brokerage, credit card company, or retail store.
Definition 2 : More generally, an arrangement between a buyer and a seller in which
payments are to be made in the future.
Accounting Equation : The fundamental balance sheet equation: assets = liabilities + net
Accrual basis accounting : The most commonly used accounting method, which reports
income when earned and expenses when incurred, as opposed to cash basis accounting, which
reports income when received and expenses when paid. Under the accrual method, companies
do have some discretion as to when income and expenses are recognized, but there are rules
governing the recognition. In addition, companies are required to make prudent estimates
against revenues that are recorded but may not be received, called a bad debt expense.
Acid-test ratio : The ratio of current assets less inventories to total current liabilities. This
ratio is the most stringent measure of how well the company is covering its short-term
obligations, since the ratio only considers that part of current assets which can be turned into
cash immediately (thus the exclusion of inventories). The ratio tells creditors how much of the
company's short term debt can be met by selling all the company's liquid assets at very short
notice. also called acid-test ratio.
Acquisition : Acquiring control of a corporation, called a target, by stock purchase or
exchange, either hostile or friendly. also called takeover.
ADR : American Depositary Receipt. A negotiable certificate issued by a U.S. bank
representing a specific number of shares of a foreign stock traded on a U.S. stock exchange.
ADRs make it easier for Americans to invest in foreign companies, due to the widespread
availability of dollar-denominated price information, lower transaction costs, and timely
dividend distributions.
ADS : American Depositary Share. The share issued under an American Depositary Receipt
agreement which is actually traded.
Aggressive growth fund : A mutual fund which aims for the highest capital gains and is not
risk-averse in its selection of investments. Aggressive growth funds are most suitable for
investors willing to accept a high risk-return trade-off, since many of the companies which
demonstrate high growth potential can also show a lot of share price volatility. Aggressive
growth funds tend to have a very large positive correlation with the stock market, and so they
often produce very good results during economic upswings and very bad results during
economic downturns. An aggressive growth fund might, for example, buy initial public
offerings (IPOs) of stock from small companies and then resell that stock very quickly in
order to generate big profits. Some aggressive growth funds may even invest in derivatives,
such as options, in order to increase their gains.

Amalgamation : The merging of two or more businesses into single entity.

AMEX : American Stock Exchange. The second-largest stock exchange in the U.S., after the
New York Stock Exchange (NYSE). In general, the listing rules are a little more lenient than
those of the NYSE, and thus the AMEX has a larger representation of stocks and bonds issued
by smaller companies than the NYSE. Some index options and interest rate options trading
also occurs on the AMEX. The AMEX started as an alternative to the NYSE. It originated
when brokers began meeting on the curb outside the NYSE in order to trade stocks that failed
to meet the Big Boards stringent listing requirements, but the AMEX now has its own trading
floor. In 1998 the parent company of the NASDAQ purchased the AMEX and combined their
markets, although the two continue to operate separately. also called The Curb.
Amortization : is distribution of a single lump-sum cash flow into many smaller cash

flow installments for easier repayment. Unlike other repayment models, each
repayment installment consists of both principal and interest. Amortization is chiefly
used in loan repayments (a common example being a mortgage) and sinking funds.
The payments are usually of equal amounts. In the case of a loan, a greater amount of
the payment is applied to interest at the beginning, while during the latter portion,
more money is applied to principal.
Annual meeting : The company gathering, usually held at the end of each fiscal year, at
which the previous year and the outlook for the future are discussed and directors are elected
by common shareholders. Shortly before each annual meeting, the corporation sends out a
document called a proxy statement to each shareholder. The proxy statement contains a list of
the business concerns to be addressed at the meeting and a ballot for voting on company
initiatives and electing the new Board. This proxy ballot authorizes someone else at the
meeting (usually the management team) to vote on investors' behalf.
Audited document required by the SEC and sent to a public company's or mutual fund's
shareholders at the end of each fiscal year, reporting the financial results for the year
(including the balance sheet, income statement, cash flow statement and description of
company operations) and commenting on the outlook for the future. The term sometimes
refers to the glossy, colorful brochure and sometimes to Form 10-K, which is sent along with
the brochure and contains more detailed financial information. All 10-Ks for public
companies and mutual funds incorporated in the U.S. are available on the SEC's website for
Arbitrage : Attempting to profit by exploiting price differences of identical or similar
financial instruments, on different markets or in different forms. The ideal version is riskless
Arbitration : A process in which a disagreement between two or more parties is resolved by
impartial individuals, called arbitrators, in order to avoid costly and lengthy litigation.
Arbitrator : A private, neutral person chosen to arbitrate a disagreement, as opposed to a
court of law. An arbitrator could be used to settle any non-criminal dispute, and many

business contracts make provisions for an arbitrator in the event of a disagreement. Generally,
resolving a disagreement through an arbitrator is substantially less expensive than resolving it
through a court of law.

Articles of Association : A document describing the purpose, place of business, and details of
a non-profit organization.
Articles of Incorporation : A document, filed with a U.S. state by a corporation's founders,
describing the purpose, place of business, and other details of a corporation. also called
Asset : Any item of economic value owned by an individual or corporation, especially that
which could be converted to cash. Examples are cash, securities, accounts receivable,
inventory, office equipment, a house, a car, and other property. On a balance sheet, assets are
equal to the sum of liabilities, common stock, preferred stock, and retained earnings.
Asset allocation fund : A single mutual fund which tries to accomplish the goals of asset
allocation all by itself. Such a fund invests in a variety of securities in different asset classes.
The purpose is to provide investors with truly diversified holdings and consistent returns,
while sparing the investor the trouble of having to accomplish asset allocation by purchasing
a large number of different funds. Some asset allocation funds have a specific breakdown of
asset classes that they try to maintain over time, while others vary the composition as
opportunities and circumstances change.
Asset-backed security : Bonds or notes backed by loan paper or accounts receivable
originated by banks, credit card companies, or other providers of credit; not mortgages.
At call : Any transaction which occurs in the call money market.

At par : A bond or preferred stock which is selling at a price equal its face (or par) value.
Definition 1 :
An examination and verification of a company's financial and accounting records and
supporting documents by a professional, such as a Certified Public Accountant. Definition 2
: An IRS examination of an individual or corporation's tax return, to verify its accuracy. An
audit is an IRS examination of an individual or corporation's tax return, to verify its accuracy.
There are three types of audits: correspondence audits (the IRS mails a request for additional
information), office audits (an interview is conducted at a local IRS office), and field audits
(an interview is conducted at a taxpayer's place of business, for a corporate tax return). Since
there is always the chance of an audit, experts recommend keeping good records to support all
the information in a return. The reason detailed and accurate bookkeeping is so important is
that the burden of proof is on the filer, not the IRS.
Authorized shares : The maximum number of shares of stock that a company can issue. This
number is specified initially in the company's charter, but it can be changed with shareholder
approval. Generally a much greater number of shares are authorized than required, to give the
company flexibility to issue more stock as needed. also called authorized stock or shares

Authorized stock : The maximum number of shares of stock that a company can issue. It's
specified initially in the company's charter, but it can be changed with shareholder approval.
also called authorized shares or shares authorized.

B2B : Business-To-Business. A transaction that occurs between a company and another

company, as opposed to a transaction involving a consumer. The term may also describe a
company that provides goods or services for another company.
Back door financing : When a government agency borrows from the U.S. Treasury instead
of relying on congressional appropriations.
Back office : Definition 1 : The administrative functions at a brokerage that support the
trading of securities, including trade confirmation and settlement, recordkeeping, and
regulatory compliance. Definition 2 :
More generally, administrative functions that support but are not directly involved in the
operations of a business, such as accounting and personnel.
Bad debt : Accounts receivable that will likely remain uncollectable and will be written off.
Bad debts appear as an expense on the company's income statement, thus reducing net
income. In general, companies make an estimate of bad debt expenses that might be incurred
in the current time period based on past records as part of the process of estimating earnings.
Most companies make a bad debt allowance since it is unlikely that all of their debtors will
pay them in full.
Bank Credit : The borrowing capacity provided to an individual by the banking system, in
the form of credit or a loan. The total bank credit the individual has is the sum of the
borrowing capacity each lender bank provides to the individual.
Bank : An organization, usually a corporation, chartered by a state or federal government,
which does most or all of the following: receives demand deposits and time deposits, honors
instruments drawn on them, and pays interest on them; discounts notes, makes loans, and
invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues
drafts and cashier's checks.
Bank discount : The bank charge made for payment of a note prior to maturity, expressed as
a percentage of the note's face value.
Bank Rate : Definition 1 : The interest rate charged by a bank for loans., Definition 2 : The
discount rate set by a central bank.
Bank Reconciliation : The process of adjusting an account balance reported by a bank to
reflect transactions that have occurred since the reporting date.
Bankrupt : A person, firm, or corporation that has been declared insolvent through a court
proceeding and is relieved from the payment of all debts after the surrender of all assets to a
court-appointed trustee.

Bankruptcy : A proceeding in a federal court in which an insolvent debtor's assets are

liquidated and the debtor is relieved of further liability. Chapter 7 of the Bankruptcy Reform
Act deals with liquidation, while Chapter 11 deals with reorganization.

Bank Term Loan : A bank loan to a company, with a fixed maturity and often featuring
amortization of principal. If this loan is in the form of a line of credit, the funds are drawn
down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds
from the loan soon after they become available. Bank term loans are very a common kind of
Basic Earnings Per Share : Earnings per share of common stock.
Bear : An investor who believes that a security, a sector, or the overall market is about to fall.
opposite of bull.
Bearer : The holder of a negotiable instrument.
Bearer bond : An unregistered, negotiable bond on which interest and principal are payable
to the holder, regardless of whom it was originally issued to. The coupons are attached to the
bond, and each coupon represents a single interest payment. The holder submits a coupon,
usually semi-annually, to the issuer or paying agent to receive payment. Bearer bonds are
being phased out in favor of registered bonds. also called coupon bond.
Bell : The open (opening bell) or close (closing bell) of a trading session; sometimes a bell is
used, sometimes a buzzer.
Bill : Definition 1 : A negotiable debt obligation issued by the U.S. government and backed
by its full faith and credit, having a maturity of one year or less. Exempt from state and local
taxes. also called T-Bill or U.S. Treasury Bill or Treasury Bill. Definition 2 : Paper currency.
Definition 3 : An invoice of charges for products and services.
Bill of Exchange : An order by one person for a second person to pay a third.
Black Friday : September 24, 1869, the day the markets crashed following a failed attempt
by some financiers to corner the gold market. Led to a depression.
Black Market : A market where products are bought and sold illegally.
Black Monday : October 19, 1987, the day on which the DJIA fell 508 points
Blackout Period : An interval of up to 60 days during which employees may not adjust the
investments contained in their plans. Such blackout periods often occur when the plan is
undergoing significant changes.

Blend Fund : A mutual fund whose assets are composed of a combination of stocks, bonds,
and money market securities, rather than just one or two of these asset classes. This enables
investors to diversify their holdings with a single fund. Since blend funds vary considerably
in composition is difficult to make generalizations about their performance or risk level, but
usually they are somewhat less risky than stock mutual funds and somewhat more risky than
bond funds or money market mutual funds. also called hybrid funds.

Board of Directors : Individuals elected by a corporation's shareholders to oversee the

management of the corporation. The members of a Board of Directors are paid in cash and/or
stock, meet several times each year, and assume legal responsibility for corporate activities.
also called directorate.
Board of Governors : Definition 1 : The governing body of the Federal Reserve System,
which is responsible for U.S. monetary policy. Definition 2 : The members of a stock
exchange that supervise the functioning of the exchange.
Board of Trustees : A group of people that oversees a non-profit organization.
Boardroom : A room set aside for the meetings of a company's board of directors.
Bond : A certificate of debt that is issued by a government or corporation in order to raise
money with a promise to pay a specified sum of money at a fixed time in the future and
carrying interest at a fixed rate. Generally, a bond is a promise to repay the principal along
with interest (coupons) on a specified date (maturity).The main types of bonds are corporate
bond, municipal bond, treasury bond, treasury note, treasury bill, and zero-coupon bond. It is
a tradable debt instrument that might be sold at above or below par (the amount paid out at
maturity), and are rated by bond rating services such as Standard & Poor's and Moody's
Investors Service, to specify likelihood of default. The Federal government, states, cities,
corporations, and many other types of institutions sell bonds. It is relatively more secured
than equity and has priority over shareholders if the company becomes insolvent and its assets
are distributed.
Bond Discount : The amount by which a bond's par exceeds its market price. also called
Book-Entry Security : Security issued not as a certificate but simply as an entry in a bank
account. Most Treasury securities are book-entry.
Bookkeeping : The systematic recording of a company's financial transactions. The two most
common bookkeeping methods are single entry and double entry.
Book Profit : Profit which has been made but not yet realized through a transaction, such as a
stock which has risen in value but is still being held. also called unrealized gain or unrealized
profit or paper gain or paper profit.

Break-Even Analysis : A calculation of the approximate sales volume required to just cover
costs, below which production would be unprofitable and above which it would be profitable.
Break-even analysis focuses on the relationship between fixed cost, variable cost, and profit.
Break-Even Point : Definition 1 : The price at which an option's cost is equal to the
proceeds acquired by exercising the option. For a call option, it is the strike price plus the
premium paid. For a put option, it is the strike price minus the premium paid. Definition 2 :
The price at which a securities transaction produces neither a gain nor a loss. Definition 3 :
The volume of sales at which a company's net sales just equals its costs.

Broker : An individual or firm which acts as an intermediary between a buyer and seller,
usually charging a commission. For securities and most other products, a license is required.
Books of Original Entry : Accounting journals where financial transactions are initially

Budget : An itemized forecast of an individual's or company's income and expenses expected

for some period in the future.
Book Value : Definition 1 : A company's common stock equity as it appears on a balance
sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as
goodwill. This is how much the company would have left over in assets if it went out of
business immediately. Since companies are usually expected to grow and generate more
profits in the future, most companies end up being worth far more in the marketplace than
their book value would suggest. For this reason, book value is of more interest to value
investors than growth investors. Definition 2 : The value of an asset as it appears on a
balance sheet, equal to cost minus accumulated depreciation. Book value often differs
substantially from market price, especially in knowledge industries such as high-tech.
Bull : An investor who believes that a particular security, a sector, or the overall market is
about to rise. opposite of bear.
Bullion : Gold, silver, platinum, or palladium, in the form of bars or ingots. Some central
banks use bullion for settlement of international debt, and some investors purchase bullion as
a hedge against inflation.
Bullish : Believing that a particular security, a sector, or the overall market is about to rise.
opposite of bearish.
CAD : Cash Against Documents. A transaction in which the buyer assumes the title for the
goods being purchased upon paying the sale price in cash.
Calendar Year : A year that ends on December 31.
Capital Asset : All tangible property which cannot easily be converted into cash and which is
usually held for a long period, including real estate, equipment, etc.

Capital Asset Pricing Model : CAPM. An economic model for valuing stocks by relating
risk and expected return. Based on the idea that investors demand additional expected return
(called the risk premium) if asked to accept additional risk.
Capital Budget : A plan to finance long-term outlays, such as for fixed assets like facilities
and equipment.
Capital Expenditure : Money spent to acquire or upgrade physical assets such as buildings
and machinery. also called capital spending or capital expense.

Capital Gain : The amount by which an asset's selling price exceeds its initial purchase price.
A realized capital gain is an investment that has been sold at a profit. An unrealized capital
gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gain
is often used to mean realized capital gain. For most investments sold at a profit, including
mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money
called capital gains tax. opposite of capital loss.
Capital Goods : Raw materials used to produce finished products.
Capital Loss : The decrease in the value of an investment or asset. opposite of capital gain.
Capital Market : A market where debt or equity securities are traded.

Capital Stock : The number of shares authorized for issuance by a company's charter,
including both common stock and preferred stock.
Cash Flow : A measure of a company's financial health. Equals cash receipts minus cash
payments over a given period of time; or equivalently, net profit plus amounts charged off for
depreciation, depletion, and amortization.
Cash Flow Statement : A summary of a company's cash flow over a given period of time.
Chapter 10 : The part of the U.S. Bankruptcy Code describing how a company can file for
court protection. Reorganization occurs under an independent, court-appointed manager.
Chapter 11 : The part of the U.S. Bankruptcy Code describing how a company or creditor
can file for court protection. In the case of a corporation, reorganization occurs under the
existing management.
Chapter 13 : The part of the U.S. bankruptcy code allowing an individual to begin debt
repayment without forfeiting property. Chapter 13 requires that the debtor maintain a source
of income and adhere to a payment schedule set forth by the court.
Chapter 7 : The part of the U.S. Bankruptcy Code describing the liquidation of a company
after bankruptcy.

Class Action Suit : A lawsuit brought by one party on behalf of a group of individuals all
having the same grievance.
Clearinghouse : An agency associated with an exchange, which settles trades and regulates
Closed Corporation : A corporation in which all of the voting stock is held by a few
shareholders, such as management or family members. also called private company.

Closed-End Fund : A fund with a fixed number of shares outstanding, and one which does
not redeem shares the way a typical mutual fund does. Closed-end funds behave more like
stock than open-end funds: closed-end funds issue a fixed number of shares to the public in an
initial public offering, after which time shares in the fund are bought and sold on a stock
exchange, and they are not obligated to issue new shares or redeem outstanding shares as
open-end funds are. The price of a share in a closed-end fund is determined entirely by market
demand, so shares can either trade below their net asset value ("at a discount") or above it ("at
a premium"). also called closed-end investment company or publicly-traded fund.
Closed Fund : An open-end mutual fund that has temporarily or permanently suspended sale
of shares to new customers, usually due to rapid asset growth. Outstanding shares are still
accepted for redemption by the fund, and existing shareholders may also buy shares in some
cases. The primary reason for closing a fund to new investors is that fund managers are
concerned that if they increase the asset base of the fund any further, their current investment
strategy will become too difficult to achieve.
Collective Bargaining : A method of negotiation in which employees use authorized union
representatives to assist them.
COMEX : Commodity Exchange. The leading U.S. exchange for metals futures and options

Commercial Paper : An unsecured obligation issued by a corporation or bank to finance its

short-term credit needs, such as accounts receivable and inventory. Maturities typically range
from 2 to 270 days. Commercial paper is available in a wide range of denominations, can be
either discounted or interest-bearing, and usually have a limited or nonexistent secondary
market. Commercial paper is usually issued by companies with high credit ratings, meaning
that the investment is almost always relatively low risk.
Corporate Governance : A generic term which describes the ways in which rights and
responsibilities are shared between the various corporate participants, especially the
management and the shareholders.
Cost Of Goods Sold : COGS. On an income statement, the cost of purchasing raw materials
and manufacturing finished products. Equal to the beginning inventory plus the cost of goods
purchased during some period minus the ending inventory. also called cost of sales.

Cost of Sales : On an income statement, the cost of purchasing raw materials and
manufacturing finished products. Equal to the beginning inventory plus the cost of goods
purchased during some period minus the ending inventory. also called Cost Of Goods Sold
Debenture : Unsecured debt backed only by the integrity of the borrower, not by collateral,
and documented by an agreement called an indenture. One example is an unsecured bond.
Debit Note : A note indicating an amount owed by a person or company. Serves the same
function as an invoice.

Debt : A liability or obligation in the form of bonds, loan notes, or mortgages, owed to
another person or persons and required to be paid by a specified date (maturity).
Deed of Trust : The document used in some states instead of a mortgage. Title is conveyed to
a trustee rather than to the borrower.
Dividend : A taxable payment declared by a company's board of directors and given to its
shareholders out of the company's current or retained earnings, usually quarterly. Dividends
are usually given as cash (cash dividend), but they can also take the form of stock (stock
dividend) or other property. Dividends provide an incentive to own stock in stable companies
even if they are not experiencing much growth. Companies are not required to pay dividends.
The companies that offer dividends are most often companies that have progressed beyond
the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they
usually choose to pay them out to their shareholders. also called payout.
Earnings per Share : EPS. Total earnings divided by the number of shares outstanding.
Companies often use a weighted average of shares outstanding over the reporting term. EPS
can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"),
or for the coming year ("forward EPS"). Note that last year's EPS would be actual, while
current year and forward year EPS would be estimates.
Encroachment : A structure, or part of a structure, built on another individual's property.
Encumbered : Owned by one entity but subject to another's valid claim.
Endorsement : Definition 1 : A signature used to legally transfer a negotiable instrument.
Definition 2 : A provision added to an existing insurance policy to modify its coverage;
here, also called rider.
Endowment : A permanent fund bestowed upon an individual or institution, such as a
university, museum, hospital, or foundation, to be used for a specific purpose.
Equilibrium : Balance, for example when demand equals supply.
Equity Fund : A mutual fund which invests primarily in stocks, usually common stocks.
Exchange : Definition 1 : Any organization, association or group which provides or
maintains a marketplace where securities, options, futures, or commodities can

be traded; or the marketplace itself. Definition 2 : To provide goods or services

and receive goods or services of approximately equal value in return; here, also
called barter. Definition 3 : The currency markets.
Ex-Dividend : A security which no longer carries the right to the most recently declared
dividend; or the period of time between the announcement of the dividend and the payment. A
security becomes ex-dividend on the ex-dividend date (set by the NASD), which is usually
two business days before the record date (set by the company issuing the dividend).

For transactions during the ex-dividend period, the seller, not the buyer, will receive the
dividend. Ex-dividend is usually indicated in newspapers with an x next to the stock or
mutual fund's name. In general, a stocks price drops the day the ex-dividend period starts,
since the buyer will not receive the benefit of the dividend payout till the next dividend date.
As the stock gets closer to the next dividend date, the price may gradually rise in anticipation
of the dividend.
Ex-Dividend Date : The first day of the ex-dividend period. The ex-dividend date was
created to allow all pending transactions to be completed before the record date. If an investor
does not own the stock before the ex-dividend date, he or she will be ineligible for the
dividend payout. Further, for all pending transactions that have not been completed by the exdividend date, the exchanges automatically reduce the price of the stock by the amount of the
dividend. This is done because a dividend payout automatically reduces the value of the
company (it comes from the company's cash reserves), and the investor would have to absorb
that reduction in value (because neither the buyer nor the seller are eligible for the dividend).
also called reinvestment date.
Face Value : The nominal dollar amount assigned to a security by the issuer. For an equity
security, face value is usually a very small amount that bears no relationship to its market
price, except for preferred stock, in which case face value is used to calculate dividend
payments. For a debt security, face value is the amount repaid to the investor when the bond
matures (usually, corporate bonds have a face value of $1000, municipal bonds $5000, and
federal bonds $10,000). In the secondary market, a bond's price fluctuates with interest rates.
If interest rates are higher than the coupon rate on a bond, the bond will be sold below face
value (at a "discount"). If interest rates have fallen, the price will be sold above face value.
here also called par or par value.
Fiscal Year : An accounting period of 365 days (366 in leap years), but not necessarily
starting on January 1.
Form 10-K : Audited document required by the SEC and sent to a public company's or
mutual fund's shareholders at the end of each fiscal year, reporting the financial results for the
year (including the balance sheet, income statement, cash flow statement and description of
company operations) and commenting on the outlook for the future. The term sometimes
refers to the glossy, colorful brochure and sometimes to Form 10-K, which is sent along with
the brochure and contains more detailed financial information. All 10-Ks for public
companies and mutual funds incorporated in the U.S. are available on the SEC's website for
free. also called annual report.
Form 10-Q : Unaudited document required by the SEC for all U.S. public companies,
reporting the financial results for the quarter and noting any significant

changes or events in the quarter. The Form 10-Q contains financial statements,
a discussion from the management, and a list of "material events" that have
occurred with the company (such as a stock split or acquisition). also called
quarterly report.
Form 3 : A document required by the SEC and the appropriate stock exchange to announce
the holdings of directors, officers, and shareholders owning 10% or more of the company's
outstanding stock.

Form 4 : A document required by the SEC and the appropriate stock exchange to announce
changes in the holdings of directors, officers, and shareholders owning 10% or more of the
company's outstanding stock.
Form 8-K : A document required by the SEC to announce certain significant changes in a
public company, such as a merger or acquisition, a name or address change, bankruptcy,
change of auditors, or any other information which a potential investor ought to know about.
Form S-1 : A registration statement used in the initial public offering of securities.
Form T : A NASD-required form that is used by brokers to report equity transactions after
the market's usual hours.
Fortune 500 : An annual list of the 500 largest industrial corporations in the U.S., published
by Fortune magazine. The corporations are ranked based on such metrics as revenues, profits,
and .
Franchise : A form of business organization in which a firm which already has a successful
product or service (the franchisor) enters into a continuing contractual relationship with other
businesses (franchisees) operating under the franchisor's trade name and usually with the
franchisor's guidance, in exchange for a fee.
Fully Diluted Earnings Per Share : Common stock earnings per share that would result if
all warrants and stock options were exercised and all convertible bonds and preferred stock
were converted. For a firm that has a lot of stock options, warrants, convertible bonds and
preferred stock outstanding, the fully diluted earnings per share are the most appropriate way
of looking at earnings on a per share basis.
Fund : Definition 1 : To finance or underwrite. Definition 2 : An investment company or
mutual fund.
GAAP : Generally Accepted Accounting Principles. A widely accepted set of rules,
conventions, standards, and procedures for reporting financial information, as established by
the Financial Accounting Standards Board.
Global Depositary Receipt : GDR. A negotiable certificate held in the bank of one country
representing a specific number of shares of a stock traded on an exchange of another country.
American Depositary Receipts make it easier for individuals to invest in foreign companies,

due to the widespread availability of price information, lower transaction costs, and timely
dividend distributions. also called European Depositary Receipt.
Going Concern : The idea that a company will continue to operate indefinitely, and will not
go out of business and liquidate its assets. For this to happen, the company must be able to
generate and/or raise enough resources to stay operational.
Goodwill : An intangible asset which provides a competitive advantage, such as a strong
brand, reputation, or high employee morale. In an acquisition, goodwill appears on the
balance sheet of the acquirer in the amount by which the purchase price exceeds the net
tangible assets of the acquired company.

Grant : Definition 1 : Funding for a nonprofit organization, usually for a specific project.
Definition 2 : To give a right to.

Growth and Income Fund : A mutual fund whose aim is to provide both growth and
income, often by investing in companies which have earnings growth as well as dividends.
Growth Fund : A mutual fund whose aim is to achieve capital appreciation by investing in
growth stocks. They focus on companies that are experiencing significant earnings or revenue
growth, rather than companies that pay outdividends. The hope is that these rapidly growing
companies will continue to increase in value, thereby allowing the fund to reap the benefits of
large capital gains. In general, growth funds are more volatile than other types of funds, rising
more than other funds in bull markets and falling more in bear markets.
Hedge : An investment made in order to reduce the risk of adverse price movements in a
security, by taking an offsetting position in a related security, such as an option or a short sale.
Hedge Fund : A fund, usually used by wealthy individuals and institutions, which is allowed
to use aggressive strategies that are unavailable to mutual funds, including selling short,
leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from
many of the rules and regulations governing other mutual funds, which allows them to
accomplish aggressive investing goals. They are restricted by law to no more than 100
investors per fund, and as a result most hedge funds set extremely high minimum investment
amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual
funds, investors in hedge funds pay a management fee; however, hedge funds also collect a
percentage of the profits (usually 20%).
Horizontal Acquisition : An acquisition by one company of another company in the same
Horizontal Merger : Merger of two or more companies with similar product lines.
Hostile Takeover : A takeover which goes against the wishes of the target company's
management and board of directors. opposite of friendly takeover.
Hot Issue : Stock, often an IPO, which is in great demand.

Hypothecation : The pledging of securities or other assets as collateral to secure a loan, such
as a debit balance in a margin account.
Hyperinflation : A period of rapid inflation that leaves a country's currency virtually
Impairment : The amount by which stated capital is reduced by distributions and losses.
Imperfect Market : A market in which the public does not immediately receive full access to
financial information about securities and in which buyers are not immediately matched with
sellers for particular securities.

Income Fund : A mutual fund which emphasizes current income in the form ofdividends or
coupon payments from bonds and/or preferred stocks, rather than emphasizing growth.
Income funds are considered to be conservative investments, since they avoid volatile growth
stocks. Income funds are popular with retirees and other investors who are looking for a
steady cash flow without assuming too much risk.
Index Fund : A passively managed mutual fund that tries to mirror the performance of a
specific index, such as the S&P 500. Since portfolio decisions are automatic and transactions
are infrequent, expenses tend to be lower than those of actively managed funds.

Indexing : Definition 1 : A passive investment strategy in which a portfolio is designed to

mirror the performance of a stock index, such as the S&P 500. Definition 2 : Tying taxes,
wages, or other amounts to an index.
Initial Public Offering : IPO. The first sale of stock by a company to the public.
Injunction : A court order requiring a person not to do something.
Insider : Definition 1 : A shareholder who owns more than 10% of a corporation, or an
officer or director.
Definition 2 : Any individual who has inside information.
Insider Trading : Trading by insiders; or illegal trading by insiders who trade based on
insider information.
Insolvency : The state of being insolvent.
Insolvent : Unable to meet debt obligations. opposite of solvent.
Interim Dividend : A dividend which is declared and distributed before the company's
annual earnings have been calculated; often distributed quarterly.
Iternational Fund : A mutual fund which invests in stocks and bonds of companies outside
of the U.S.

Joint Stock Company : A company which has some features of a corporation and some
features of a partnership.
Joint Venture : A contractual agreement joining together two or more parties for the purpose
of executing a particular business undertaking. All parties agree to share in the profits and
losses of the enterprise.
Junior Debt : Debt that is either unsecured or has a lower priority than that of another debt
claim on the same asset or property. also called subordinated debt.

Limited Company : A business structure used in Europe and Canada, in which shareholder
responsibility for company debt is limited to the amount he/she has invested in the company.
Abbreviated Ltd or plc.
Limited Liability Partnership : LLP. Another name for a Limited Liability Company, often
used by professional associations. The partner or investor's liability is limited to the amount
he/she has invested in the company.
limited liability : Type of investment in which a partner or investor cannot lose more than the
amount invested. Thus, the investor or partner is not personally responsible for the debts and
obligations of the company in the event that these are not fulfilled.
Limited Liability Company : LLC. A type of company whose owners and managers receive
the limited liability and (usually) tax benefits of an S Corporation without having to conform
to the S corporation restrictions.
limited partnership : A business organization with one or more general partners, who
manage the business and assume legal debts and obligations, and one or more limited
partners, who are liable only to the extent of their investments. Limited partners also enjoy
rights to the partnership's cash flow, but are not liable for company obligations.
liquidity : The ability of an asset to be converted into cash quickly and without any price
Lockup Period : An interval during which an investment may not be sold. In the case of an
IPO, employees may not sell their shares for a period time determined by the underwriter and
usually lasting 180 days.
Long-Term Assets : On a balance sheet, the value of a company's property, equipment and
other capital assets expected to be useable for more than one year, minus depreciation.
Malpractice : Injurious conduct by an individual acting in an official or professional
capacity, such as a doctor.
Manifesto : A written declaration of intent or principles.

Marginal Cost : The cost associated with one additional unit of production. also called
incremental cost.
Money Market : Market for short-term debt securities, such as banker's acceptances,
commercial paper, repos, negotiable certificates of deposit, and Treasury Bills with a maturity
of one year or less and often 30 days or less. Money market securities are generally very safe
investments which return a relatively low interest rate that is most appropriate for temporary
cash storage or short-term time horizons. Bid and ask spreads are relatively small due to the
large size and high liquidity of the market.
Merger : The combining of two or more entities into one, through a purchase acquisition or a
pooling of interests. Differs from a consolidation in that no new entity is created from a
Mortgagee : The creditor or lender in a mortgage agreement.
Mutual Company : A company whose profits are distributed in proportion to the amount of
business each participant does with the company. Examples include federal savings and loan
associations, state-chartered mutual savings banks, and mutual insurance companies.
Mutual Fund : An open-ended fund operated by an investment company which raises money
from shareholders and invests in a group of assets, in accordance with a stated set of
objectives. mutual funds raise money by selling shares of the fund to the public, much like
any other type of company can sell stock in itself to the public. Mutual funds then take the
money they receive from the sale of their shares (along with any money made from previous
investments) and use it to purchase various investment vehicles, such as stocks, bonds and
money market instruments. In return for the money they give to the fund when purchasing
shares, shareholders receive an equity position in the fund and, in effect, in each of its
underlying securities. For most mutual funds, shareholders are free to sell their shares at any
time, although the price of a share in a mutual fund will fluctuate daily, depending upon the
performance of the securities held by the fund. Benefits of mutual funds include
diversification and professional money management. Mutual funds offer choice, liquidity, and
convenience, but charge fees and often require a minimum investment. A closed-end fund is
often incorrectly referred to as a mutual fund, but is actually an investment trust. There are
many types of mutual funds, including aggressive growth fund, asset allocation fund,
balanced fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund,
crossover fund, equity fund, fund of funds, global fund, growth fund, growth and income
fund, hedge fund, income fund, index fund, international fund, money market fund, municipal
bond fund, prime rate fund, regional fund, sector fund, specialty fund, stock fund, and tax-free
bond fund.
National Income : The income earned by a country's people, including labor and capital
NAV : Net Asset Value. The dollar value of a single mutual fund share, based on the value of
the underlying assets of the fund minus its liabilities, divided by the number of shares
outstanding. Calculated at the end of each business day.
Net Present Value : NPV. The present value of an investment's future net cash flows minus
the initial investment. If positive, the investment should be made (unless an even better
investment exists), otherwise it should not.
Nifty Fifty : Term given to fifty blue chip stocks which were so popular prior to the bear
market of 1973-1974 that their prices were temporarily driven up to ridiculous levels.

Off-board : A transaction of a listed stock which is not completed on a national exchange, or

a transaction of an over-the-counter stock. also called off the board.
Open-End Fund : A fund operated by an investment company which raises money from
shareholders and invests in a group of assets, in accordance with a stated set of objectives.
Open-end funds raise money by selling of the fund to the public, much like any other type of
company which can sell stock in itself to the public. Mutual funds then take the money they
receive from the sale of their shares (along with any money made from previous investments)
and use it to purchase various investment vehicles, such as , and money market instruments.
In return for the money they give to the fund when purchasing shares, receive an position in
the fund and, in effect, in each of its securities. For most open-end funds, shareholders are
free to sell their shares at any time, although the price of a share in an open-end fund will
fluctuate daily, depending upon the performance of the securities held by the fund. Benefits of
open-end funds include diversification and professional money management.

Open-end funds offer choice, liquidity, and convenience, but charge and often require a
minimum investment. also called mutual fund.
Open Market : A market which is widely accessible to all investors or consumers.
Operating Asset : Asset which contributes to the regular income from a company's
Outside Director : A member of a corporation's board of directors who is not an employee of
the company and has no operational responsibilities within the company.
Preference Shares : Capital stock which provides a specific dividend that is paid before any
dividends are paid to common stock holders, and which takes precedence over common stock
in the event of a liquidation. Like common stock, preference shares represent partial
ownership in a company, although preferred stock shareholders do not enjoy any of the voting
rights of common stockholders. Also unlike common stock, preference shares pay a fixed
dividend that does not fluctuate, although the company does not have to pay this dividend if it
lacks the financial ability to do so. The main benefit to owning preference shares are that the
investor has a greater claim on the companys assets than common stockholders. Preferred
shareholders always receive their dividends first and, in the event the company goes bankrupt,
preferred shareholders are paid off before common stockholders. In general, there are four
different types of preferred stock: cumulative preferred, non-cumulative, participating, and
convertible. also called preferred stock.
Public Company : A company which has issued securities through an offering, and which are
now traded on the open market. also called publicly held or publicly traded. opposite of
private company.

Public Sector : The part of the economy concerned with providing basic government
services. The composition of the public sector varies by country, but in most countries the
public sector includes such services as the police, military, public roads, public transit,
primary education and healthcare for the poor. The public sector might provide services that
non-payer cannot be excluded from (such as street lighting), services which benefit all of
society rather than just the individual who uses the service (such as public education), and
services that encourage equal opportunity.

Quorum : Minimum number of people who must be present (physically or by proxy) in order
for a decision to be binding.
Quote : The highest bid or lowest ask price available on a security at any given time.
Regional Fund : Mutual fund which invests in one specific region of a country or the world.
Registered Company : A corporation that has filed a registration statement with the SEC
prior to releasing a new stock issue.
Reverse Acquisition : One way for a company to become publicly traded, by acquiring a
public company and then installing its own management team and renaming the acquired

Reverse Merger : The acquisition of a public company by a private company, allowing the
private company to bypass the usually lengthy and complex process of going public.
Reverse Mortgage : An arrangement in which a homeowner borrows against the equity in
his/her home and receives regular monthly tax-free payments from the lender. also called
reverse-annuity mortgage or home equity conversion mortgage.

Reverse Split : A stock split which reduces the number of outstanding shares and increases
the per-share price proportionately. This is usually an attempt by a company to disguise a
falling stock price, since the actual market capitalization of the stock does not change at all.
For example, if a company declares a one-for-ten reverese split, then a person who previously
held 20 shares valued by the market at $1 each will then have 2 shares worth $10 each. Many
stock exchanges in the U.S. do not allow companies with a stock price of less than $1 to
remain listed, and many such companies then have to undertake reverse splits if they want to
remain listed.
Reverse Take-Over : Definition 1 : RTO. When a company buys out a larger company, but
could also occasionally refer to a private company taking over a publicly listed company.
Typically, a public company that is taken over by a private company will remain listed, and
the private company will use the acquisition as means of gaining a listing. A reverse take-over
is a relatively rare event. Definition 2 : One way for a company to become publicly traded,
by acquiring a public company and then installing its own management team and renaming
the acquired company. also called reverse acquisition.

Revolving Line of Credit : An agreement by a bank to lend a specific amount to a borrower,

and to allow that amount to be borrowed again once it has been repaid. also called revolving
Same-Store Sales : In retail, sales to stores which have been open for more than one year.
This enables investors to determine what component of the overall sales growth was due to
the opening of new stores.

SEC filing : A document, usually containing financial data, that a company delivers to the
SEC and, thereby, to the public.
Sector Fund : A mutual fund which invests entirely or predominantly in a single sector.
Sector funds tend to be riskier and more volatile than the broad market because they are less
diversified, although the risk level depends on the specific sector. Some investors choose
sector funds when they believe that a specific sector will outperform the overall market, while
others choose sector funds to hedge against other holdings in a portfolio. Some common
sector funds include financial services funds, gold and precious metals funds, health care
funds, and real estate funds, but sector funds exist for just about every sector.

Security : Definition 1 : An investment instrument, other than an insurance policy or fixed

annuity, issued by a corporation, government, or other organization which offers evidence of
debt or equity. The official definition, from the Securities Exchange Act of 1934, is: "Any
note, stock, treasury stock, bond, debenture, certificate of interest or participation in any
profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral
trust certificate, preorganization certificate or subscription, transferable share, investment
contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle,
option, or privilege on any security, certificate of deposit, or group or index of securities
(including any interest therein or based on the value thereof), or any put, call, straddle, option,
or privilege entered into on a national securities exchange relating to foreign currency, or in
general, any instrument commonly known as a 'security'; or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, or warrant or right to
subscribe to or purchase, any of the foregoing; but shall not include currency or any note,
draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of
not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of
which is likewise limited."
Speculation : Taking large risks, especially with respect to trying to predict the future;
gambling, in the hopes of making quick, large gains.
Spinoff : An independent company created from an existing part of another company through
a divestiture, such as a sale or distribution of new shares.
Split : An increase in the number of outstanding shares of a company's stock, such that
proportionate equity of each shareholder remains the same. This requires approval from the
board of directors and shareholders. A corporation whose stock is performing well may
choose to split its shares, distributing additional shares to existing shareholders. The most
common split is two-for-one, in which each share becomes two shares. The price per share
immediately adjusts to reflect the split, since buyers and sellers of the stock all know about
the split (in this example, the share price would be cut in half). Some companies decide to
split their stock if the price of the stock rises significantly and is perceived to be too expensive
for small investors to afford. also called stock split.
Statutory Merger : A merger in which one of the merging companies continues to exist as a
legal entity, rather than being replaced by the new entity. opposite of statutory consolidation.

Buyback : Definition 1 : The purchase of a long position to offset a short position.

Definition 2 : A corporation's repurchase of stock or bonds it has issued. In the case of
stocks, this reduces the number of shares outstanding, giving each remaining shareholder a
larger percentage ownership of the company. This is usually considered a sign that the
company's management is optimistic about the future and believes that the current share price
is undervalued. Reasons for buybacks include putting unused cash to use, raising earnings per
share, increasing internal control of the company, and obtaining stock for employee stock
option plans or pension plans. When a company's shareholders vote to authorize a buyback,
they aren't obliged to actually undertake the buyback. also called corporate repurchase.
Swap : An exchange of streams of payments over time according to specified terms. The
most common type is an interest rate swap, in which one party agrees to pay a fixed interest
rate in return for receiving a adjustable rate from another party.

Takeover : Acquiring control of a corporation, called a target, by stock purchase or exchange,

either hostile or friendly.
Ticker : A scrolling display of current or recent security prices and/or volume.
Treasury Bill : A negotiable debt obligation issued by the U.S. government and backed by its
full faith and credit, having a maturity of one year or less. Exempt from state and local taxes.
also called Bill or T-Bill or U.S. Treasury Bill.
Treasury Bond : A negotiable, coupon-bearing debt obligation issued by the U.S.
government and backed by its full faith and credit, having a maturity of more than 7 years.
Interest is paid semi-annually. Treasury bonds are exempt from state and local taxes. These
securities have the longest maturity of any bond issued by the U.S. Treasury, from 10 to 30
years. The 30-year bond is also called the "long bond." Denominations range from $1000 to
$1 million. Treasury bonds pay interest every 6 months at a fixed coupon rate. These bonds
are not callable, but some older Treasury bonds available on the secondary market are callable
within five years of the maturity date. also called U.S. Treasury bond or T-bond.
Trust Company : Organization which acts as a fiduciary, trustee or agent for individuals and
businesses in the administration of trust funds, estates and custodial arrangements.
Turnaround : A sharp, positive reversal in the performance of a company or the overall
Tycoon : An extremely powerful business person. also called mogul.
Turnover : For a company, the ratio of annual sales to inventory; or equivalently, the fraction
of a year that an average item remains in inventory. Low turnover is a sign of inefficiency,
since inventory usually has a rate of return of zero. here also called inventory turnover. For a
mutual fund, the number of times per year that an average dollar of assets is reinvested.

Underwater : A call option whose strike price is higher than the market price of the
underlying security, or a put option whose strike price is lower than the market price of the
underlying security. Thus, there is no incentive to exercise the option today. However, the

option still has "time value", value based on the fact that the prices of the underlier can
change. This "time value" diminishes as the option approaches maturity.
U.S. Treasury Bill : A negotiable debt obligation issued by the U.S. government and backed
by its full faith and credit, having a maturity of one year or less. U.S. Treasury Bills are
exempt from state and local taxes. These securities do not pay a coupon rate of interest, and
the interest earned is estimated by taking the difference between the price paid and the par
value of the bond, and calculating that rate of return on an annual basis. Treasury Bills are
considered the safest securities available to the U.S. investor, and so the yield on these
securities are considered the risk-free rate of return. also called Bill or T-Bill or Treasury Bill.
U.S. Treasury Bond : A negotiable, coupon-bearing debt obligation issued by the U.S.
government and backed by its full faith and credit, having a maturity of more than 7 years.
Interest is paid semi-annually. U.S. Treasury Bonds are exempt from state and local taxes.

These securities have the longest maturity of any bond issued by the U.S. Treasury, from 10
to 30 years. The 30-year bond is also called the "long bond." Denominations range from
$1000 to $1 million. U.S. Treasury Bonds pay interest every 6 months at a fixed coupon rate.
These bonds are not callable, but some older U.S. Treasury Bonds available on the secondary
market are callable within five years of the maturity date. also called Treasury bond or Tbond.

U.S. Treasury Note : A negotiable debt obligation issued by the U.S. government and backed
by its full faith and credit, having a maturity of between 1 and 10 years. U.S. Treasury Notes
are safe investments and are actively traded in the secondary market. also called Treasury
Value Added Tax : VAT. A consumption tax which is levied at each stage of production based
on the value added to the product at that stage.
Venture Capital : VC. Funds made available for startup firms and small businesses with
exceptional growth potential. Managerial and technical expertise are often also provided. also
called risk capital.
Vertical Acquisition : An acquisition in which the acquirer and the target are in the same
industry but focus on different parts of the production process.
Vertical Merger : Merger of a vendor and a customer.
Warrant : A certificate, usually issued along with a bond or preferred stock, entitling the
holder to buy a specific amount of securities at a specific price, usually above the current
market price at the time of issuance, for an extended period, anywhere from a few years to
forever. In the case that the price of the security rises to above that of the warrant's exercise
price, then the investor can buy the security at the warrant's exercise price and resell it for a
profit. Otherwise, the warrant will simply expire or remain unused. Warrants are listed on
options exchanges and trade independently of the security with which it was issued. also
called subscription warrant.

White Paper : An educational report made available to the public that expounds on a
particular industry issue.

Window-Dressing : Definition 1 : The deceptive practice of some mutual funds, in which

recently weak stocks are sold and recently strong stocks are bought just before the fund's
holdings are made public, in order to give the appearance that they've been holding good
stocks all along. Definition 2 : The deceptive practice of using accounting tricks to make a
company's balance sheet and income statement appear better than they really are.
Write-Off : To charge an asset amount to expense or loss, in order to reduce the value of
that asset and one's earnings.
Zero-Base Budgeting : Budgeting method for a corporation or government in which all
expenditures must be justified each year, not just amounts in excess of the previous year.
Z shares : Mutual fund shares of a class available to employees of the fund.



1.1 Types of business

Business can be conducted through one of three main business
Sole traders and partnerships are not legally distinguished from the
personal affairs of those running them. Personal assets may be
called upon to meet business liabilities.
A company is created as a separate legal entity and continues to exist
through changes of ownership and management until officially
wound up.
1.2 Types of company
The majority of companies are limited by shares. Each of the
shareholders are the owners of the company and may also be
referred to as members. Their liability is limited to amounts unpaid
on their shares.

A company may be limited by guarantee. Upon winding up,

members are liable for company debts to the amount guaranteed.
Unlimited companies do not offer the proprietors any limitation upon
their liability when wound up.


2.1 Definition
The Companies Act states that the term includes any person
occupying the position of director by whatever name called. A
company may give its directors alternative titles; this does not affect
their legal status.
Indeed, the title director does not imply board status. It is generally
accepted that a Director of ... does not sit on the board, but the ...
Director does. A director is therefore recognised by function, not
by title.
One of several individuals elected by a corporation's shareholders to
establish company policies, including selection of operating officers
and payment of dividends.
A shareholder who owns more than 10% of a corporation, or an officer or
Outside director
A member of a corporation's board of directors who is not an employee of
the company and has no operational responsibilities within the company.
2.2 Types of directors
In addition to board duties executive directors have day-to-day
management responsibilities. Normally such directors are employed
under a service contract.
Non-executive directors take no part in the day-to-day running of
the business, but contribute at board meetings. Strictly nonexecutive directors have the same responsibilities as executive

directors, however should a company fail the courts might attribute

more blame to the executive directors.
Shadow directors. The definition of a shadow director is any
person in accordance with whose directions or instructions the
directors of the company are accustomed to act. The term can be
applied to individuals, who effectively run the company but are not
appointed director. Holding companies, banks and venture
capitalists who exercise significant influence on decisions made may
also be deemed shadow directors.
Alternate directors. A director who is temporarily absent or
incapacitated may be permitted under the articles to appoint a person
to speak on his or her behalf.
Associate directors. This term is used to cover special, assistant,
local, regional or divisional directors, none of whom are board
members. However, the actions of these persons can be binding on
the company, where a third party relies upon their apparent authority.
Nominee directors. The interests of substantial shareholders or the
companys bankers may be represented by a nominee director. Any
such person is required to act in the interests of the company as a
whole and not purely for the interest of their principal.
Managing director. All or any of the powers of management may
be delegated by the board to one director, the managing director, if
permitted by the articles.
Lead Director: The Board has adopted a policy that it have a Lead
Director, selected by non-employee directors, who will chair
regularly scheduled executive sessions of the non-employee
directors and may have such other responsibilities as the nonemployee directors may designate from time to time. Should the
Company be organized in such a way that the Chairman is other than
a non-employee director, another director will be selected for this
2.3 Appointment
Private companies must have at least one director and public
companies at least two. The articles may limit the number of
directors on the board and may prescribe a higher minimum number.

The first directors are appointed when the company is formed but
must normally retire at the first annual general meeting. Directors
may then offer themselves for re-election.
The directors may appoint additional directors or fill any vacancy
which arises, but the person appointed must normally retire at the
following annual general meeting. A notice of appointment, must be
signed by the appointee and a serving director and then filed with the
Registrar of Companies.
Certain persons may be disqualified from directorship by the articles,
for example those of unsound mind and those absent from board
meetings for six months or more without consent. The following can
never be appointed as director:

undischarged bankrupts, unless approved by the court;

those disqualified (see section 7.5);

the company auditor;

those over seventy years of age, unless specifically allowed in

the articles.
2.4 Resignation and dismissal
Generally a director can resign at any time by notifying the company
of his intentions. The articles may impose certain restrictions or
Resignation does not exempt the director from the results of his actions
whilst a director nor does it free him from obligations under his
service contract; the company may be able to sue for damages.
Normally the articles do not give the board the power to remove a
director, although some specially adapted ones do. Directors can be
removed from the board by an ordinary resolution of the members.
The company must be given 28 days notice of such a resolution.
The director concerned must be notified and has the right to speak at
the meeting or to have written representations circulated to members.
2.5 Shareholdings

A director may also be a shareholder of the company. Some articles

make a minimum shareholding a pre-requisite of directorship.
Directors are required to disclose their interests in shares of the
company, which must be recorded in a register available for public
2.6 Remuneration and employment
Directors have no right to remuneration. However, most modern
forms of articles allow directors to fix their own remuneration.
Non-executive directors are normally paid fees for their part-time
service to the board. Executive directors are advised, as employees,
to have a written service contract. The Institute of Directors
produces a specimen contract which suggests that duties,
remuneration, holidays, sickness, pension and notice details should
be incorporated into a service contract. In addition, there may be
clauses requiring confidentiality and devotion from the director.
Service contracts which cannot be terminated within five years, may
not be entered into without prior approval of members. Members
also have a right to inspect directors service contracts.
2.7 Duties
The duties of a director derive from two separate sources:
Common law: Decided legal cases have established the directors
position as one of both trustee and agent. As a trustee he has a
fiduciary duty to the company. As an agent he has a duty of skill and
Statute: The Companies Act 1985 imposes a large number of duties
upon the director. These relate to accounts and auditors,
administration and transactions with the company.


3.1 Fiduciary duty

Directors are entrusted with the assets of the shareholders and should
therefore act in good faith in the best interests of the company. They
should not place themselves in a position of conflict between
personal and company interests. A director should try to avoid any
interest in contracts entered into by the company. Where such an
interest exists the director is required to make disclosure to the
The fiduciary duty of a director also excludes him gaining personally
from opportunities arising due to his directorship regardless of him
acting for the good of the company. Should any such profit arise it
must be paid over to the company.
Company law recognises the importance of a directors fiduciary duty
and has re-inforced the common law principles by including detailed
statutory requirements regarding transactions between a company
and its directors (see section 6).
3.2 Skill and care
Every director is required to exercise the degree of skill and care
expected from somebody in their position. This is, however, a
subjective matter and a director is judged by the way he applies the
skills he personally possesses. Professionally qualified directors are
required to act with the skill and care expected from a member of
their profession.
Executive directors should devote themselves absolutely to the
business of the company. Although non-executive directors attend
board meetings on a intermittent basis, they should exercise
independent judgement. Directors may rely on their peers and staff
provided they are satisfied as to the competence, honesty and
reliability of the individual concerned. However, they must not
abandon all responsibility by delegation and have a duty to ensure
that they are informed as to the progress of tasks assigned.
3.3 Breach of duty
Failure by a director to fulfil his duties constitutes a breach and the
director may have an unlimited personal liability for any loss.
Professional liability insurance is available to indemnify a director
against liability to the company and third parties.

Where the directors are also the shareholders, an action is unlikely as

the company may ratify the breach. However, certain breaches
cannot be ratified and there are also provisions to protect minority
The company has the following legal remedies if it chooses to sue:

an injunction to prevent the breach from continuing;

damages for loss suffered;
restoration of property;
repayment of secret profit;
rescission of a contract.

However, the court may find that the director has acted honestly and
reasonably and ought to be excused.


4.1 Accounting records

Many businesses fail through a lack of accurate financial
information. For this reason the Companies Act 1985 requires the
company to maintain proper accounting records which:

provide a reasonably accurate picture of the companys

financial position at any time;

enable the directors to produce the annual accounts for

shareholders in a form required by the Act.

All companies must maintain records of day-to-day money received

and paid together with records of assets and liabilities. In addition,
where goods are held, stocktaking records and summaries must be
prepared at the financial year end.
Private companies are required under the Act to retain their
accounting records for three years. However, VAT regulations state
that records must now be kept for six years and it is therefore
advisable that all records are retained for that period.
Company auditors must refer in their report to any failure to keep
adequate records.

4.2 Accounting periods

Under the Companies Act directors must prepare a profit and loss
account for each accounting period and a balance sheet as at the end
of the period. Companies must notify the Registrar of their year end
within nine months of incorporation, if they fail to do so it is taken
as the end of the month in which the anniversary of the incorporation
date falls.
The first accounting period must be of six to eighteen months in
4.3 Annual accounts
The directors of a company have a duty to produce accounts
regularly for members in order that a judgement may be made as to
how well the directors have managed the company assets.
The annual accounts include the profit and loss account, balance
sheet and supporting notes, a directors report and an auditors report.
The balance sheet is signed on behalf of the board.
The requirements relating to the content of accounts are contained in
the Companies Act. To ensure that members are given sufficient
information the disclosure rules are very strict and detailed.
Professional assistance is usually required in the preparation of the
Members must be given sight of the accounts at least twenty-one
days before the annual general meeting (see section 5.2) where the
accounts are presented. Private companies must file their accounts
within ten months of the accounting reference period. The Registrar
may prosecute directors who fail to comply with the requirements to
prepare and file accounts.
Certain small and medium sized companies can file abbreviated
accounts with the Registrar. The advantage of these accounts is that
less information is given and therefore available to the public.
However, a set of full statutory accounts must be presented to the
4.4 Auditors

Auditors are required to report to the members of the company

whether or not in their opinion the accounts give a true and fair view.
It is essential that the auditor is independent and therefore cannot be
a director or employee of the company nor a partner of those
persons. Normally auditors are professionally qualified chartered or
certified accountants.
The auditors report is attached to the accounts circulated to
members and is often read aloud at the annual general meeting (see
section 5.2). At the same time the appointment or reappointment of
the auditors is approved by the members.
There are exemptions available for certain small companies whereby
they may only need an independent examination, or indeed no
examination for very small companies.


5.1 Statutory books

A company is required by the Companies Act to maintain the
following registers:
Register of members. The register lists the names and addresses of
members, the numbers and classes of shares held and the date on
which each person was registered and ceased to be a member.
Register of directors interests. Every director is obliged to notify
the company in writing of his interest in, or of his ceasing to be
interested in the shares or debentures of the company. Any change
must be notified to the company within five days and the amendment
made to the register within three days.
Both the register of members and directors interests should be kept
at the registered office. If the registers are kept elsewhere the
Registrar should be notified.
Register of directors and secretaries. For each director an entry
should be made giving all names (and any former names), residential
address, nationality, business occupation and details of other
directorships held or previously held within the last five years.
Changes should be notified to the Registrar within fourteen days.

Register of charges. A charge is a type of security given to a

creditor. It must be registered with the Registrar within twenty-one
days. The register must contain details of the parties to and the
amount of the charge together with a description of the property
Minute books. Proceedings of general meetings and directors
meetings must be recorded in minute books. These should be signed
by the Chairman of the meeting or of the next meeting as evidence
of the proceedings.
Many small companies fail in their duty to regularly update these
statutory books. Failure to maintain the registers and minute books
is a default and every director is liable to a fine.
5.2 Meetings
Normally a company will have only one meeting with its members
each year, known as the annual general meeting (A.G.M.). Twentyone days notice in writing must be given to the members.
The ordinary business of the A.G.M. is to present the accounts to the
members, to declare a dividend, to elect and re-appoint directors and
to appoint and fix the remuneration of the auditors. Any other
business dealt with at the A.G.M. must be called special business and
be referred to in the notice of the meeting.
The first A.G.M. must be held within eighteen months of the
incorporation of the company. From that time an A.G.M. must be
held once every calendar year and no more than fifteen months after
the previous meeting. Failure to call an A.G.M. leaves the company
and every director liable to a fine.
Any other general meeting is known as an extraordinary general
meeting. Directors or 10% of members (or those holding 10% or
more of the issued share capital) may call an extraordinary general
Private companies can make elective resolutions to dispense with an
AGM and deal with related matters and, subject to certain exceptions
and conditions, can deal with general meeting business by written

5.3 The company secretary

The administrative duties are generally delegated to the company
secretary. Where there is only one director, a separate person must
be appointed as company secretary. However, generally the position
is combined with that of director.
Duties of the secretary would include convening board and
shareholders meetings, taking minutes of those meetings, filing
returns with the registrar and dealing with share transfers. In
addition the secretary normally maintains the statutory books and
witnesses the company seal when applied to documents.


6.1 Restrictions on loans

The law here is very complex and professional advice should be
sought. It is intended to prevent directors abusing their position and
borrowing money from the company.
A company is prohibited from making loans to its directors or from
guaranteeing loans to them from third parties. The restriction applies
to directors of the company and its holding company.
6.2 Permitted loans
Loans of up to 5,000 per director may be made. In addition,
directors may be provided with funds to meet expenses incurred for
the purposes of the company or in performance of their duties. Prior
approval by the members in the general meeting must be given or the
loan must be repaid within six months if not approved at the
following annual general meeting .
Quasi loans, which are indirect loans by a company to a director, are
not prohibited for private companies. Similarly the law does not
prohibit the sale of goods or services on deferred credit terms by a
private company to its directors, although there may be taxation
6.3 Disclosure of loans

The annual accounts must contain details of loans, quasi loans and
credit transactions with directors whether or not they are legal. If the
company fails to make this disclosure, the auditors must detail the
information in their report.
These disclosure requirements extend to transactions between the
company and persons or businesses connected with a director or the
company. The legal definition of connected person is very complex
but includes spouse, children, partners and companies in which the
director controls over 20% of the shares.
6.4 Substantial property transactions
Directors cannot acquire from or sell to the company non-cash assets
worth more than 100,000 or 10% of the companys net assets
without the shareholders consent. Transactions with a value of
2,000 or less are excluded from this rule. If approval in general
meeting is not obtained, the company has various remedies
depending upon the circumstances.
6.5 Material interest in contracts
A director who is interested in a contract or proposed contract with
the company must declare the nature of his interest at a meeting of
the directors. Although there is no prohibition regarding these
transactions, in most circumstances disclosure must be made in the
audited accounts.
These rules also apply to transactions between the company and
persons connected with a director.

The provisions of the Insolvency Act 1986 affect the day to day
responsibilities of directors, who may find themselves personally
liable for incompetent management should the company be

7.1 Going concern/considerations

There is no precise legal definition of insolvency. However, a
company becomes insolvent if:

it is unable to pay its debts as they fall due;

the value of its assets is less than its liabilities. The Act
includes contingent and prospective liabilities within the
definition, which makes this test of insolvency very difficult to

Directors who are concerned about their companys ability to

continue to trade should seek professional advice immediately.
In many cases it will be possible to come to an informal agreement
with creditors, to extend the bank overdraft facility or to arrange to
sell the company. However, if the cash position is critical the only
solution may be to appoint an administrative receiver, an
administrator or a liquidator.
7.2 Administrative receivership
Administrative receivers may be appointed by a creditor who has a
floating charge on the assets of a company, generally a bank. The
receiver, who acts as agent of the company, has obligations not only
to the creditor that appointed him but to all other creditors.
The duty of the receiver is to assess the companys financial position
and to recover the amount due to the creditor who appointed him.
He has no power to deal with unsecured creditors.
Receivership does not always result in liquidation, as debts may be
repaid. However, the receivers contract is terminated upon
Directors remain in office but their powers are suspended during the
receivership. It is their duty to assist the receiver in appraising the
financial position of the company and to submit to the receiver,
within twenty-one days of his appointment, a Statement of Affairs
showing assets and liabilities.
7.3 Administration
Where no debenture exists or the debenture holder refuses to appoint
an administrative receiver, the directors, company or creditors may
apply for administration. An administrator is then appointed by the
Courts. The appointment will assist the company to:

survive as a going concern;

come to an arrangement with its creditors;

secure a more advantageous realisation of assets for creditors
than a liquidation would.
The role of the administrator is very similar to that of the
administrative receiver, and the obligations of directors identical.
7.4 Liquidation
Any creditor may put a company into liquidation. Alternatively the
directors can place the company in voluntary liquidation.
The company remains in the directors control, until the appointment
of a liquidator at a shareholders meeting. Creditors must confirm
the appointment within fourteen days of the shareholders meeting.
It is essential at this stage that the directors act only under
professional advice. Duties of directors at this time include:
disposing of perishable and other goods which might decrease
in value;
protecting company assets, including freezing the company
bank account;
avoiding further credit;
preparing a Statement of Affairs;
chairing the creditors meeting.
The directors powers cease once the liquidator has been appointed.
The liquidator must secure control and realise the companys assets.
Creditors claims are agreed and funds distributed accordingly.
Finally it is the responsibility of the liquidator to look at the
companys affairs prior to his appointment. Directors are required to
assist the liquidator throughout his appointment despite their lack of
7.5 Reports on the conduct of directors
If the administrative receiver, the administrator or liquidator
considers that the conduct of a director makes him unfit to run a
company, he must report the matter to the Secretary of State.
The Secretary of State generally has two years from the date of
insolvency to apply to a court for a disqualification order. Directors

may also be disqualified following a report from an inspector

appointed under the Companies Act.
If found unfit a director may be disqualified for up to fifteen years,
with a minimum of two years where insolvency is involved.
Disqualified persons may not act as director or take part in the
management of a company. If they do so it may result in personal
liability for debts of the company in addition to being a criminal
7.6 Fraudulent and wrongful trading
Under the Companies Act fraudulent trading is committed where a
company is found to have traded with intent to defraud its creditors.
It is an offence whether or not a company is being wound up.
However few actions have been successful at it is necessary to prove
dishonest intent.
Wrongful trading applies only to directors of a company in insolvent
liquidation. It is not necessary to prove intent to defraud, but to
show that the director knew or should have concluded that
insolvency was inevitable. If the court decides that the director took
all possible steps to minimise the loss to creditors, a declaration of
wrongful trading cannot be made.
A director who is found guilty of wrongful trading is required to
make a contribution to the companys assets, which is dependent
upon his personal skills and role within the company. Directors with
financial qualifications are therefore more at risk, but ignorance is no
defence; all directors should keep themselves informed of the
companys financial position.

The position of director carries responsibilities and onerous duties.
The law is designed to penalise those who act irresponsibly and
incompetently. However, a director who acts honestly and
conscientiously, seeking professional advice where necessary, should
have nothing to fear.
This document provides only an overview of the regulations in force
at the date of publication and no action should be taken without
consulting the detailed legislation or seeking professional advice.

No responsibility for loss occasioned by any person acting or

refraining from action as a result of the material contained in this
document can be accepted by the firm.

Investor Words
Structured Finance : A service offered by many large financial
institutions for companies with very unique financing needs. These
financing needs usually don't match conventional financial products such
as a loan. Structured finance generally involves highly complex financial
Working Capital : A company's current assets minus its current liabilities
- considered a good measure of both a company's efficiency and its
financial health. A positive working capital means that the company is
able to payoff their short-term liabilities. A negative working capital
means that a company currently is unable to meet their short-term
liabilities with their current assets (cash, accounts receivable, inventory).
Also known as "net working capital".
Trade Working Capital : The difference between current assets and
current liabilities directly associated with everyday business operations.
Vendor Financing : The lending of money by a company to one of its
customers so that the customer can buy products from it. By doing this,
the company increases its sales even though it is basically buying its own
Waiver : The voluntary action of a person or party that removes that
person's or party's right or particular ability in an agreement. The waiver
can either be in written form or some form of action. A waiver essentially
removes a real or potential liability for the other party in the agreement.
Bull Market :
A financial market of a certain group of securities in
which prices are rising or are expected to rise. The term "bull market" is
most often used in respect to the stock market, but really can be applied
to anything that is traded, such as bonds, currencies, commodities, etc.

Bull markets are characterized by optimism, investor confidence and

expectations that strong results will continue. Of course, no bull market
can last forever, and sooner or later a bear market (in which prices fall)
will come. It's tough if not impossible to predict consistently when the
trends in the market will change. Part of the difficulty is that
psychological effects and speculation can sometimes play a large (if not
dominant) role in the markets. The extreme on the high end is a stockmarket bubble, and on the low end a crash.
Bull : An investor who thinks the market, a specific security or an
industry will rise.
Accounting Rate of Return ARR : ARR provides a quick estimate of a
project's worth over its useful life. ARR is derived by finding profits
before taxes and interest.
Accounts Payable Turnover Ratio : A short-term liquidity measure
used to quantify the rate at which a company pays off its suppliers.
Accounts payable turnover ratio is calculated by taking the total
purchases made from suppliers and dividing it by the average accounts
payable amount during the same period.
Accounts Receivable AR : Money owed by customers (individuals
or corporations) to another entity in exchange for goods or services that
have been delivered or used but not yet paid for. Accounts receivable
usually come in the form of operating lines of credit and are usually due
within a relatively short time period, ranging from a few days or weeks to
a year.
Accrued Expense : An accounting expense recognized in the books
before it is paid for. It is a liability, usually current. These expenses are
typically periodic and documented upon a company's balance sheet due to
the high probability of collection.
Accrued Interest : The interest that has accumulated on a bond since the
last interest payment up to but not including the settlement date.
There are two methods for calculating accrued interest:
1) 360-day year method, used for corporate and municipal bonds.
2) 365-day year method, used for government bonds.
Acid-Test Ratio

A stringent test that indicates if a firm has enough short-term assets

to cover its immediate liabilities without selling inventory. The acid-test
ratio is far more strenuous than the working capital ratio, primarily
because the working capital ratio allows for the inclusion of inventory
Calculated by:

Acquisition:When one company purchases a majority interest in the

American Depository Receipt ADR : A negotiable certificate issued by
a U.S. bank representing a specified number of shares (or one share) in a
foreign stock that is traded on a U.S. exchange. ADRs are denominated in
U.S. dollars, with the underlying security held by a U.S. financial
institution overseas, and help to reduce administration and duty costs on
each transaction that would otherwise be levied.
American Depository Share - ADS
A share issued under deposit agreement that represents an
underlying security in the issuer's home country.
Amortization : 1. The paying off of debt in regular installments over a
period of time.
2. The deduction of capital expenses over a specific period of time.
Similar to depreciation, it is a method of measuring the consumption of
the value of long-term assets like equipment or buildings.
Annual General Meeting AGM : A mandatory yearly meeting of
shareholders that allows stakeholders to stay informed and involved with
company decisions and workings.
The simultaneous purchase and selling of an asset in order to profit from
a differential in the price. This usually takes place on different exchanges
or marketplaces. Also known as a "riskless profit".

Articles of Incorporation : A set of documents filed with a government

body for the purpose of legally documenting the creation of a corporation.
Also referred to as the "corporate charter."
Auditor's Report : Recorded in the annual report, the auditor's report tests
to see that a corporation's financial statements comply with GAAP. This
is sometimes referred to as the clean opinion.
Average Annual Return AAR : A figure used when reporting the
historical return of a mutual fund. The AAR is stated after expenses have
been tallied, including administration fees, 12b-1 fees, and others
Back Door Listing : A strategy of going public used by a company that
fails to meet the criteria for listing on a stock exchange. To get onto the
exchange, the company desiring to go public acquires an already listed
Business Risk : The risk that a company will not have adequate cash flow
to meet its operating expenses.
Bid : 1. An offer made by an investor, a trader or a dealer to buy a
security. The bid will stipulate both the price at which the buyer is willing
to purchase the security and the quantity to be purchased.
2. The price at which a market maker is willing to buy a security. The
market maker will also display an ask price, or the amount and price at
which it is willing to sell.
This is the opposite of the ask, which stipulates the price a seller is
willing to accept for a security and the quantity of the security to be sold
at that price.
1. An example of a bid in the market would be $23.53 x 1,000, which
means that an investor is willing to purchase 1,000 shares at the price of
$23.53. If a seller in the market is willing to sell that amount for that
price, then the transaction is completed.
2. Market makers are vital to the efficiency and liquidity of the
marketplace. By quoting both bid and ask prices on the market, they
always allow investors to buy or sell a security if they need to.

Board of Directors - B of D : A group of individuals who are elected by

stockholders to establish corporate management policies and make
decisions on major company issues, such as dividend policies.
These are the people who make decisions on your behalf for the
company you invest in.
Every pub Bond Rating : A specification of a bond issuer's probability of
defaulting based on an analysis of the issuer's financial condition and
profit potential.
Bond rating services are provided by Standard & Poor's, Moody's
Investors Service, and Fitch Investors Service.
Bond ratings start at AAA (denoting the highest investment quality) and
usually end at D (meaning payment is in default). lic company must have
a board of directors.
Break-Even Point - BEP : 1. In general, the point at which gains equal
2. In options, the market price that a stock must reach for option buyers to
avoid a loss if they exercise. For a call, it is the strike price plus the
premium paid. For a put, it is the strike price minus the premium paid.
For businesses, reaching the break-even point is the first major step
towards profitability
Call Option : An agreement that gives an investor the right (but not the
obligation) to buy a stock, bond, commodity, or other instrument at a
specified price within a specific time period
Capital Adequacy Ratio (CAR) : A measure of a bank's capital. It is
expressed as a percentage of a bank's risk weighted credit exposures.
This ratio is used to protect depositors and promote the stability and
efficiency of financial systems around the world.
Two types of capital are measured: tier one capital, which can absorb
losses without a bank being required to cease trading, and tier two capital,
which can absorb losses in the event of a winding-up and so provides a
lesser degree of protection to depositors.

Capital Budgeting : The process of determining whether or not projects

such as building a new plant or investing in a long-term venture are
worthwhile. Popular methods of capital budgeting include net present
value (NPV), internal rate of return (IRR), discounted cash flow (DCF),
and payback period.
Also known as investment appraisal.
Capital Loss : The loss incurred when a capital asset (investment or real
estate) decreases in value. This loss is not realized until the asset is sold
for a price that is lower than the original purchase price.
A capital loss is essentially the difference between the purchase price and
the price at which the asset is sold, where the sale price is lower then the
purchase price.
For example, if an investor bought a house for $250,000 and five
years later sells the house for $200,000. The investor would
realize a capital loss of $50,000.
Capital Markets : Markets where capital, such as stocks and bonds, are
Capital markets are used by companies to raise additional funds.
Capitalization : 1. In accounting, it is where costs to acquire an asset are
included in the price of the asset.
2. The sum of a corporation's stock, long-term debt and retained earnings.
Also known as "invested capital".
3. A company's outstanding shares multiplied by its share price, better
known as "market capitalization".
Capitalization Rate : According to the Appraisal Institute, it is a method
used to convert an estimate of a single year's income expectancy into an
indication of value in one direct step, by dividing the income estimate by
an appropriate rate.
Also known as the cap rate. The relationship between Cap Rate (R),
Income (I), and Estimated Value (V) is as follows:

Cash Earnings Per Share - Cash EPS : A ratio derived from operating
cash flow divided by diluted shares outstanding.
Sometimes you may see cash EPS defined as either EPS plus
amortization of goodwill and other intangible items or net income plus
depreciation divided by outstanding shares.
Whatever the definition, the point of cash EPS is to be a stricter number
than other flavors of EPS because cash flow cannot be manipulated as
easily as net income can.
Cash Flow Statement : One of the quarterly financial reports any
publicly traded company is required to disclose to the SEC and the
public. The document provides aggregate data regarding all cash inflows
a company receives from both its ongoing operations and external
investment sources, as well as all cash outflows that pay for business
activities and investments during a given quarter.
Because public companies tend to use accrual accounting, the income
statements they release each quarter may not necessarily reflect changes
in their cash positions. For example, if a company lands a major contract,
this contract would be recognized as revenue (and therefore income), but
the company may not yet actually receive the cash from the contract until
a later date. While the company may be earning a profit in the eyes of
accountants (and paying income taxes on it), the company may, during
the quarter, actually end up with less cash than when it started the quarter.
Even profitable companies can fail to adequately manage their cash flow,
which is why the cash flow statement is important: it helps investors see
if a company is having trouble with cash.
Chapter 10 : Named after the U.S. bankruptcy code 10, chapter 10
discusses how a company can file for court protection.
Under Chapter 10 provisions a company is subjected to reorganization.
Chapter 11 : Named after the U.S. bankruptcy code 11, chapter 11 is a
form of bankruptcy that involves a reorganization of a debtor's business

affairs and assets. It is generally filed by corporations which require time

to restructure their debts.
Chapter 11 gives the debtor a fresh start, subject to the debtor's
fulfillment of its obligations under its plan of reorganization.
A Chapter 11 reorganization is the most complex of all bankruptcy cases
and generally the most expensive. It should be considered only after
careful analysis and exploration of all other alternatives.
Chapter 7 : A bankruptcy proceeding where a company stops all
operations and goes completely out of business. A trustee is appointed to
liquidate (sell) the company's assets, and the money is used to pay off
The investors who take the least risk are paid first. For example, secured
creditors take less risk because the credit that they extend is usually
backed by collateral, such as a mortgage or other asset of the company.
Next in line are the unsecured creditors, and then the investors. We call
this phenomenon "absolute priority."
Generally Accepted Accounting Principles - GAAP : The common set
of accounting principles, standards and procedures that companies use to
compile their financial statements. GAAP is a combination of
authoritative standards (set by policy boards) and simply the commonly
accepted ways of recording and reporting accounting information.
Portfolio management : The process of managing the assets of a mutual
fund, including choosing and monitoring appropriate investments and
allocating funds accordingly.
Mutual fund: An open-ended fund operated by an investment company
which raises money from shareholders and invests in a group of assets, in
accordance with a stated set of objectives. Mutual funds raise money by
selling shares of the fund to the public, much like any other type of
company can sell stock in itself to the public.
Price/earnings ratio: The most common measure of how expensive a
stock is. The P/E ratio is equal to a stock's market capitalization divided
by its after-tax earnings over a 12-month period, usually the trailing
period but occasionally the current or forward period. The value is the
same whether the calculation is done for the whole company or on a pershare basis.

Poison pill: Any tactic by a company designed to avoid a hostile

takeover. One example is the issuance of preferred stock that gives
shareholders the right to redeem their shares at a premium after the
Debt/equity ratio: A measure of a company's financial leverage.
Debt/equity ratio is equal to long-term debt divided by common
shareholders' equity. Typically the data from the prior fiscal year is used
in the calculation. Investing in a company with a higher debt/equity ratio
may be riskier, especially in times of rising interest rates, due to the
additional interest that has to be paid out for the debt.
Diluted earnings per share: Earnings per share, including common
stock, preferred stock, unexercised stock options, unexercised warrants,
and some convertible debt. In companies with a large amount of
convertibles, warrants and stock options, diluted earnings per share are
usually a more accurate measure of the company's real earning power
than earnings per share.
Spin-off: An independent company created from an existing part of
another company through a divestiture, such as a sale or distribution of
new shares.
Bridge financing: Financing extended to a person, company, or other
entity, using existing assets as collateral in order to acquire new assets.
Bridge financing is usually short-term.
Puttable Common Stock: Common stock that gives investors the option
to put the stock back to the company at a predetermined price.
With puttable common stock, investors have the option of selling their
shares back to the issuer at a predetermined price. Typically, this price is
relatively low, so the option to put acts merely as a type of insurance for
investors, sweetening the security.
Seed Capital: The initial equity capital used to start a new venture or
This initial amount is usually quite small because the venture is still in
the idea or conceptual stage. Also, there's a high risk that the venture will

Balanced Fund: A mutual fund that invests its assets into the money
market, bonds, preferred stock, and common stock with the intention to
provide both growth and income. Also known as an asset allocation fund.
A balanced fund is geared towards investors looking for a mixture of
safety, income, and capital appreciation. The amount the mutual fund
invests into each asset class usually must remain within a set minimum
and maximum.
Underwriter: A company or other entity that administers the public
issuance and distribution of securities from a corporation or other issuing
body. An underwriter works closely with the issuing body to determine
the offering price of the securities buys them from the issuer and sells
them to investors via the underwriter's distribution network.
Underwriters generally receive underwriting fees from their issuing
clients, but they also usually earn profits when selling the underwritten
shares to investors. However, underwriters assume the responsibility of
distributing a securities issue to the public. If they can't sell all of the
securities at the specified offering price, they may be forced to sell the
securities for less than they paid for them, or retain the securities
Gross Domestic Product GDP: The monetary value of all the goods
and services produced by an economy over a specified period. It includes
consumption, government purchases, investments, and exports minus
This is perhaps the best indicator of the economic health of a country. It
is usually measured annually; although, monthly stats are also released.
Factor: A financial intermediary that purchases receivables from
2. In terms of mortgages, the ratio of principal outstanding to the original
The sale of accounts receivables is called factoring.
Code sharing: Code sharing is a business term which first originated in
the airline industry. It refers to a practice where a flight operated by an
airline is jointly marketed as a flight for one or more other airlines. Most
if not all major airlines nowadays have code sharing partnerships with
other airlines, and code sharing is a key feature of the major airline

Going Concern: A term for a company that has the resources needed in
order to continue to operate. If a company is not a going concern, it
means the company has gone bankrupt.
Investopedia Says: In other words, this refers to a company's ability to
make enough money to stay afloat. For example, many dotcoms are no
longer a going concern.
Liquidation: When a business or firm is terminated or bankrupt, its assets
are sold and the proceeds pay creditors. Any leftovers are distributed to
2. Any transaction that offsets or closes out a long or short position.
Investopedia Says: Creditors liquidate assets to try and get as much of the
money owed to them as possible. They have first priority to whatever is
sold off. After creditors are paid, the shareholders get whatever is left
with preferred shareholders having preference over common
Lockup period: An interval during which an investment may not be sold.
In the case of an IPO, employees may not sell their shares for a period
time determined by the underwriter and usually lasting 180 days.
Rights issue: In equities, a rights issue can be made when a company
wants to issue new shares. The company gives existing shareholders the
right to purchase new shares in proportion to their existing holding, so as
to avoid dilution. Shares are usually offered at a discount, and most
investors take up the offer of a rights issue.
Depletion: The reduction of the value of the assets of a company engaged
in removing natural resources (as by mining) because of the decrease
over time of the natural resources (as coal) available in or on the land
being worked
The Calendar effect : The Calendar effect describes the tendency of
stocks to perform differently at different times, including performance
anomalies like the January effect, month-of-the-year effect, day-of-theweek effect, and holiday effect. While certainly not an indicator that
should be relied upon as the primary source for trading, systems like our
Options Trading System often do consider such effects when determining
whether to hold a position into a long weekend, through an options
expiration period, etc.

Commercial Paper : An unsecured obligation issued by a corporation or

bank to finance its short-term credit needs, such as accounts receivable
and inventory. Maturities typically range from 2 to 270 days. Commercial
paper is available in a wide range of denominations, can be either
discounted or interest-bearing, and usually have a limited or nonexistent
secondary market. Commercial paper is usually issued by companies with
high credit ratings, meaning that the investment is almost always
relatively low risk.
Credit Rating : An assessment of the credit worthiness of individuals
and corporations. It is based upon the history of borrowing and
repayment, as well as the availability of assets and extent of liabilities.
Credit is important since individuals and corporations with poor credit
will have difficulty finding financing, and will most likely have to pay
more due to the risk of default.
Letter of Credit : A letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount.
In the event that the buyer is unable to make payment on the purchase the
bank will be required to cover the full or remaining amount of the
Book Building : The process by which an underwriter attempts to
determine at what price to offer an IPO based on demand from
institutional investors.
Excise Duty : An indirect tax charged on the sale of a particular good.
SEBI :The regulatory body for the investment market in India. The
purpose of this board is to maintain stable and efficient markets by
creating and enforcing regulations in the market place. The Securities and
Exchange Board of India is similar to the U.S. SEC. The SEBI is
relatively new (1992) but is a vital component in improving the quality of
the financial markets in India both to attract foreign investors and to
protect Indian investors.
Meetings : Classified under three categories
1. Share Holders Meetings
2. Board Meetings

3. Meeting of Board Commitees

Share Holders Meetings are of three types

1. Statutory Meeting
2. Annual General Meeting
3. Extra-Ordinary General Meeting

Quorum: The minimum acceptable level of individuals with a vested

interest in a company needed to make the proceedings of a meeting valid
under the corporate charter.
Proxy: An agent legally authorized to act on behalf of another party.
Shareholders not attending a company's annual meeting may choose to
vote their shares by proxy by allowing someone else to cast votes on their
Qualification Shares : It shall be the duty of every director who is
required by the articles of the company to hold a specified share
qualification and who is not already qualified in that respect, to obtain his
qualification within two months after his appointment as director. The
nominal value of the qualification shares shall not exceed five thousand
rupees, or the nominal value of one share where it exceeds five thousand
Futures : A financial contract obligating the buyer to purchase an asset
(or the seller to sell an asset), such as a physical commodity or a financial
instrument, at a predetermined future date and price. Futures contracts
detail the quality and quantity of the underlying asset; they are
standardized to facilitate trading on a futures exchange. Some futures
contracts may call for physical delivery of the asset, while others are
settled in cash. The futures markets are characterized by the ability to use
very high leverage relative to stock markets.
Institutional Investor : A non-bank person or organization that trades
securities in large enough share quantities or dollar amounts that they
qualify for preferential treatment and lower commissions. Institutional
investors face less protective regulations because it is assumed that they
are more knowledgeable and better able to protect themselves.

Disinvestment : 1. The action of an organization or government selling

or liquidating an asset or subsidiary. Also known as "divestiture".
2. A reduction in capital expenditure, or the decision of a company not to
replenish depleted capital goods.
Balance of Payments : A record of all transactions made by one
particular country during a certain period of time. It compares the amount
of economic activity between a country and all other countries..
Diversification: A risk management technique that mixes a wide variety
of investments within a portfolio. It is designed to minimize the impact of
any one security on overall portfolio performance.
Capital Lease : A lease considered to have the economic characteristic of
asset ownership.
Operating Lease : A lease contract that allows the use of an asset, but
does not convey rights similar to ownership of the asset.
Market Segmentation : A marketing term describing the aggregating of
prospective buyers into groups (segments) that have common needs and
will respond similarly to a marketing action.
What is Reverse Book Building (Delisting of shares)? : The Reverse
Book Building is a mechanism provided for capturing the sell orders on
online basis from the share holders through respective Book Running
Lead Managers (BRLMs) which can be used by companies intending to
delist its shares through buy back process. In the Reverse Book Building
scenario, the Acquirer/Company offers to buy back shares from the share
holders. The Reverse Book Building is basically a process used for
efficient price discovery. It is a mechanism where, during the period for
which the Reverse Book Building is open, offers are collected from the
share holders at various prices, which are above or equal to the floor
price. The buy back price is determined after the offer closing date.

What is Anti Dumping Duty? : Where any article is exported from any
country or territory to India at less than its normal value then upon the
importation of such article to India the central Govt. may be notification
in the official gazette impose an anti dumping duty not exceeding the
margin of dumping in relation to such article. For purpose of
identification, assessment and collection of Anti Dumping Duty on
dumped articles and for determination of injury, the Govt. has appointed
Additional Secretary to the Govt. of India Ministry of Commerce as
designated Authority for purpose of above rules.
It is to be understood that imposition of Anti Dumping Duty is based on
Commodity to Commodity, country to country and suppliers in Exporting
Capital Budgeting Techniques : There are a number of capital
budgeting techniques available to an analyst. For our purposes, we will
only review net present value and internal rate of return.
Net Present Value : The Net Present Value technique involves
discounting net cash flows for a project, then subtracting net investment
from the discounted net cash flows. The result is called the Net Present
Value(NPV). If the net present value is positive, adopting the project
would add to the value of the company. Whether the company chooses to
do that will depend on their selection strategies. If they pick all projects
that add to the value of the company they would choose all projects with
positive net present values, even if that value is just $1. On the other
hand, if they have limited resources, they will rank the projects and pick
those with the highest NPV's.
Internal Rate of Return : The internal rate of return (IRR) on a project
is the rate of return where the cash inflows (net cash flows) equals the
cash outflows (net investment.) The easiest way to find IRR is to use a
financial calculator or spreadsheet program.
Portfolio Management : The art and science of making decisions about
investment mix and policy, matching investments to objectives, asset
allocation for individuals and institutions, and balancing risk vs.
Investopedia Says: Portfolio management is all about strengths,
weaknesses, opportunities, and threats in the choice of debt vs. equity,
domestic vs. international, growth vs. safety, and numerous other tradeoffs encountered in the attempt to maximize return at a given appetite for

Activity Based Budgeting - ABB : A method of budgeting in which

activities that incur costs in each function of an organization are
established and relationships are defined between activities. This
information is then used to decide how much resource should be allocated
to each activity.
Investopedia Says: Basically, ABB is budgeting by activities rather than
by cost elements.
cap/floor : A cap (floor) is a predetermined maximum (minimum) payoff
level of a derivative.
For example, an interest rate swap with a cap (floor) places a maximum
(minimum) on the interest rate paid on the floating rate leg. When this
kind of swap has both a cap and a floor, it is said to have a "collar". The
key feature of portfolio insurance is the floor it places on loses.
What is a nominee director/manager? : The term is meant to imply that
a client or clients who are the majority shareholders or majority member
certificate holders, have nominated Nevada First Holdings to appoint a
Director or Managing Member and oversee that the Director/Manager
completes their responsibilities. At NFH we are proud to offer
Professional Director/Manager Services. It is important to understand
that Directors/Managers have a responsibility to the
shareholders/certificate holders that all legal responsibilities of the
mangers of the business have been reported annually and that their
responsibilities according to the By-Laws/Operating Agreement have
been satisfied.
Sec 313

Appointment and term of office of alternate directors.

The Board of directors of a company may, if so authorised by its articles

or by a resolution passed by the company in general meeting, appoint an
alternate director to act for a director (hereinafter in this section called
"the original director") during his absence for a period of not less than
three months from the State in which meetings of the Board are ordinarily

Intangible Asset : An asset that is not physical in nature.

Investopedia Says: Examples are things like copyrights, patents,

intellectual property, and goodwill. These are the opposite of tangible

for Financial Statement Analysis
Liquidity Analysis Ratios
Current Ratio
Current Assets
Current Ratio = -----------------------Current Liabilities
Quick Ratio
Quick Assets
Quick Ratio = ---------------------Current Liabilities
Quick Assets = Current Assets - Inventories
Net Working Capital Ratio
Net Working Capital
Net Working Capital Ratio = -------------------------Total Assets
Net Working Capital = Current Assets - Current Liabilities
Profitability Analysis Ratios
Return on Assets (ROA)
Net Income
Return on Assets (ROA) = ---------------------------------Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Return on Equity (ROE)
Net Income
Return on Equity (ROE) = -------------------------------------------Average Stockholders' Equity

Average Stockholders' Equity

= (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2
Return on Common Equity (ROCE)
Net Income
Return on Common Equity (ROCE)
Average Common Stockholders' Equity
Average Common Stockholders' Equity
= (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2
Profit Margin
Net Income
Profit Margin = ----------------Sales
Earnings Per Share (EPS)
Net Income
Earnings Per Share (EPS) = --------------------------------------------Number of Common Shares Outstanding

Activity Analysis Ratios

Assets Turnover Ratio
Assets Turnover Ratio = ---------------------------Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio = ----------------------------------Average Accounts Receivable
Average Accounts Receivable
= (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Inventory Turnover Ratio

Cost of Goods Sold
Inventory Turnover Ratio = --------------------------Average Inventories
Average Inventories = (Beginning Inventories + Ending Inventories) / 2
Capital Structure Analysis Ratios
Debt to Equity Ratio
Total Liabilities
Debt to Equity Ratio = ---------------------------------Total Stockholders' Equity
Interest Coverage Ratio
Income Before Interest and Income Tax Expenses
Interest Coverage Ratio = ------------------------------------------------------Interest Expense
Income Before Interest and Income Tax Expenses
= Income Before Income Taxes + Interest Expense
Capital Market Analysis Ratios
Price Earnings (PE) Ratio
Market Price of Common Stock Per Share
Price Earnings (PE) Ratio
Earnings Per Share
Market to Book Ratio
Market Price of Common Stock Per Share
Market to Book Ratio = ------------------------------------------------------Book Value of Equity Per Common Share
Book Value of Equity Per Common Share
= Book Value of Equity for Common Stock / Number of Common Shares
Dividend Yield

Annual Dividends Per Common Share

Dividend Yield =-----------------------------------------------Market Price of Common Stock Per Share
Book Value of Equity Per Common Share
= Book Value of Equity for Common Stock / Number of Common Shares
Dividend Payout Ratio
Cash Dividends
Dividend Payout Ratio = -------------------Net Income

ROA = Profit Margin X Assets Turnover Ratio

ROA = Profit Margin X Assets Turnover Ratio
Net Income
Net Income
ROA = ------------------------ =
-------------- X
Average Total Assets

-----------------------Average Total Assets

Profit Margin = Net Income / Sales

Assets Turnover Ratio = Sales / Averages Total Assets

Initial Public Offering

The first sale of stock by a private company to the public. IPOs are often issued by smaller,
younger companies seeking capital to expand, but can also be done by large privately-owned
companies looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine
what type of security to issue (common or preferred), best offering price and time to bring it to
Also referred to as a "public offering".

Going Public
The process of selling shares that were formerly privately held to new investors for the first
time. Otherwise known as an initial public offering (IPO).

Public Offering
The sale of equity shares or other financial instruments by an organization to the public in
order to raise funds for business expansion and investment. Public offerings of corporate
securities in the U.S. must be registered with and approved by the SEC and are normally
conducted by an investment underwriter

General Public Distribution

A type of primary market offering in which the securities being issued are available to anyone
who has the ability to purchase them. This differs from conventional public distributions of
securities in which underwriting investment banks sell large blocks of the issued securities to
large investors.

Deal Flow
The rate at which new proposals are flowing to the underwriters of an investment bank.
Proposals include initial public offerings (IPO) of securities, takeovers, acquisitions, and

A situation in which the demand for an initial public offering of securities is less than the
number of shares issued. Also known as an "underbooking".

An initial public offering that appeals to many investors and for which there is great demand.
Hot IPOs are often oversubscribed - meaning market demand far exceeds the supply of
shares - which results in the stock price surging as soon as it is offered on the market.

Preliminary Prospectus

A first draft registration statement filed by a firm prior to proceeding with an initial public
offering of securities. The document, filed with the Securities & Exchange Commission, is
intended to provide pertinent information to prospective shareholders about the company's
business description, management, strategic initiatives, financial statements and ownership

Closed-End Management
An investment-management company that sells a limited number of shares to investors on an
exchange by way of an initial public offering. For investors to sell the shares they purchased
from the closed-end management company, there must be buyers willing to buy the
shares at a price determined by the market. The most common type of closed-end
management company is a closed-end mutual fund.

Baptism of Fire
A difficult situation that a company or individual experiences that will result in either success
or failure. Examples include Initial Public Offerings (IPOs), a new CEO hired to manage a
struggling company, and hostile takeover attempts.

Public Offering Price POP

The price at which new issues are offered to the public by an underwriter.

Assets that can be traded in a public market, such as the stock market.

In the context of finance, a company that has a management team with enough strength and
experience to run a public company. It's imperative for Wall Street to have confidence in a
companys management; otherwise it will be difficult, if not impossible, for that company to go

Installment Receipt
A debt or equity issuance in which the purchaser does not pay the full value of the issue up
front. In the purchase of an installment receipt, an initial payment is made to the issuer at the
time the issue closes; the remaining balance must be paid in installments, usually within a

two-year period . Although the purchaser has not paid the full value of the issue, he or she is
still entitled to full voting rights and dividends.
This type of debt or equity financing is most attractive to issuers that are unable to get an
attractive price for more traditional financing techniques, such as a traditional initial public
offering (IPO).

Cheap Stock
The illegal practice of issuing stock options at artificially low prices shortly before an initial
public offering.
Often underwriters will require a company to have more qualified management before they
can go public. They attract these qualified individuals by giving options with a low exercise

IPO Lock-up
A legally binding contract between the underwriters and insiders of the company undergoing
an initial public offering (IPO). The contract prevents them from selling any shares of stock for
a specified period of time
When lock-ups expire, restricted people are permitted to sell their stock. This sometimes
results in a drastic drop in share price.

Grey Market
1. A market where a product is bought and sold outside of the manufacturer's authorized
trading channels.
2. The unofficial trading of a company's shares, usually before they are issued in an
initial public offering (IPO

Follow-On Offering
An offering of additional shares after a company has had an initial public offering

Godfather Offer
An irrefutable takeover offer made to a target company by an acquiring company.
The Godfather offer is usually extremely generous, so if the target company refuses,
shareholders may initiate lawsuits or other forms of revolt against the target company.

Like the Godfather in the famous movies, the bidding company is essentially making an offer
the target company cannot refuse.

Public Elevator
A grain elevator that, for an associated fee, stores the bulk grain of public clients.

Back Door Listing

A strategy of going public used by a company that fails to meet the criteria for listing on a
stock exchange. To get onto the exchange, the company desiring to go public acquires an
already listed company.

Dog And Pony Show

A slang term referring to a financial seminar that presents new products or issues of securities
to potential buyers

Back Stop
The act of providing last-resort support or security in a securities offering for the unsubscribed
portion of shares. A company will try and raise capital through an issuance and to guarantee
the amount received through the issue, the company will get a back stop from an underwriter
or major shareholder to buy any of the unsubscribed shares

Tender Offer
An offer to purchase some or all of shareholders' shares in a corporation. The price offered is
usually at a premium to the market price.

Direct Public Offering DPO

Where a company raises capital by marketing its shares directly to its own customers,
employees, suppliers, distributors and friends in the community. DPOs are an alternative to
underwritten public offerings by securities broker-dealer firms where a company's shares are
sold to the broker's customers and prospects.


The perception that a firms attempt to raise capital by selling equity or debt through a private
or public offering is an act of desperation. When a company's management 'overshops' a
financing deal, it leaves investment banks, bridge financiers, lenders and private equity
groups wondering why they should be the ones to take on the risk of financing a project that
others have rejected.

Gray Market
1. An unofficial market where new issues of shares are bought and sold before they
become officially available for trading on the stock exchange.
2. The sale or import of goods by unauthorized dealers.

Brought Over The Wall

The situation of an employee in the research department of an investment bank - usually a
research analyst - who has been brought over to work for the underwriting department with a
focus on a particular company. The purpose of this transfer is to add a knowledgeable opinion
to the underwriting process, thereby adding value to it. Also known as "brought over the
Chinese Wall".

Tracking Stock
1. Common stock issued by a parent company that tracks the performance of a
particular division without having claim on the assets of the division or the parent
company. Also known as "designer stock".
2. A type of security specifically designed to mirror the performance of a larger index.

A sales book created by an investment bank/firm that details the main attributes of the firm.
The pitchbook is used by the firm's sales force to aid it with selling products and issues, and
generating new clients.