Series 7 (chapter 14)
Terms
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- supply-side economics
- holds that government should allow market forces to determine prices of all goods; reduced government spending as well as taxes
- special situation stocks
- are stocks of a company with unusual profit potential resulting from nonrecurring circumstances, such as new managment, the discovery of valuable natural resources on corporate property, or the introduction of a new product
- accrued wages payable
- unpaid wages, salaries, commissions, and interest
- financial leverage
- is a company's ability to use long -term debt to increase its return on equity
- financial statements
- provides a fundamental analyst with the raw material needed to assess the corporation's profitability, financial strength. and operating efficency
- cyclical industries
- are highly sensative to business cycles and inflation trends; most of these industries produce durable goods, such as heavy machinery, and raw materials, such as steel and automobiles
- coincident indicators
- are those measurable factor that vary directly and simultaneously with the business cycle; they confirm where an economy is
- balance of trade
- the export and import of merchandise
- short interest
- refers to the number of shares that have been sold short; because short positions must be repurchased eventually, some analysts believe that short interest reflects mandatory demand, which creates a support level for stock prices.
- current long-term debt
- any portion of long-term debt due within 12 months
- common stock ratio
- common shareholders' equity divided by total capitalization
- deficit
- with regard to trade; more money flowing out of the country than in
- expanison
- is characterized by increased business activity - increasing sales, manufacturing, and wages - througout the economy; for a variety of reasons an economy only expand for so long
- liquidity ratios
- measures the firm's ability to meet its current financial obligations
- Book Value per Share
- assets minus liabilities minus intangibles minus per value of perferred stock divided by shares of common stock outstanding
- reversal trend
- indicates that a upward or downward trendline has haleted and the stock's price is moving in the opposite direction
- lagging indicators
- are those factors that change after the economy has begun a new trend but serve as confirmation of the new trend
- current assets
- current assets include all cash and other items expected to be converted into cash within the next 12 months
- dividend payout ratio
- annaul dividends per common share divided by earnings per share (EPS)
- market timers
- they are technical analysts
- gross domestic product (GDP)
- a nations annual economic output- all of the goods and services produced within the nation
- additional paid in capital
- (paid-in surplus) is the amount of money over par value that a company received for selling stock
- odd-lot trading
- believe that these small investors investors invariably buy and sell at the wrong times. When the odd-lot traders buy, odd-lot anaylysts are bearish. When odd-lot traders sell, odd-lot traders are bullish.
- retained earnings
- sometimes called earned surplus, are profits that have not been paid out in dividends; represents the total of all earnings held since the corporation was formed, less dividends paid to stockholders.
- notes payable
- the balance due on equipment purchased on credit or cash borrowed
- acid-test ratio
- quick assets divided by current liabilities
- capitalization
- is the combined sum of its long-term debt and equity accounts.
- balance of payments
- with regard to trade; the flow of money between the United States and other countries
- economics
- the study of supply and demand
- technical analysis
- attempts to predict the direction of prices on the basis of historic price and trading volume patterns when laid out graphically on charts
- leverage
- is the use of long-term debt financing to increase earnings
- saucer
- because of it's gentle curving shape, an easily identifiable reversal pattern
- efficient market theory
- which holds that the stock market is perfectly efficient, with prices reflecting all known information at any given time; it is impossible therefor, to beat the market using fundamental or technical analysis
- accounts receivable
- amounts due from customers for goods delivered or service rendered, reduced by the allowance for bad debts
- bullish breakout
- a rise through resistance level
- federal fund rate
- the interest rate banks charge each other for loans
- debt service ratio
- EBIT divided by annual interest + principal payments
- head-and-shoulders
- named for its resemblence to the human body; indicates the beginning of a bearish trend in thes tock
- current yield
- annual dividends per common share divided by market value per common share
- depreciation
- is the declining value of fixed assets, such as buildings, equipment, and machinery, wear out as they are used.
- preferred stock ratio
- preferred stock divided by total capitalization
- bond ratio
- long term liabilites divided by total capitalization
- accounts payable
- amounts owed to suppliers of materials and other business costs
- disintermediate
- is the flow of money from traditional, low yielding savings accounts to higher-yielding investments in the markeplace without a bank acting as an intermediary or middleman;often takes place when the FRB tightens the money supply and interest rates rise.
- resistance level
- stock prices may move within a narrow range for months or even years; this is the top of that trading range
- fundamental analysis
- concentrate on the broad-based economic trends; current business conditions within an industry; and the quality of a particular corporation's business, finances, and management
- PE ratio
- current market price of common share divided by earnings per share (EPS)
- fixed assets
- typically property, plants and equipment; not readily converted to cash
- market breadth
- the number of issues closing up or down on a specified day
- quick assets
- current assets - liabilities
- monetarist economic theory
- Milton Friedman; believe the quantity of money, the money supply, is the major determinant of price levels. Too many dollars chasing too few goods leads to inflation; too few dollars chasing too many goods leads to deflation
- accrued taxes
- unpaid federal, state, and local taxes
- federal funds
- all money commercial banks deposit at Federal Reserve Banks, including, money exceeding the reserve requirement
- deflation
- is the general decrease in prices
- operating income
- is a company's profits from business operations before interest and taxes
- growth phase
- when the industry is growing faster than the economy as a whole because of technological changes, new products, or changing consumer tastes.
- M3
- includes time deposits of more than $100,000 and repurchase agreements with terms longer than one day
- capital structure
- is the relative amounts of debt and quity that compose a company's capitalization; some companies fund with debt while other fund with earnings
- cash and equivalents
- cash and short-term safe investments (such as money market instruments) that can be sold readily, as well as other market securities
- working capital
- is the amount of capital or cash a company has available; therefore a measure of a firm's liquidity; its ability to quickly turn assets into cash to meet its short-term obligations
- excess reserves
- (federal funds) borrowed from another bank
- support level
- stock prices may move within a narrow range for months or even years; this is the bottom of that trading range
- M2
- includes some time deposits (less than $100,000) that are fairly easy to convert into demand deposits; savings accounts, nonnegotiable CDs, money market funds, and overnight repurchase agreements
- market trading volume
- substantially above normal signifies or confirms a pattern in the direction of prices; if overall volume has been listless for months and suddenly jumps significantly, a technical analyst views that as the beginning of a trend
- long-term liabilities
- are financial obligations due for payment after 12 months. (mortgages or real estate)
- random walk theory
- is an academic theory maintaining that the direction of stock or market prices is unpedictable; the hypothesis is based on efficent market theory.
- trough
- when business activity stops declining and levels off
- shareholders equity
- is the stockholder's claims on a company's assets after all of its creditors have been paid
- reserve requirement
- commerical banks must deposit a certain percentage of their depositors' money with the Federal Reserve
- par value
- is the total dollar value assigned to stock certificates when a corporation's owners (the stockholders) first contributed capital; no relationship to market price
- current liabilities
- are coporate debt obligations due for payment within the next 12 months
- highly leveraged
- a company with a high ratio of long-term debt to equity
- inverted saucer
- reversal of an uptrend
- consumer price index (CPI)
- the most prominent measure of general price changes; the CPI measures the rate increase or decrease in a broad range of consumer prices, such as food, housing, transportation, medical care, clothing, electricity, entertainment and services; CPI is computed monthly
- bearish breakout
- a decline through the support level
- head-and-shoulders bottom
- also called inverted, it indicates a bullish reversal
- contracting
- when business activity is declining from its peak
- prepaid expenses
- items a company has already paid for but has not yet benefited from (e.g. prepaid advertising, rents, taxes, and operating supplies)
- depressions
- are longer severe contractions
- EPS (earnings per share)
- earnings available to common divided by no. of common shares outstanding
- debt-to-equity ratio
- total long term debt divided by total shareholders equity
- leading indicators
- reflects where the economy is going
- Federal Open Market Committee (FOMC)
- meets regularly to direct the government's open-market operations; when the organization buys securities, it increases the supply of money in the banking system, and when it sells securities, it decreases the supply
- current ratio
- current assets divided by current liabilities
- keynesian economics
- the theory that active government invervention in the marketplace is the best method of ensuring economic growth and stability
- defensive industries
- are least effected by normal business cycles; companies in this industry generally produce nondurable consumer goods, such as food, pharmaceuticals, and tabacco.
- cash asset ratio
- cash and equivalents divided by current liabilities
- balance sheet
- provides a snapshot of a company's financial position at a specific time; it defines the value of the company's assets (what it owns) and its liabilites (what it owes)
- dow theory
- according to this theory, the three types of changes in stock prices are primary trends (one yr or more), secondary trends (3-12 weeks), and short-term fluctuations (hours or days).
- consolidating trend
- if a stock's price stays within a narrow range
- the laffer curve
- shows the relationship between the tax rates and tax revenue collected by governments; as tax rates increase from low levels, tax revenue would increase; if taxes rise too high people stop working; lack of work leads to a lack in income and therefore, a fall in tax revenue
- earnings per share
- is what remains after payment of interest, taxes, and perferred dividends; dividing net income after taxes, interest and payments of preferred dividends by the number of common shares outstanding determines earnings per share
- fiscal policy
- refers to government budget decisions, which can include increases and decreases in federal spending; money raised through taxes; and federal budget deficits or surpluses; is based on the assumption that the government can control unemployment levels and inflation by adjusting overall demands for goods and services
- funded debt
- is any long-term debt payable in five years or more.
- inventory
- the cost of raw materials, work in process, and finished goods ready for sale
- inflation
- is the general increase in prices
- modern portfolio theory
- instead of emphasizing particular stocks, this theory focuses on the relationship of all the investment in a portfolio; the theory holds that analysts' ability to predict price movement is of no value; adherents believe that securities markets are efficient markets, meaning securities prices react so quickly to most investment information that no analyst is likely to outsmart the market as a whole.
- discount rate
- the interest rate the Fed charges its member for short-term loans.
- M1
- the most readily available type of money; consists of currency in circulation and demand deposits (checking accounts) that can be converted to currency immediately;is the largest and most liquid component of the money supply
- surplus
- with regard to trade; more money flowing into the country than out
- dividends per share
- annual cash dividends divided by no. of common shares outstanding