.mutual fund an organization that combines the capital of many investorsto purchase a diversiﬁed portfolio of stocks, bonds, or a combinationof both.net asset value (NAV) the current market value of a mutual fund, representing the total of assets minus liabilities, and divided by the numberof outstanding shares.net proﬁt the ‘‘bottom line’’ of the income statement, including operatingproﬁt adjusted for nonoperating income and expenses and for taxliabilities.net return the percentage of net proﬁt, divided by total revenues.no-load fund a mutual fund that does not charge investors a sales commission.nondiversiﬁcation risk the risk of investing in too narrow a portfolio,meaning that a single event in a company, sector, or the economymay affect the entire portfolio in a negative manner.open-end fund any mutual fund that will accept new investors, comparedwith a closed-end fund that excludes additional participation.operating proﬁt the proﬁt from operations, before adjusting for nonoperating items (capital gains, currency exchange gains or losses, interest income or expense, etc.) or for tax liabilities.options intangible instruments with a limited life span, allowing traders
Glossary
233
to speculate on price movement in stocks; a call provides its ownerwith the right to buy 100 shares at a ﬁxed price, and a put providesits owner with the right to sell 100 shares at a ﬁxed price.overdiversiﬁcation risk the risk that a portfolio is so diversiﬁed thatoverall net returns will approximate rather than beat the market.pattern day trader any trader who moves in and out of the same positionin the market four or more times within ﬁve consecutive trading days;under the SEC rules for pattern day trading, this level of activity canbe undertaken only when $25,000 or more is left on deposit with thebrokerage ﬁrm in the form of cash or securities.Ponzi scheme a con game in which high returns are promised, and oldinvestors are paid from funds raised from new investors. Theseschemes eventually crash, causing large losses; named after the infamous Charles Ponzi who promised investors they would double theirmoney in 90 days, active during the 1920s.premium the current value of an option contract.price-to-earnings (P/E) ratio the current market price per share ofstock, divided by the company’s earnings per share in the latest reported quarter or ﬁscal year.price-weighted index any market index in which the more expensivestocks have greater weight, the best-known of which is the DowJones Industrial Average.pro forma ‘‘as a matter of form,’’ any ﬁnancial report that estimatesactual outcome, often associated with reporting of income from pension fund assets.pump and dump an illiquid act in which investors buy shares of stock,promote the stock on investment chat lines to create interest andmore demand (pump), and then sell their shares at inﬂated value(dump).put an option granting its owner the right, but not the obligation, to sell100 shares of a speciﬁed stock at a ﬁxed price on or before a speciﬁedexpiration date.quick assets ratio the current ratio, excluding the value of inventory; alsocalled the acid test.random walk theory a theory stating that all market price movement israndom, and that the chances of a stock’s price rising or falling is50–50.
234
Glossary
real estate investment trust (REIT) a conduit investment that trades onpublic exchanges; the REIT invests in property (equity REIT) orlends money (mortgage REIT) or may combine both activities (hybrid REIT).redemption fee a fee charged by a mutual fund to investors when sharesare sold.Regulation SHO an SEC regulation restricting short sales (SHO), especially uncovered, or naked short sales.reinvested dividends action when dividends are applied to purchase additional partial shares rather than taken in cash; this creates a compound rate of return on dividend yield.resistance the top level of an existing trading range, above which pricesare not expected to rise until a breakout occurs; the opposite of support.retained earnings the net sum total of proﬁts or losses from operationseach year, and part of stockholders’ equity.reverse head and shoulders a head and shoulders pattern occurring onthe bottom of the trading range and testing support, believed to anticipate a subsequent rise in price levels.risk tolerance an individual’s ability to accept a known and deﬁned levelof market risk and other forms of risk in the stock market.runaway gap a trading gap that continues in one direction over severaltrading days.sales load a commission charged by a mutual fund.small-cap fund a mutual fund emphasizing small corporations in theirportfolios, as measured by capital value.specialty fund any mutual fund deﬁned by its emphasis on a speciﬁcmarket sector, country, commodity, or industry.stockholders’ equity the net worth of a corporation, consisting of allclasses of stock, retained earnings, and adjustments for dividends declared and other additions to or reductions from equity.striking price the ﬁxed price at which options can be exercised, regardless of movement in the current market price of the stock.support the bottom level of a trading range, the price below which pricesare not expected to extend until the current range is violated with abreakout; the opposite of resistance.
Glossary
235
swing trading a technique involving moving in and out of long or shortpositions in three- to ﬁve-day cycles or short-term trends.tax risk the risk that marginal proﬁts will be reduced by federal and statetax liabilities; or that long-term capital gains will be lost when positions are closed before one full year.tax-free bond fund a mutual fund specializing in a portfolio of municipalbonds and other tax-free debt instruments.technical analysis any form of analysis focused on price and volumeaction rather than on a company’s ﬁnancial results.total capitalization the sum of all debt capitalization (bonds and longterm notes) and equity capitalization (stockholders’ equity).trading range the space between resistance and support, the range ofprices at which stocks trade.uncovered call a call written without also owning 100 shares of stock,considered high risk because losses are in theory unlimited; in comparison, a covered call is a very conservative strategy.value fund a mutual fund emphasizing high-quality companies whosestock is expected to outperform the market over the long term.volatility the tendency for prices to move in a speciﬁed price range; themost popular format for deﬁning market risk.weighted average an average in which later entries are given greaterweight than earlier entries in the ﬁeld, on the theory that more recentactivity is more relevant to the trend.
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INDEX
12b-1 fee, 184–1853M (MMM), 67Abbott Labs (ABT), 51, 56ABC of Stock Speculation, 70account fee, 184accounting disclosures and changes,101–102accumulation, 71, 80–81acid test, 163–164administrative fee, 184after-tax proﬁt, 28aggressive growth fund, 189Altavista, 125Altria (MO), 51, 56, 202, 218Amazon.com (AMZN), 114–115,125, 209–210American Airlines (AMR), 114–115,117American Association of IndividualInvestors (AAII), 16American Funds, 145American Stock Exchange (AMEX), 1Ameritrade, 125annual report, 96–104annualized return, 61–62Apple (AAPL), 125Argus Ratings, 92
Arthur Andersen, 18asset allocation, 137–138, 140assumptions, 216–218AT&T (T), 29–30, 32–34balance sheet, 92–96balanced fund, 187–188Bank of America (BAC), 51, 201beta, 139Boeing (BA), 67breakaway gap, 86–88breakeven return, 13, 14, 128–130Bureau of Labor Statistics (BLS), 12buy low, sell high, 197–200, 207capital assets, 39capital preservation, 189capital stock, 95capitalization tests, 56–60cash ﬂow, 4–5certiﬁcates of deposit (CD), 129–130,141, 158, 175Charles Schwab & Company, 92Chevron (CVX), 67Chicago Board Options Exchange(CBOE), 195Citigroup (C), 29–30, 32–34, 51,125, 173–175, 201237
238classiﬁcations of mutual funds,186–189closed-end fund, 186Coca-Cola (KO), 144, 147, 202common gap, 86–88competitive and management status,117conduit investment, 182, 189–191conﬁrmation, 72, 81–82Consolidated Edison (ED), 51, 56Consumer Price Index (CPI), 12contingent deferred sales load(CDSL), 183contingent liabilities, 103contrarian investing, 77, 198, 200core earnings, 34–40, 116cost of goods sold, 26–27Countrywide (CFC), 175credit rating, 117current assets and liabilities, 93, 94current ratio, 111–112current yield, 52–53, 113–114Customers’ Afternoon Letter, 69day trading, 193debt/equity ratio, 112Delphi (DPHIQ), 100distribution fee, 184distribution, 71, 80–81diversiﬁcationadequacy of, 137, 142–146asset allocation and, 137–138, 140bias, 146–150exchange-traded fund, 5methods, 138–142risk, 132speculation and, 214–215dividendachievers, 54–55, 114calculation, 52–53growth, 113–114income, 48–52interest and, 56–60
Index
payments, 162reinvestment, 48, 50–51yield history, 47, 54–56dollar-cost averaging, 54dot.com bubble, 122–124double-entry bookkeeping, 92Dow Jones Company, 206Dow Jones Industrial Average (DJIA),19–20, 139, 153, 202, 219–220Dow Jones Stock Average, 69Dow Theory, 65–66, 68–73, 120,197downtrend, 71, 80Du Pont de Nemours (DD), 35–36,115–116E*TRADE, 125earnings per share (EPS), 23, 30–34,164earnings, 28–40Eastman Kodak (EK), 58–60, 108–110, 112–113, 170–171,217–218eBay (EBAY), 125effective tax rate, 12–13, 129, 130efﬁcient market hypothesis, 76–77employee stock options, 37–38Enron, 18, 125–126, 143, 206, 216,224entry price, 8, 215–216equity funds, 186equity REIT, 190eToys, 125exchange fee, 184exchange-traded funds (ETFs)alternative to mutual funds, 15,182–186diversiﬁcation with, 5, 140explained, 191–192online site, 140, 192performance, 132types, 144–145
239
Index
exchange-traded notes (ETN),191–192Excite, 125exhaustion gap, 87–88Exxon-Mobil (XOM), 61, 67, 143–144, 146–147, 172–173, 202Fannie Mae, 189–199Federal Express, 143Federal Home Loan Mortgage Corporation (FHLMC), 190federal income taxes, 27Federal National Mortgage Association (FNMA), 189–190Federal Reserve, 160, 164nFidelity, 145Fifth Third Bancorp (FITB), 51ﬁnancial planner, 15–16ﬁnancial statements, 91–96ﬁxed income fund, 186–187ﬂoat-weighted index, 67footnotes, 101–104Franklin Funds, 145Freddie Mac, 190fundamental analysis, 5–6, 104–107,115–116, 202–204
green fund, 187gross proﬁt, 27gross revenue, 26, 114growth fund, 188head and shoulders, 86, 87hedging activities, 40Honda (HMC), 79hybrid REIT, 190IBM (IBM), 29–30, 32–34, 61, 67,124income fund, 189income statement, 24–28, 92, 95–96index fund, 65, 68, 73, 78, 188individual retirement account (IRA),12, 129–130inﬂation, 12–13InfoSpace, 125Investment Company Institute, 15JDS Uniphase (JDSU), 125Johnson & Johnson (JNJ), 108–110JPMorgan Chase (JPM), 42Kroger, 143
gaps, 86–88general expenses, 27General Motors (GM), 36–37, 45n,57, 79, 96–97, 99–101, 112,116–117, 218GeoCities, 125Ginnie Mae, 189Global Crossing (GLBC), 125global fund, 187GMAC, 100Goldman Sachs Ratings, 92goodwill impairment, 39Google (GOOG), 108, 125, 143,172–173, 203–204Government National Mortgage Association (GNMA), 189
large-cap fund, 188leverage, 166, 174–180limited partnership, 190liquiditycapital movement and, 154corporate, 161–164market, 158–161meaning of, 151options and, 155–156performance, 155portfolio, 152–158quick assets ratio as test of,163–164risk, 130–131, 149tests, 163–164
240
Index
litigation settlements or proceeds, 40long-term assets, 93long-term liabilities, 95Lord Abbett Funds, 145Lycos, 125
New York Stock Exchange (NYSE),17, 19, 159NorthPoint Communications(NPNTQ), 125NYSE Composite Index, 67
management fee, 184Market Edge, 92market emotions, 200–202market future, 218–221market myths, 210–216McDonald’s (MCD), 35–36, 172–173, 202mega-pool investments, 190Merck (MRK), 42, 202Mergent Company, 54–55mergers and acquisitions (M&A), 40,103, 158Merrill Lynch (MER), 125, 223Microsoft (MSFT), 58–59, 61, 78–79, 105–106, 112, 124, 144,146–147mid-cap fund, 188money market fund, 187mortgage pool, 189–190mortgage REIT, 190mortgage.com, 125mutual fund expense analyzer, 185
off-balance sheet items, 102–103online investing, 221–223open-end fund, 186operating proﬁt, 27Options Clearing Corporation(OCC), 159–160, 195options, 155–156, 159–160, 192–195, 176–181other assets, 93–94other income and expenses, 27
NASDAQ Composite Index, 67, 73,78, 124–125National Association of Investors Corporation (NAIC), 16National Association of Real EstateInvestment Trusts (NAREIT),190National Association of SecuritiesDealers (NASD), 184Nelson, S. A., 70net asset value (NAV), 185–186, 191net return, 28–29, 91, 114, 116net revenue, 26Netscape, 125
passive gains and losses, 190pattern day trader, 193PayPal, 125pension gains and costs, 38, 39–40Pepsico (PEP), 144Pets.com, 125Philadelphia Stock Exchange (PHX),1, 17planned proﬁts, 223–225Ponzi, Charles, 18–19pre-tax proﬁt, 27price-to-earnings ratio (P/E)analytical value of, 23–24calculation, 41, 107–108core earnings and, 40–45core earnings and, 41–42diversiﬁcation criterion, 141dividends and, 53–54test of value, 9, 83Priceline.com, 125pricing of stocks, 8–9pro forma, 39–40Providence Evening Press, 69public participation, 71, 80–81pump and dump, 6purchase fee, 184
241
Index
quick assets ratio, 163–164random walk theory, 74–76real estate investment trust (REIT),131, 141, 190, 220Real Estate Mortgage InvestmentConduit (REM IC), 189–190redemption fee, 184Regulation SHO, 168Remington, 222research and development (R&D),38–39resistance, 84–85restructuring charges, 38retained earnings, 95returns and allowances, 26Reuters Research, 92reverse head and shoulders, 86, 87riskdiversiﬁcation, 132inﬂation and tax, 127–130levels, 10–11leverage, 166liquidity, 130–131, 149lost opportunity, 133–135market, 3–4, 125–127price analysis, 166–169runaway gap, 86–88S&P 500, 67, 73, 78, 139, 145, 188,213S&P Stock Reports, 92–93, 95–96,99Safeway, 143sales load, 182Sarbanes-Oxley Act of 2002 (SOX),18, 98Schwab Equity Ratings, 92secondary mortgage, 189Securities and Exchange Commission(SEC)founding of, 18investigations, 103
mutual fund fee calculator, 185oversight, 98redemption fee limits, 184Regulation SHO , 168reporting with, 6website, 15shareholder service fee, 184–185Sholes & Glidden Type Writer, 222short selling, 168Skype, 125small-cap fund, 188specialty mutual fund, 187Standard & Poor’s (S&P), 34–35,38, 51Starbucks (SBUX), 42–43stock market history, 16–22Sun Microsystems (JAVA), 125support, 84–85swing trading, 193–195T. Rowe Price, 145Target (TGT), 61tax-free bond fund, 188technical analysis, 6, 83–89, 104–107Telefonica, 125timing of transactions, 7–8total capitalization, 56–63Toyota, 79trading range, 84–86, 108, 169–171Travelocity, 125triple top or bottom, 86tulip mania, 119–122Twain, Mark, 222U.S. Bancorp (USB), 51underdiversiﬁcation, 142–144unexpected losses, 223–225United Parcel Service, 143uptrend, 71, 80value fund, 188value investing, 133, 204–207,211–212
242
Index
value-weighted index, 67volatilityDJIA, 153fundamental, 115–116price history and, 165safety and, 6short selling and, 168–169spikes, 171–174test, 164, 166trading range, 84, 108–109,169–171
Wal-Mart (WMT), 58–59, 61, 105–106, 115–116, 144, 146–148,170–171, 218Washington Mutual (WM), 51, 56,201weighted averages, 66–68Wharton School, 148WorldCom, 125–126write-down of assets, 38
Wachovia (WB), 51Wall Street Journal, 65, 69Walloons, 17
Y2K, 124Yahoo! (YHOO), 6, 125YouTube, 125
Xerox Corporation (XRX), 61
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