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Business Related Terminology
A
accounts payable — The amount a company owes for goods already
received. Not unlike a person’s credit card balance; you’ve got the VCR,
but you haven’t taken the money out of the bank yet.
accounts receivable — The amount a company is owed for goods it
sold on credit.
accrual method of accounting — Used for most corporate financial
statements. Revenues are counted during the time they’re earned, and
expenses are counted during the time they’re incurred. Cash doesn’t need
to change hands to be recorded. This is a fuller way of looking at
financial health. It’s as if you kept records not just of checks you’d
written and deposits you made, but also of what you owed on your credit
cards and what you were owed by others. You can feel pretty rich if your
checking account is flush, but if you owe thousands on your credit card
and don’t take that into account, you can spend yourself into trouble.
allowance for bad debt — The amount of debt a company expects not
to collect. This is subtracted from what the company is owed for goods it
sold on credit (accounts receivable), so the balance sheet better reflects
the company’s true economic health.
arbitration — One method of settling disputes, including
union-employer battles. The parties choose a third party to settle their
disagreement. This is called binding arbitration when the parties also
agree to abide by the arbitrator’s decision.
assets — Things a company controls, which usually means it owns
these items. A car company’s assets would include everything from
computers used by the accounting department, to cars not yet sold, to the
factory where the autos are made. Items must have value and must have been
obtained for a measurable cost; broken computers that can’t be repaired
don’t count, nor does a company’s reputation.
automatic teller machine (ATM) — The machines that let you do your
banking without dealing with a person. At ATMs, you can take cash from
your account, make deposits and move money between accounts. All you need
is a password you key in and an access card.
B
balance of trade — An accounting of a country’s exports versus
imports.
balance sheet — A reckoning of a company’s financial health at a
given time. Lists assets, liabilities and equities.
bankruptcy — A word you don’t want to hear if a company or person
owes you a lot of money. The person or company is considered bankrupt if
they’re unable to pay their debts. Companies filing for
protection under Chapter 7 of the bankruptcy code are shut down and their
assets handed over to the creditors. Under Chapter 11, companies try to
rework their debts and stay in business.
binding arbitration — Better really mean it when you use this
method of solving a dispute. Warring parties—like a union and
employer—agree to argue their cases before a neutral party and accept the
outsider’s decision.
board of directors — A group of people chosen by stockholders to
watch over a company and its executives, and to set overall corporate
policy. Their job is to try to keep the company healthy and ensure
stockholders get a good return on their money.
bond — A written promise to repay a loan plus interest, usually
more than one year after the bond is issued. Investors buy bonds from a
company or government entity, essentially loaning the company or
government that money.
buying on margin — For those who don’t have lots of money, but
believe that’s what it takes to make a killing on the stock market. Stock
buyers purchase stocks with borrowed money, gambling the share price will
rise enough to pay off the loan and then some.
C
call — An option to buy a certain amount of stock at a specific
price during a specific time.
capital — Money needed to start or grow a business. This pool can
come from securities offerings and retained earnings.
capital budget — Shows plans for buying long-term assets—machinery
and other things you expect to last several years—and estimates the costs
of those purchases.
cash flow — Money coming into a company and being paid out by the
company. Ideally you’d want to take in at least as much as you pay out. On
a personal level, you’re having a cash-flow problem if you can’t make your
mortgage payments. You’re not necessarily poor; your house might be worth
a lot if sold, but you’re still having cash-flow problems.
cease and desist order — Federal Trade Commission ruling that
orders a stop to an unfair business practice.
certificates of deposit (CDs) — Generally considered conservative
investments. You purchase the CDs from financial institutions–essentially
loaning your money–and they promise to pay you back on a fixed date,
usually with interest. You can invest for several months, but longer
investments generally earn higher interest.
closed-end fund — A mutual fund that sells a limited number of
shares.
collective bargaining — The process by which labor leaders and
management iron out agreements on pay and working conditions.
commercial paper — Short term unsecured debt, with maturity up to
270 days. Banks, corporations and others raise money by issuing commercial
paper to investors.
commission broker — A person who does the trades for a stock
broker’s clients, receiving a commission for the work. The stock broker
places orders with them.
common stock — Regular old stock. Owners of this bottom rung of
stocks have a piece of the company and get to vote for the board of
directors and on corporate policy. But they have to queue up behind owners
of preferred stock both to receive dividends and, usually, to receive
assets if a company is liquidated.
consumer price index (CPI) — Measures price changes of common goods
and services, including such things as housing and food. What you quote
when you’re trying to convince your boss you need a raise to keep up with
inflation.
corporation — A business owned by shareholders.
cost of goods sold — How much it cost the seller to make or buy the goods
sold. Same as “cost of sales.”
cost-of-living adjustment (COLA) — A type of raise workers can get to
reflect the higher cost of consumer goods. Also a sort of corporate
hardship pay for employees sent to live and work in expensive places.
coupon — A detachable part of traditional bond certificates. You present
these to the issuer to collect your interest payments.
coupon rate — A bond’s annual interest rate, stated as a percentage of
what was originally paid for the bond. Gets its name from traditional bond
certificates, which have coupons you detach and return to the issuer to
collect your interest payments.
cumulative preferred — Preferred stock that is due dividends, even if
payments are delayed until the company can afford them. The amount owed
builds until the dividends are paid. Owners are entitled to their payments
before common-stock owners can collect theirs.
current assets — Cash and assets that are expected to be used, sold or
converted to cash in the near future, usually one year. A sporting goods
store’s current assets would include the money in the register and its
bicycles, as well as short-term insurance policies and marketable
securities—securities expected to be turned into cash in one year.
current liabilities — These liabilities must be paid in a relatively short
time, usually one year. Taxes are one example.
D
debentures — You need to trust in a company and its strength to give this
type of loan, which isn’t backed by collateral.
debt-to-net-worth ratio — Also debt-equity ratio. To get it, you divide
liabilities by stockholders’ equity. This is a general measure of how safe
creditors can feel about their loans. Creditors often avoid lending to
companies with a high debt-equity ratio.
deflation — Opposite of inflation. Decrease in the general price of
consumer goods and services.
demand deposit — Checking account. So named because you can demand your
money—or write a check—without clearing it with the bank first.
depreciation — Dividing the cost of an asset over that asset’s usable
life. When dealing with a $200,000 factory expected to be used for 10
years, you would count $20,000 a year as expenses. Assets are considered
unusable if they don’t work well anymore or are obsolete.
derivative — A type of investment whose value depends on the value of
other investments, indices or assets. A stock option is a common type of
derivative.
discount brokers — Discount stock brokers are to full-service brokers as
warehouse stores are to boutiques. You don’t expect much, if any, advice
from your discount broker on what to buy. She or he usually doesn’t expect
you to pay as much as you would at full-service brokers. A discount
broker’s main job is to carry out your requests to buy and sell.
diversification — An investing technique. The idea is to buy lots of
different types of investments so if the value of one nose dives, you’re
not suicidal.
dividends — Payments corporations make to their shareholders. The
per-share amount is determined by corporate earnings.
dollar-cost-averaging — A system of buying securities at regular intervals
with a fixed-dollar amount. The investor buys by the dollar’s worth rather
than by the number of shares. If the number of dollars stays constant,
investments buy more shares when prices are low and fewer when prices are
high. Temporary downswings in price benefit the investor who continues to
buy in good times and bad, as the price at which shares are sold exceeds
the average purchase price.
Dow Jones Industrial Average — An important stock market indicator, used
to judge the stock market’s general well-being and how well your stocks
are doing comparatively. It measures the performance of 30 industrial
stocks. When the media reports that the market rose 20 points, they’re
really saying the Dow rose 20 points.
E
earnings per share — The amount of money a company makes per share of
common stock. This figure is calculated by taking net income and dividing
it by the number of common shares outstanding.
export — A domestically produced good sold abroad.
F
fixed assets — A company’s nonliquid assets, such as its office building
or factory.
fixed costs — Costs that don’t vary with sales volume. Rent is a fixed
cost; companies need to pay it whether they make money that month or not.
Other fixed costs are insurance payments and executives’ salaries.
fixed-rate loans — A loan whose interest rate doesn’t change. A
conventional mortgage is an example.
float — Provides financial breathing room if you’re short of cash. This is
the value of the money that stays in your account until a check you wrote
is processed.
franchising — Setting up a system like McDonald’s. A company (the
franchiser) grants the right to use its name and sell its products to a
person or group (the franchisee).
full-service brokers — Like the full-service island at the gas station.
You usually pay more, but you also get more–in this case a wide range of
services including advice on what stocks to buy and sell. The “self-serve”
variety of broker is called a discount broker, who generally just handles
trades.
futures contract — An agreement to buy or sell a commodity or financial
instrument at a specific price and on a set date. Unlike an option, in
that the seller must sell and the buyer must buy at the established time.
Futures can be traded among parties.
G
General Agreement on Tariffs and Trade (GATT) — An international accord
meant to stimulate trade. It encourages lowering tariffs and abolishing
quotas that restrict imports.
general partner — General partners are liable for all of their
partnership’s debts.
generally accepted accounting principles (GAAP) — Rules and procedures
generally accepted by accountants. The rules guide them in assessing and
reporting on a company’s finances.
gross domestic product (GDP) — Key indicator of an economy’s health, this
is the value of all the goods and services produced by a country in a
given period of time. Used to be called Gross National Product, or GNP.
gross national product (GNP) — Out-of-date name for gross domestic product
(GDP). GDP is a key indicator of an economy’s health; it’s the value of
all the goods and services produced by a country in a given period of
time.
gross profit — Sales revenue minus the cost of making or buying the things
that were sold (cost of goods sold). If a manufacturer sold 10 bikes for
$300 a piece, and each bike cost him $250 to make, the company’s gross
profit is $500.
gross sales — Revenue from a company’s total sales before deducting for
returns and discounts.
growth funds — Mutual funds that invest in companies that pay little or no
dividends and reinvest their profits in expansion and in research and
development. You buy these if you’re willing to give up dividend income in
return for a chance at big gains in the stock price over time.
I
income from continuing operations — Revenue minus expenses, including
taxes. This doesn’t include income from discontinued operations, like a
closed arm of the corporation; extraordinary items or the financial effect
of a change in accounting principles.
individual retirement account (IRA) — You may place $2,000 a year in these
accounts, which are used to invest in stocks, certificates of deposit,
etc. The contributions may be tax deductible depending on whether you’re
covered by a company retirement plan and whether your adjusted gross
income is low enough. IRAs accumulate money tax-deferred.
inflation — An increase in the general price of consumer goods and
services. What the Federal Reserve chairman is always trying to keep under
control so it doesn’t harm the economy.
injunctions — Courts issue these to stop a person or group from doing
something that might cause future harm.
interest — What a borrower pays for the privilege of using someone else’s
money for a given period of time.
International Monetary Fund (IMF) — An international lending
institution that focuses on stabilizing currencies.
investment bankers — Companies that help other companies raise capital
through the sale of new stock and bonds.
L
leveraged buyout (LBO) — The purchase of a company using borrowed money.
Usually the buyer secures the loan with the assets of the company to be
purchased.
limited partner — An owner in a limited partnership who’s liable only up
to the amount of money invested.
line of credit — Financial institutions offer this to some customers. It
allows the customer to borrow up to a certain amount of money without
applying for another loan.
load fund — A mutual fund that charges a commission for the stockbroker or
financial planner who’s marketing it.
lockout — When union-management disagreements get ugly. Management
prevents union employees from entering the workplace and doing their jobs.
M
margin — The amount a customer deposits in a special account kept by a
stockbroker. The customer uses the money in this margin account, combined
with money borrowed from the broker, to purchase stock (called buying on
margin).
market — The group of people who can and want to buy a product now or
later. As in, is there a market for this $3,000 bicycle?
marketable securities — Securities, like government bonds, that can be
sold easily. On balance sheets, they are listed as current assets because
they’re expected to be converted to cash in the near future, usually one
year.
market share — A company’s or product’s portion of the total market for
that good.
mediation — Using a neutral third party to settle a dispute by fostering
compromise among battling groups. Can be used in labor-management
disputes.
money market deposit accounts — A bank account that pays a variable rate
of interest based loosely on market rates. Often used by people who need
to keep money readily available, but want to try for a higher return than
on regular bank accounts. Added bonus: they’re federally insured.
money market funds — Funds that put their money in short-term investments.
Considered pretty safe because the funds invest in such things as
government securities and bank certificates of deposit.
monopoly — What you tried for in the game with the same name: complete
domination of a market. When you have a monopoly, you have no competitors
for what you’re selling.
municipal bond — These bonds are issued by state or local government
entities, such as cities and counties. Interest earned is generally
tax-free.
mutual funds — These funds pool money from many investors, and fund
managers invest the money in specific types of securities. Money market
funds are a type of mutual fund.
N
NASDAQ (The National Association of Securities Dealers Automated
Quotations System) — A computerized system that lists price quotes for
many over-the-counter stocks, as well as some other stocks.
net income — The bottom line, after everything is paid up, including
taxes. What’s left after all expenses are deducted from total revenue.
Dividends are paid from net income.
net worth — Equity. Fair market value of total assets minus total
liabilities.
no-load fund — Mutual fund that doesn’t charge a commission.
nonprofit corporations — Or simply nonprofits. Organizations that don’t
exist to make a profit. Usually, the groups are dedicated to charitable or
educational efforts; they are, therefore, exempted from income taxes.
note receivable — What you put on the books if you’re owed money by
someone who has signed a promissory note, which states you will be paid a
certain amount by a certain time.
O
oligopoly — Not quite a monopoly, but getting there. A small group of
large suppliers dominate a market, providing similar versions of a
product, like cars.
open-end fund — Mutual fund that doesn’t limit its number of shares.
option — The right to buy or sell stock at a given price within a certain
period of time. Options are often traded.
over-the-counter market (OTC) — A virtual marketplace for trading
securities. Dealers conduct transactions via computer or telephone, rather
than through an auction at a central location, like the New York Stock
Exchange.
P
partnership — Business owned by two or more people who share profits and
losses. Owners are personally liable for the partnership’s debt.
poison pill — Companies resort to poison pills when someone is trying to
take them over. To discourage the suitor, the takeover prospect takes on a
heap of new debt or does something else to make the stock less attractive.
preferred stock — If you own this higher class of stock, you get your
dividends before common stockholders. If the company folds, you also get
assets before common stockholders do. The one thing you usually don't have
is voting rights.
price-earnings ratio — One measure of how much faith investors have in a
particular stock, it shows how much they’re willing to pay for each share
of a corporation’s earnings. You calculate it by dividing the current
price per share by the earnings per share for the last year.
primary market — Market where new issues of securities, like stocks, are
sold and the proceeds go to the issuer. A secondary market is where people
trade securities after they’ve been bought from the issuing company.
prime rate — Interest rate banks charge their most credit-worthy
commercial customers for loans. Often given to large corporations.
productivity — What plummeted nationwide during the President
Clinton-Monica Lewinsky controversy. Productivity measures how much work
you get done in a given period of time.
profit — Same as income, the difference between revenue and expenses,
before taxes.
profit margin — A good measure of a company’s efficiency, this essentially
tells you how much the company makes off sales after expenses are paid.
Generally, the higher the profit margin, the more efficient the company.
Net profit margin is net income divided by net sales. Gross profit margin
is gross profit divided by net sales.
profit-sharing plan — If your company’s doing well, this is one great
perk. The company gives employees bonuses tied to the amount of profit it
makes.
pro forma income statement — A statement of revenue and expenses that
includes some hypothetical values. It shows what could be expected to
happen if a corporation decided to go through with a takeover, for
example.
proxy — A shareholder’s written statement designating someone else to vote
for him or her at a corporate meeting.
put — An option to sell a certain amount of stock at a specific price
during a specific time.
R
raw materials — Raw as in unfinished. The stuff finished products are made
of.
recession — A time when business is slow, people lose jobs and sitting
presidents worry about their re-election prospects as people tend to blame
them for economic woes. Technically speaking, six months or more of a
decline in the gross domestic product.
reserve requirements — Set by the Federal Reserve, these rules require
member banks to keep a certain amount of cash and other liquid assets on
hand or at a nearby Federal Reserve bank. The amount is stated as a
percentage of deposits. The rules help the Fed control lending and the
nation’s money supply.
retained earnings — What’s left of earnings after dividends are paid.
These are cumulative; they’re additions to capital earned since a
company’s birth.
return on owners’ equity — A measure of profitability. Net income is
divided by common stock equity.
revolving credit agreement — You have one of these for your charge cards.
The lender lets you borrow up to a certain amount again and again; once
you pay off part of the loan you can reborrow that part. In other words,
once you pay off one shopping spree, you can start on another.
S
secondary boycott — When a union puts the squeeze on. It organizes a
boycott of companies that do business with the company the union is
battling. The idea is to isolate the company fighting with the union,
hurting its business by cutting off supplies or buyers.
secondary market — Where securities are traded after their initial
issuance. Money from trades goes to dealers and sellers, not to the
company that originally issued the security. Secondary markets include
exchanges, as well as virtual marketplaces–the over-the-counter markets of
computer and telephone lines.
secured bonds — Bonds backed by collateral or a lien. If the bond issuer
defaults, he or she must hand over whatever asset was pledged–such as a
house–so the creditor can recoup the loss on the bond.
secured loan — To get one, you have to promise to hand over specific
assets if you default.
securities — Stocks, bonds and a host of other investments, including
certificates of deposit. Investments for consumers; ways of raising cash
for the issuer, including corporations and governments.
selling short — Gamblers love this technique that lets them bet a stock
price will drop. It works this way: you borrow stock from your broker and
sell it. If the price drops, you buy the shares you owe the broker and
return them, pocketing the difference between what you sold them for and
what you bought them back for. You’re in trouble if the price rises since
you still owe the broker his shares.
Sharpe ratio — A formula developed by Nobel Laureate Bill Sharpe that
attempts to measure how a fund performs relative to the risk it takes.
Take a fund’s returns in excess of a guaranteed investment (a 90-day
T-bill) and divide by the standard deviation of those returns. The bigger
the Sharpe ratio, the better a fund performed considering its riskiness.
Standard & Poor's 500 (S&P 500) — A stock-market thermometer of sorts.
Helps gauges the health of the overall market by measuring the performance
of 500 popular common stocks.
stockbroker — Person in charge of a client’s stock trades. If the stock is
traded on an exchange, the broker relays buy and sell orders to
representatives on the exchange floor. Full-service brokers give advice on
which stocks to buy; discount brokers generally charge less, but usually
don't offer advice.
stock insurance companies — An insurance company owned by stockholders.
stock market indicators — Indexes of stock-market performance, including
the S&P 500 and the Dow Jones Industrial Average. Indicators help
investors figure out if their mutual fund or stock is doing as well as the
rest of the market.
stock option — Popular form of employee compensation, most often given to
executives. The options allow executives to buy stock for a number of
years at or below the share price when the option was granted. This is an
added incentive for executives to maximize company profit and increase
share prices.
stock split — Corporations do this to make shares more affordable. They
multiply the number of shares, while keeping the aggregate value of stock
even. In a 2-for-1 split of shares worth $50, an investor would have twice
as many shares as he had, but each would be worth $25.
T
tariff — A federal tax on imports or exports.
term loans — Loans that are generally several years’ long.
trade deficit — Imports exceed exports–or we
buy more than we sell. Opposite of trade surplus.
trade surplus — Exports exceed imports–or you sell more than you buy.
Opposite of trade deficit.
U
underwriting — Buying an initial stock or bond offering and selling it to
the public. Investment bankers are underwriters; they make money by
charging more for the stock or bonds than they paid for the securities.
V
value added — The amount added to sales value through production. It’s
considered good for an economy to produce lots of value-added goods, which
adds jobs, rather than shipping raw materials elsewhere to be processed.
Smoked salmon is a value-added product because it’s processed and more
expensive than regular salmon.
variable-rate loan — A loan with an interest rate that changes, tracking
market conditions.
W
World Bank — This international bank focuses its lending on helping
developing countries develop.
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