chaos theory
A developing field in physics that seeks to find deterministic patterns in seemingly random events.
chartist
A technical analyst who believes that skillful interpretation of charts can improve investment performance.
continuous pricing function
One of the functions of the securities markets. This function ensures that assets listed on an exchange can always be
traded quickly without the need to search for a buyer or seller.
day-of-the-week effect
A market anomaly whereby Wednesdays and Fridays tend to
be good days for the stock market, with Mondays being bad.
economic function
The characteristic of the capital markets that facilitates the matching of potential buyers and sellers.
efficient market hypothesis (EMH)
The theory that publicly available information is rapidly and accurately reflected in the price of securities, and that over the long run, realized returns will be consistent with their level of undiversifiable risk
fair price function
The characteristic of the capital markets in which investors are able to trust the validity of the prevailing prices.
information efficiency
The aspect of the market considered by the efficient market
hypothesis. ______ means that the market quickly and accurately reacts to the arrival of new information.
inside information
Privately held news that, when released to the public, is likely to have an impact on the price of securities. Trading on the basis of inside information is illegal
January effect
A pricing anomaly in which stock returns (especially those of small firms) do abnormally well in January.
low-PE effect
The phenomenon whereby stocks with low price/earnings (PE) ratios often seem to outperform stocks with higher PE ratios.
neglected-firm effect
The tendency for lesserknown firms to perform better than they should according to financial theory
operational efficiency
A measure of the speed and accuracy with which orders are placed and confirmed at an exchange.
optimum trading range
The unproved notion that there is a best price range for stock.
random walk
A data series in which the next value is totally unpredictable.
runs test
A nonparametric statistical test signed to determine the likelihood of a binomial pattern's occurring by chance
semi-efficient market hypothesis
The notion that there are various tiers of stocks, some of which are priced more efficiently than others.
small-firm effect
The tendency for firms with low levels of capitalization to perform better than finance theory suggests they should.
technical analyst
A security analyst who makes use of charts and technical indicators, believing that changes in price occur because of changes in supply and demand.
blue chip
A subjective term for a good stock. Often used to refer to a stock with a long, uninterrupted history of dividend payments.
cash dividend
A payment to shareholders of a portion of a firm's earnings
cyclical stock
A stock whose earnings are particularly sensitive to trends in the overall economy
defensive stock
A stock whose earnings are largely independent of swings in the economy.
dividend discount model (DDM)
The mathematical identity for the value of a growing perpetuity.
This model is often used to estimate the intrinsic value of a common stock.
dividend reinvestment plan
A program offered by many corporations in which shareholders
can choose to have immediate reinvestment of their dividend checks in additional stock of the firm. These programs always provide for the purchase of fractional shares and often give a slight di
forward split
A stock split in which shareholders receive additional shares and are left with a greater number of shares than before the split.
fundamental analyst
A person who studies earnings and relative value in determining the intrinsic value of a security.
growth investor
An investor who prefers stocks that are in favor and whose prices have been advancing.
growth stock
A stock in a company that retains a good portion of its earnings in anticipation of being able to reinvest them profitably in the company
income stock
A stock that pays out most of its earnings as dividends.
multi-stage dividend discount model
A variation of a dividend discount model that allows for more than one anticipated future growth rate in the income stream
odd lot-generating split
A stock split that is not in a whole-number ratio like 2-for-1 or 4-for-1. For instance, in a 3-for-2 split, the holder of 100 shares would have 150 shares (an odd lot) after the split.
payout ratio
A firm's dividends per share divided by its earnings per share
penny stock
A colloquial term for any lowpriced stock.
property dividend
A proportional distribution to shareholders of some asset other than cash or securities.
required rate of return
The expected rate of return that must be associated with an investment (given its risk) in order to make it an acceptable investment.
retention ratio
One minus the earnings retention ratio. Also called the plowback ratio
reverse split
A recapitalization in which the number of shares of common stock is reduced rather than increased. After a reverse split,
shareholders are left with fewer shares than before, but the price per share is higher.
signaling
A theoretical area of finance that studies the extent to which the market interprets various activities of the firm (such as dividend increases) as management signals of likely future firm performance.
speculative stock
A loose category of common stock that includes growth stocks with high betas or with little price history.
spin-off
A recapitalization in which a firm reissues shares of a previously acquired subsidiary and ceases to be involved in the
management of the subsidiary.
stock dividend
A distribution of more shares of stock to stockholders. Stock dividends generally do not increase or decrease a shareholder's wealth.
stock split
A recapitalization in which the number of shares in existence is increased by giving shareholders more shares for each share they own. This is also called a forward split or a regular-way stock split.
street name
The name of the brokerage firm that is holding securities on behalf of a client
cash flow from operations
Money that has been earned by a firm, as opposed to borrowed (cash flow from financing) or raised by selling an asset (cash flow from investing). This is a firm's lifeblood.
EBITDA
This stands for earnings before interest, taxes, depreciation, and amortization. This measure of earnings excludes non-operational expenses from the earnings figure. Also called operating cash flow.
equity risk premium
The difference in the average return between stocks and some
measure of the risk-free rate, usually either the Treasury bill rate or Treasury bond rate.
free cash flow
A form of cash flow that reflects the funds available to management after an allowance for needed capital expenditures in the near future.
GARP investing
GARP stands for Growth at a Reasonable Price. A GARP investor appreciates the potential of a growth stock but is not
willing to pay "too much" for it, even if the stock is in vogue.
Greenspan Model
A rule of thumb investors use to gauge the general extent to which the broad stock market is over- or undervalued.
PEG ratio
An acronym for a firm's price/earnings ratio divided by its expected future earnings growth rate.
present value of growth opportunities (PVGO)
A simple analytical tool that is calculated based on a firm's current stock price. This comes from partitioning the current stock price into two parts, one reflecting the current earnings
(E) and one reflecting expected future growth in those earnings.
sustainable growth rate
A rate that equals a firm's earnings retention ratio multiplied
by its return on equity. This is one of the methods an analyst can use to estimate the future growth rate of a firm's earnings and dividends.
best of class investing
The practice of identifying the most socially conscious (or least offensive) company within an industry and investing in that company even though some of its activities may be inconsistent with the manager's views of social responsibility.
compustat
A database covering most U.S. companies and containing a history of virtually all accounting variables
mergent, Inc.
Formerly known as Moody's Financial Information Services; publishes a widely used set of investment information.
screen
A logical method of reducing the size of a population so that the remaining members can be examined closely
socially responsible investing
Integrating personal values and societal concerns with
investment decisions.
S&P corporation
A company that publishes a wide variety of reports on the economy, industries, and individual stocks
thin trading
Securities whose trading volume is low relative to other securities.
value line investment survey
A popular investment advisory service widely known for its timeliness and safety ranking system.
weak form
it is impossible to predict future stock prices by analyzing prices from the past. - The current price is a fair one that consideres any information contained in the past price data
semi-strong
form that states security prices fully reflect all publicly available information
strong form
security prices fully reflect all relevant public and private information.
financial anomaly
refers to unexpected results that deviate from those expected under financial theory
preemptive right
mean shareholders have the ability to maintain the same percentage share of ownership in a corporation when the firm sells new shares
security screening
involves reducing the security universe down to a manageable size
Mergent's manuals
contain seven sets of volumes covering industrial firm, public utilities, ... and bank/financial issues
mergent dividend record
contains info on the recent dividend history of a company