Terminology

Question 1

Authorized Shares

Answer 1

Max number of shares a company is legally allowed to sell to the public. Can be changed but there’s a process around it w/ shareholder votes

Question 2

Outstanding Shares

Answer 2

Number of shares currently held by all shareholders of the company, including restricted shares

Question 3

Common Shares

Answer 3

Stocks sold on the public stock market. Shareholder is granted 1 vote for every share they own. Also known as ordinary shares or float

Question 4

Book Value

Answer 4

Total assets minus total liabilities. Also known as Shareholder Equity.

Question 5

Bonds

Answer 5

Loan given to company from investor. Company pays investor back after specified number of years in interest payments, typically semi-annually

Question 6

Gross Sales vs. Net Sales

Answer 6

Gross sales is money received from all transactions. Net sales Gross sales minus allowances, discounts, and refunds

Question 7

Convertible Security

Answer 7

Security that can change its asset type, switching from bond to share, or reverse. Has terms and certain price tied to it

Question 8

Solvency

Answer 8

Ability to pay off debts

Question 9

Allowances, Discounts, & Refunds

Answer 9

Number subtracted from Gross Sales to determine Net Sales. This number is not known during time of sale. Allowances (e.g. price reduction/credits from defects), Discounts (2% less price if paid before invoice date), and Refunds (complete returns).

Question 10

Restricted Shares

Answer 10

Shares issued to corporate affiliates, including executives on the team. Have to follow certain SEC rules when executing, related to earnings calls/officially revealing information to the public

Question 11

Peer Group

Answer 11

A collection of entities with shared characteristics. Can be individuals or companies. Example traits: age, demographic, region, sector, industry, size, etc.

Question 12

Secured/Unsecured Bonds

Answer 12

Secured bonds are safer, where the company pledges certain assets that will be transferred over to the bondholder if the company isn’t able to repay their obligation. Unsecured bonds have no pledge/guarantee. If the company defaults/goes bankrupt,

Question 13

Shareholder Equity

Answer 13

Another name for Book Value

Question 14

Debentures

Answer 14

Another name for Unsecured Bonds. Bond/Debt Instrument not backed by collateral. Usually has terms longer than 10 years. They are only backed by the reputation and creditworthiness of the issuer.

Question 15

Coupon

Answer 15

The official interest rate based on the bond’s par value. Note that this is different than the bond yield

Question 16

Callability

Answer 16

The ability for the bond issuer to pay off a bond’s principle earlier. Possible if the bond has a call provision. Typically will be paid back with a premium added to the par value. Companies may do this if current interest rates are a lot lower

Question 17

Bond Yield

Answer 17

The measured effective rate of return from the bond based on the actual price paid for the bond, whether directly issued bond or bought from the secondary market. Calculated by Annual interest payments / Face value of bond

Question 18

Bond Face Value

Answer 18

Also called Par Value. The price of the bond at the time of issuance. After that, the price of the bond will fluctuate based on market conditions

Question 19

CAGR

Answer 19

Compound Annual Growth Rate. Special formula that calculates the ‘smoothed’ rate of return. Because of how math works, trying to directly calculate the annual compound rate of return, factoring the natural swings in price, the simple calculation will give you a wild and likely wrong number.

Question 20

Russell 1000, 2000, 3000

Answer 20

Russell 1000 tracks the U.S.’s 1000 largest companies. Russell 2000 tracks 2000 smaller cap companies. Many companies are newer growth companies Typically considered bellwether of U.S. economy (leading sheep of a stock, wearing a bell).
Russell 3000 is collectively the Russell 1000 and Russell 2000 and is regarded as one of the best barometers for the overall U.S. stock market’s performance

Question 21

Earnings Yield

Answer 21

EPS divided by Stock price (E/P). The inverse of the PE ratio. Expressed as a percentage. Used to compare companies against each other. All other things equal, the company with a larger Earnings Yield will be the better investment.

Question 22

Senior Securities

Answer 22

Typically offers less returns than lower ranked securities due to being safer

Question 23

Working Capital

Answer 23

Current assets - current liabilities. A measure of a company’s liquidity, operational efficiency, and its short term financial health. Having a very high working capital is a strong indicator of a company’s ability to grow and invest. In fact, if it’s boom times and they have too much working capital, could be a bad sign that they’re not pushing or investing as hard as their competition (unless they already have a huge lead and are making the smartest decisions and investments, and don’t see an opportunity that currently justifies throwing a lot of money at it)

Question 24

Liquidity

Answer 24

The ability for an asset or security to be quickly converted into cash without impacting its market price. The most liquid asset of all is cash itself.

Question 25

Top-Heavy Market

Answer 25

When the biggest companies comprise a relatively large percentage of the market. Can lead to idiosyncratic risk, where results of one of the largest companies can cause huge movements across all assets in the same peer group or category

Question 26

Idiosyncratic Risk

Answer 26

Risk that is endemic to a particular asset or group/category of assets (e.g. company, sector, etc.)

Question 27

Diluted Earnings per Share

Answer 27

The calculated EPS if all convertible securities were changed into common stock

Question 28

Discount Rate

Answer 28

The % risk-free rate of return an investor could get instead of pursuing another investment (like checking account, savings account, US Treasury Bonds)

Question 29

DCF

Answer 29

Discounted Cash Flow. A valuation method used to determine the present value of a company’s future projected cash flows. There’s a formula for calculating the DCF which uses the discount rate. The discount rate is typically the WACC

Question 30

WACC

Answer 30

Weighted Average Cost of Capital. Special equation. The cost of all the firm’s raised capital, taking into account common stock, preferred stock, bonds, and other sources of debt. Represented as a
Each category of capital is proportionately weighed.
Also typically used as the discount rate when calculating a company’s DCF

Question 31

Payout Ratio

Answer 31

Percentage of earnings paid out to investors as dividends. Typically under 35% is a lower risk sign. In extreme circumstances over 100% can happen