Glossary of Equity Investment Terms*

Unbiased Financial Information Provided by Financial Wisdom.

Annual Report
Yearly record of a publicly held company’s financial condition. It includes a description of the firm’s operations, balance sheet, income statement and some historical information. The SEC requires a more detailed report called a 10-K which is available from the company.

Arbitrage
A trading strategy in which one tries to profit from differences in the prices of the same security that is traded on more than one market.

Basis
The price an investor pays for a security plus any commissions. It is used to determine capital gains or losses for tax purposes when the security is sold.

Bear Market
A bear market is a prolonged period when stock prices generally fall. The term came from “bears pawing the ground.”

Blue Chip
Common stocks of large, solid and well-known companies like GM, Exxon, GE or Procter & Gamble.

Bull Market
A bull market is a prolonged period when stock prices generally rise. The term came from “bulls tossing their horns up into the air.”

Capital Gains
When a stock is sold for a profit, the difference between the net sales price of the security and its net cost, or original basis. Net capital gains are taxed.

Capital Loss
The difference between the net cost of a security and the net sale price, if that security is sold at a loss. The deductibility of net capital losses may be limited.

Churning
Excessive trading in a brokerage account. This can be done to increase the broker’s commissions.

Commission
The fee paid to the broker to execute a trade. Commissions are usually based on number of shares, bonds, options and their dollar value. Commissions can be charged on the purchase and sale of securities.

Common Stock
Shares of ownership issued by corporations to raise capital. Holders of common stock are entitled to receive dividends and to participate in some corporate decisions such as electing the board of directors.

Dividend
Distribution of a portion of a company’s earnings to shareholders. Dividends are usually paid in cash and are subject to tax.

Dividend Reinvestment Plan
Automatic reinvestment of dividends into more shares of stock. Dividend reinvestment plans are a convenient ways to accumulate more shares.

Dow Jones Industrial Average
An index of the performance of 30 well known stocks on the New York Stock Exchange and NASDAQ. The Dow Jones Industrial Average is commonly reported as an indication of whether stock prices rose or fell.

Earnings
Net income for the company during the period after income taxes, but before dividends.

Earnings per share
Net income for a company for the past 12 months, divided by the number of common shares outstanding. The company often uses a weighed average of shares outstanding over the reporting term.

Good ‘Til Canceled Order
Sometimes simply called “GTC”, it is an order for the broker to buy or sell stock that remains in effect until it is executed or canceled.

Hedging
An investment strategy designed to reduce investment risk using “call” options, “put” options, “short” selling, or futures contracts. Hedging is usually used by professional investors and institutions.

Index
A statistical measure to show movement in price or rate of return over certain time periods. Well known indexes include the S & P 500 Index and the Dow Jones Industrial Average.

Index Mutual Fund
A relatively new type of mutual fund that tries to match the return of a certain index by owning the securities that make up the index. This is a form of passive investment management.

Initial Public Offering
A company’s first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital. IPO’s are usually considered high-risk investments.

Margin Account
A brokerage account where the brokerage firm will lend money to help purchase securities. The loan in a margin account is collateralized by the securities in the account. If the value of the stock drops, the owner will be asked to either put in more cash, or sell a portion of the stock.

Market Capitalization
The dollar value of the outstanding shares of a company. It is calculated by multiplying the number of outstanding shares by the current price.

Market Cycle
The period between the 2 latest bull or bear markets.

Market Order
An order to a broker to buy or sell a stock at the existing price.

Option
An investment that gives the buyer the right, but not the obligation, to buy or sell stock at a set price on or before a given date. Trading options can be a speculative strategy.

Price/Earnings Ratio
Shows the “multiple” of earnings at which a stock sells. The P/E ratio is determined by dividing current price by the most recent four quarters’ earnings per share.

Profit Margin
Indicator of a company’s profitability. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage.

Prospectus
A legal document used to sell securities. A prospectus includes a description of the business and the risk factors. It is “required reading” for informed investors.

Return on Equity
Indicator of profitability. ROE is determined by dividing net income by common stockholders’ equity. The result is shown as a percentage.

Selling Short
If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker, sell it and then buy it back at a later date to repay the broker.

Sell Stop Order
An order to a broker to sell stock when the price falls to a specified level.

Shareholders equity
The portion of a company’s balance sheet that includes the par value of issued shares, additional paid in capital and accumulated earnings.

Stock Dividend
Payment of a corporate dividend in the form of additional stock rather than cash. A stock dividend may also be shares in a subsidiary being spun off to the shareholders.

* Non-Deposit investment products (NDIP) are not insured Adams Community Bank deposits and are not FDIC insured. These products are not endorsed, recommended, or guaranteed by Adams Community Bank or any government agency. The value of investments may fluctuate, the return on investments is not guaranteed, and loss of principal is possible.