Category: Glossary


Indices Stock

Filed Under: Glossary by Bill — Comments Off
December 9, 2008

When you watch the financial news you hear things like the DOW is up 200 points today or the NASDAQ is down 30 points or the S&P 500 is up 12 points.  These various entities are collections of stocks that represent different markets or sectors.  In the past you would have had to buy all the stocks in the collection in order to mimic what was being reported but now you can buy an indices stock or as it is often called an index fund (mutual fund) or ETF (electronic traded fund).

These indices stocks are companies that hold the same collection of stocks as the index and then for a small management fee allow you to purchase shares of the collection without all the hassle of balancing the fund yourself.  Another advantage is a much smaller price of entry than buying one of each S&P 500 stock or even the DOW 30 Shares.  Your only real task once you’ve determined you wish to diversify your portfolio with one of the indices stocks is to verify that the management fee is worth not purchasing each of the shares yourself and balancing the fund as it changes.  Odds are if you are a new investor their management fee is much lower than the commission fees for buying and selling stocks.

Here are a few of the common stock indices, memorize a bunch of these to earn stock market points at your next party:

Stock DOW Jones: The Diamonds Trust, Series 1 (DIA) often called the diamonds, is one ETF which allows you to track the DOW stocks.

Stock S&P 500: The SPDR Trust, Series 1 (SPY) often called the Spiders, is an ETF that lets you track the S&P 500.

Stock NASDAQ: The Powershares QQQ Trust, Series 1 (QQQQ), usually called “the Qs” allows an investor to buy the NASDAQ 100.

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B Stock

Filed Under: Glossary by Bill — Comments Off
December 8, 2008

Sometimes you’ll notice a company has two types of shares available for purchase on the market that appear nearly identical in every way – often called class A stock and class B stock.  Usually they are identical in every way except voting rights and number of shares outstanding.  These shares are usually made for founding members of the company to maintain a higher share of the voting right while selling more of the corporation’s equity.

The most famous example is Berkshire Hathaway’s (BRK.A and BRK.B) Class A and B stock.  Class A has full voting rights, the standard common share while Class B shares have 1/30th the value but only 1/200th the voting right.

These types of situations make a popular form of arbitrage in the stock market where the two classes of stock shift apart from each other to the point where it’s worth selling one class of shares to buy the other.  However, do remember that the voting rights and other differences may have a small amount of value to them and pricing those in can be difficult, but if you manage you could make some money swapping shares.

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Stock Debt

Filed Under: Fundamental, Glossary by Bill — 2 Comments
December 2, 2008

There are a few types of debt to look at when inspecting the stock debt.  Most of these can be found using a service like google or yahoo finance, but sometimes it’s good to just dig into a companies financial statements.  You can get a better feel on why they have the debt and what they intend on doing with the money.

The two major types of stock debt are current liabilities and and non-current liabilities.  Current liabilities are what a company owes in one year’s time.  This is usually things like working capital, short term bills from suppliers, etc.  Non-current liabilities are like bonds sold to raise money (Issued shares can be a hidden form of debt), or long term bank loans for capital improvement. 

When looking at the overall debt of a company you don’t want to get lost in the big numbers.  Remember it’s all relative and you need to compare the debt (especially the current liabilities) to the cash flow of the company and see if that spread is improving over time.  Then you want to verify that earnings are improving compared to the debt load.  If the earnings aren’t improving then the increased cash flow must come from taking on more debt.  This is a long term downward spiral.

The last thing to look at (which you can usually only see by reading through the reports unless you know the company personally) is if they are taking on more debt is this debt going to improve future earnings by a greater margin than the cost of the debt?  If you can see the turnaround in earnings before the general market is paying attention you can pick up some fantastic stock deals.

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Forex Pairs

Filed Under: Forex, Glossary by Bill — 6 Comments
November 27, 2008

In trading currencies you don’t just buy the yen.  You buy the yen with US dollars.  Or you sell the euro for US dollars.  Or maybe you sell the yen for euros.  This trading of one currency for another is the Forex pair you choose.  That’s why you never just see a chart for one currency or another, it’s always versus another currency.

Even if you’re not interested in trading currencies (though adding another option to your portfolio could reduce risk but reducing the number of related investments) you should have a basic understanding that different currencies are influenced more by different events, just like how different stocks will react to a major storm or interest rate change differently.  Also important is to know how your investments react to a currency change.  If the US dollar falls does that actually hurt your investments?  It may if it buys a lot of raw materials from oversea, though if it does a lot of exporting it may be a good thing.  Following the currency markets may help your timing on that stock you’ve been following.

Here are some Forex pairs with some real general trends associated with them:

International trade currencies: These currencies are influenced by changes in demand for commodities and finished goods. A few of them (CAD, AUD, NZD) are often referred to as the “commodity currencies.”

GBP/USD
AUD/USD
NZD/USD
USD/CAD
USD/JPY

Capital flow currencies: These currencies are swayed by changes in demand for investments including equities, bonds and interest bearing investments. You will notice that there are some currencies are in both categories.  It is impossible to strictly say that one forex pair falls only in one category and no other category. 

EUR/USD
GBP/USD
USD/CHF
USD/JPY

I know, it’s more charts to consider, but if it just adds 1% to your personal CAGR, imagine how much sooner you’ll be retiring.  Or don’t imagine calculate it.

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