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Sunday, February 8, 2009

Some Common Financial Terms - Part I


Liquidy Risk

The risk that arises from the difficulty of selling an asset. An investment may sometimes need to be sold quickly. Unfortunately, an insufficient secondary market may prevent the liquidation or limit the funds that can be generated from the asset. Some assets are highly liquid and have low liquidity risk (such as bank deposits or stocks of a publicly traded company), while other assets are highly illiquid and have high liquidity risk (such as a house).

Window dressing

The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund's holdings are made public, in order to give the appearance that they've been holding good stocks all along.

or

The deceptive practice of using accounting tricks to make a company's balance sheet and income statement appear better than they really are. (Example Satyam Fiasco)

Profit sharing

An arrangement in which an employer shares some of its profits with its employees. The compensation can be stocks, bonds, or cash, and can be immediate or deferred until retirement. Profit sharing allows for changing contributions each year. Contributions are determined by a formula to allocate the overall contribution and distribution of accumulated funds after the retirement age. Unless the plans are defined as an elective deferral plan, the contributions are not tax deductible. Contributions and earnings can grow tax deferred until withdrawal.

Corporate

Pertaining to corporations. Corporations are the most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners. This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, called incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnership.

Ask

The lowest price that any investor or dealer has declared that he/she will sell a given security or commodity for. For over the counter stocks, the ask is the best quoted price at which a Market Maker is willing to sell a stock. For mutual funds, the ask is the net asset value plus any sales charges. also called asked price or asking price or offering price.

Price earnings ratio - P/E Ratio

The most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after tax earnings over a 12 month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per share basis. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. The last year's price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. also called earnings multiple or (P/E ratio).

Financial Terms - Part II
Financial Terms - Part III
Financial Terms - Part IV
Financial Terms - Part V
Financial Terms - Part VI

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