GLOSSERY OF FINANCIAL TERMS

blue chips - large companies with good credit and established reputations, or their stocks (Examples include IBM, AT&T, and the Ford Motor Company.)

brokerage fee - fee a broker charges for buying or selling stock on behalf of the investor.

diversification - spreading investments widely across different industry sectors (see below) and/or investment types to reduce risk.

dividend - cash payment a company issues to its stockholders as a share of profits.

earnings per share, or EPS - a company’s profit divided by the number of shares outstanding (If a company made $1,000,000 in profit and had issued 100,000 shares, it would have an EPS of $10.  Released quarterly and annually, a company’s EPS is one way to evaluate its performance.)

financial asset - claim on the property or income of a borrower.

index funds - type of mutual fund whose portfolio (see below) mirrors that of a major index such as the Dow Jones Industrial Average (These funds attempt only to match the market’s performance, not to beat it.)

industry sector - area in which a company does business, for example, pharmaceuticals or telecommunications.

mutual fund - collection of stocks and bonds arranged and managed by an investment company on behalf of customers who buy shares in the fund and pay a fee for management services.

net asset value (NAV) - equivalent of a stock price for a mutual fund; derived from the number of shares owned and the prices of the securities owned by the mutual fund.

portfolio - for an investor or mutual fund, the collection of financial assets, or securities (see below), owned.

price-to-earnings ratio (P/E) - This ratio is calculated by dividing the last closing price by the annual earnings per share of a company. Low P/E ratios usually mean high earnings per share; high P/E ratios usually mean the reverse.

rate of return - percentage gain or loss a stock, mutual fund, or other investment returns over time:

rate of return = (current price – price purchased)/price purchased. (For example, one share of Company X stock purchased at $10, if sold at $15 one year later would show a one-year rate of return of 50 percent.)

security - any financial instrument used as an investment, such as stocks, bonds, or mutual funds.

volume - number of shares of a stock that has been exchanged on any given day (In a newspaper, the volume is displayed in 100-share lots. Thus, a volume of 270 indicates that 27,000 shares were exchanged. It shows the level of interest in a stock.)