A Glossary
Young Fools
March 25, 1998

Aggressive Investing: Taking on a lot of risk, hoping to make a lot of money, is investing aggressively. The opposite of aggressive investing is conservative investing, where the investor does not take on much risk. Foolish investing falls somewhere in the middle, where you take on a reasonable amount of risk in order to earn solid returns.

Bears and Bulls: You'll often hear about the "bull market" and the "bear market." You'll hear that so-and-so is a "bear" or is "bullish." It's really just like optimists and pessimists. Bears think the market is going to crash soon, and they either take their money out of stocks or invest it defensively. Bulls think the market will keep going up. And Fools are just Fools. We know the market will crash now and then, but we also know it will keep going up after crashes. We don't take our money out of the market in fear. We have the guts to hold on to our stocks through crashes.

Blue-chip Stocks: Blue-chip stocks are those from companies which are the most well-known and well-trusted. These companies are usually very large and often very old. Examples would be IBM, AT&T, Texaco, and so on. All the Dow's 30 stocks would be considered blue-chips.

Bonds: Bonds are essentially loans that companies and governments sell in order to raise money. If you buy a bond, you are lending money to whoever issued it, and you will usually collect some regular interest payments until your money is returned to you.

Brokers: Stockbrokers are agents who buy or sell stocks for the public. (See also Full-service Broker and Discount Broker)

Capitalization / Market Capitalization: This refers to how much a company's total stock is worth. It's also kind of like a price tag for the whole company. If you wanted to buy the company, that's how much, at least, you'd have to cough up. To figure out a company's capitalization, you multiply the number of shares of the company that exist by the current price of a share. So a company with 10 million shares, priced at $65 each, would have a market capitalization of $650 million, making it a "medium-cap" stock -- not very big or very small. Investors categorize companies as "large-cap," "medium-cap," "small-cap," or "micro-cap."

CD: Certificates of Deposit, also called CDs, are offered by banks and can also be sold by brokerages. They require that you leave your money invested in the CD for a specific period of time, and they pay an interest rate slightly higher than a savings account. If you withdraw your money early, you pay a penalty.

Commission: Whenever you buy or sell shares of stock through a broker, you will be charged a fee called a commission. Commissions vary greatly in size, from as little as $8 or less to as much as hundreds of dollars. They can make trading very expensive if you are only buying or selling small numbers of shares. For example, if you want to buy one share of stock for $25, you might have to pay more in commission than for the stock. If you're buying 20,000 shares of a $50 stock, though, paying even a $300 commission is not a big deal.

Compounding: Compounding is when your money increases regularly and when the amount it increases by also increases. For example, if you have $100 growing at 10% per year, it will be $110 in one year (having increased by $10), and then $121 in the second year (having increased by $11), and $133 in the third year (having increased by $12). Over large periods of time, compounding makes money grow more and more quickly.

Conglomerate: A conglomerate is a company made up of lots of different companies, usually ones which it has bought. Time Warner, for example, owns Warner Music, HBO, Time Inc., Elektra Entertainment, The Atlantic Group, and a bunch of other operations.

Conservative Investing: A conservative investor is someone who is afraid of taking on too much risk and who sticks with safer investments -- perhaps government bonds instead of stocks. The opposite of this is aggressive investing, where an investor takes on a lot of risk hoping for a big payoff. Foolish investing falls somewhere in the middle, where you take on a reasonable amount of risk in order to earn solid returns.

Correction: If you hear someone talk about a "correction" on a business program on television, she means a drop in the market. A big "correction" is a crash. The word correction is used because people sometimes think that the market has grown more than it should and is due to be corrected, to get to what they think is its proper place.

Crash: A market crash is a big correction. It's what many investors always worry about. The stock market never goes up in a straight line, so there will always be crashes. After the stock market has crashed, it has always recovered. Sometimes it takes a few months, sometimes many years.

Discount Broker: A discount broker executes your buy or sell orders but, unlike a full-service broker, does not give you advice on which stocks you should buy or sell. The discount broker charges much lower commissions, and Fools prefer discount brokers. Examples of discount brokers are Charles Schwab, Fidelity, and Muriel Siebert. (See also Full-service Brokers)

Diversification: If you're keeping all your eggs in one basket, you're not diversified. Good investors make sure their money is divided between 8-12 stocks so that if anything terrible happens to one company, they won't lose too much. You also want to diversify your holdings over different industries. You wouldn't want all your money in automobile companies, becuase that industry might go into a long slump.

Dividend: Part of a company's profit that is distributed to its shareholders.

Dividend Yield: If you divide the dividend a company pays each year by its current stock price, you get the dividend yield. So a stock trading at $50 per share which pays a $3.00 per year dividend has a yield of 6%. (3 divided by 50 = 0.06, or 6%.) This means that even if the stock price never goes up, you'll be earning 6% each year just from the dividend.

Dow: The Dow is short for the Dow Jones Industrial Average, which is a measure of how 30 of America's largest companies are doing. TV news announcers often report on how "the Dow" did during the day.

Dow Dividend Approach: The Dow Dividend Approach is an amazingly simple way of picking stocks in which to invest. It only takes a few minutes a year and targets stocks among the Dow 30 which are beaten down and due to rebound. Over the last 35 years, the Dow Dividend Approach has averaged roughly a 16-20% return per year.

DRIP: DRIP stands for Dividend Reinvestment Plan. These allow you to buy shares directly from the company, without having to buy through a broker. This means you won't have to pay commissions. DRIPs usually require that you buy your first share from a broker. Cousins of DRIPs are "Direct Purchase Plans," which let you buy even your first share directly from the company.

Equities: This is a fancy way of saying "stocks." Equity is when you own part of something. If your parents are paying off the mortgage on their house and have paid for half of it already, that means that they have 50% equity in the house. They don't quite own it all yet, but they own part of it.

Fool: Fools are investors who have learned enough about investing to take charge of their financial future, picking stocks on their own after researching the companies. Fools have learned how to outperform the market.

The Foolish Four: This is a variation on the Dow Dividend Approach that offers slightly higher returns.

Full-service Broker: A full-service broker not only executes your stock buy or sell orders but also gives you advice, recommending which stocks you should buy or sell. These brokers charge much higher commissions than discount brokers and Fools think you should make your own decisions and use the discount brokers. Merrill Lynch, for example, is a full-service broker. (See also Discount Broker)

Index: An index is a bunch of stocks grouped together to try to track the market as a whole or a particular part of the market. The S&P 500 Index (see S&P 500) is an example of an index that aims to show the market's overall moves, while the Philadelphia Semiconductor Index is an example of an index that tracks one market segment -- in this case, semiconductor stocks.

Index Funds: Index funds are mutual funds which are set up to mimic or copy particular groups of companies. They buy and hold whatever stocks are in the index that they're based on. An S&P 500 Index fund is one example.

Initial Public Offering (IPO): An initial public offering occurs when a company goes public, offering shares of itself to the public for the first time. Once it goes public, shares of the company will trade through stock markets and exchanges. There can be a lot of investor interest and excitement over IPOs.

Interest: Interest is what a borrower pays to a lender in exchange for the use of the borrowed money. When this payment is expressed as a percentage, like 10%, it's called the interest rate. So if you deposit money in a bank, you're really lending the bank your money, and the bank pays you interest for it.

Large-Cap: (see Capitalization)

Lottery: A game of chance, where many people buy tickets and winners are chosen at random. Lotteries are an easy way to lose money.

Market Capitalization: (see Capitalization)

Medium-Cap: (see Capitalization)

Merger: A merger is when one company buys another or joins forces with another.

Money Market: Money Market funds put money in a bunch of short-term investments (like bonds). If you invest your money in the Money Market, you'll usually earn a little more than the current interest rate offered by banks. This is a safe, and therefore very conservative, way to invest money.

The Motley Fool: The Motley Fool is an online forum dedicated to teaching people how to successfully invest in the stock market. The mission? To educate, amuse, and help you make money for yourself.

Mutual Funds: Mutual funds are pooled amounts of money from many people that are invested by professional managers. Most mutual funds underperform the market. Since most people don't have the confidence or know-how to invest on their own, they often put their money in mutual funds.

Nasdaq: The Nasdaq Stock Market is a computerized system which helps brokers trade stocks over-the-counter. It appears to work just like the New York Stock Exchange or other exchanges, but it is really a little different. Stocks either trade on a particular exchange or through Nasdaq.

Okapi: An African mammal related to the giraffe, which doesn't have an extremely long neck.

P/E Ratio (Price-to-Earnings): A stock's price divided by its annual earnings is its P/E ratio. P/E ratios seem to suggest when a stock is over- or undervalued, but investors should look at much more than just a company's P/E ratio. These ratios are usually listed along with a stock's price in a newspaper's business section.

Penny Stocks: Penny stocks are low-priced, risky stocks which usually trade for less than $5. Many years ago, when stock prices were lower, penny stocks traded for pennies per share -- that's how they got their name. Even today, some still trade for pennies per share. Most Fools avoid penny stocks.

Portfolio: A collection of investments. For example, your investment portfolio might be made up of stock in a dozen different companies. Or it might have some bonds, some stocks, and a mutual fund. Your portfolio might also include six dozen baseball cards, $75 in your bank, and a $50 savings bond from Aunt Selma.

Profit Margin: This is a percentage that reflects how much of the money a company takes in it keeps as profit. If a company received $50 million from selling stuff and made a profit of $10 million after paying its expenses and taxes, its profit margin would be 20%. (10 divided by 50 = 0.20 or 20%.)

Prospectus: A prospectus is a thorough description of an investment opportunity. It is meant to provide information to help investors decide whether or not to invest.

Publicly-traded: If a company has shares trading on the market, it is said to be "publicly-traded." That means that whoever owns a share owns part of the company. If you own 5% of the shares, you own 5% of the company. Companies "go public" in order to raise money. Many companies, like Levi Strauss, are still privately-held, not publicly-traded. You can't buy stock in them.

Real Estate: Real estate is property like land, houses and office buildings.

Return: The word "return" is used to describe the money you make on your investments. Savings accounts at banks, for example, offer low returns (they pay little in interest), while some stocks can offer spectacular returns (perhaps doubling your money).

Risk: Risk is often associated with return because to try and earn a high rate of return, you usually have to take on higher risk. All the ways you can invest your money vary in how risky they are. For example, bonds are usually less risky than stocks, but they offer lower returns.

S&P 500: An "index" of 500 of America's largest companies monitored by Standard & Poor's (S&P). If the companies, as a group, rise in price, the S&P 500 Index rises, as well. This is an excellent benchmark for investors. It's what you should probably compare your returns to. If you're not beating the S&P 500, you should reevaluate what you're doing and maybe just invest in the S&P 500.

Shareholder: You, if you own stock in a company.

Shares Outstanding: The shares outstanding are the number of shares of a company that exist.

Small-Cap: (see Capitalization)

Split: (see Stock Split)

Stock: Shares of publicly-traded companies. A share of stock legally represents part of a company's value.

Stockbroker: (see Broker)

Stock Split: When a company wants to increase the number of its shares, it can split them. A 2-for-1 split means that for every share of the stock you own, you'll get another, but the value of each will be cut in half. The end result is that the value of the company and your holdings remain the same. Stocks can split in lots of ways (2-for-1, 3-for-2, 4-for-1, etc.) and can even reverse-split, when the number of shares is reduced and the stock price is increased.

Street Name: If you buy stocks through a broker, they are often registered in "street name," which is the name of the brokerage firm. This is done to simplify things, and it usually doesn't matter for most customers. It does matter, though, if you're buying an initial share or shares of a stock and you plan to open a DRIP with that company. DRIPs generally require that the shares are registered in your name, not street name. Some brokers will transfer registration to you for no charge, while others will charge you -- so be careful.

Suspenders: These are bands of elastic worn over the shoulders to keep up pants. Many men who work on Wall Street wear them instead of belts. Don't ask us why, though!

Ticker Symbol: All companies that are publicly-traded must have a ticker symbol for their shares. This is so that the company can be identified with just a few letters. Thanks to the ticker symbol, you don't have to say or write "Minnesota Mining and Manufacturing" -- you can just say "MMM." Other examples of tickers are "Z" for Woolworth and "MSFT" for Microsoft.