Key Financial Terms

7/30/2019 Key Financial Terms

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KEY FINANCIAL TERMS

Accrued interest: Interest due from issue date or from the last coupon payment date to thesettlement date. Accrued interest on bonds must be added to their purchase price.

Arbitrage: Buying a financial instrument in one market in order to sell the same instrument at ahigher price in another market. Ask Price: The lowest price at which a dealer is willing to sell a given security. Asset-Backed Securities (ABS): A type of security that is backed by a pool of bank loans,

leases, and other assets. Most ABS are backed by auto loans and credit cards these issues are

very similar to mortgage-backed securities.

At-the-money: The exercise price of a derivative that is closest to the market price of theunderlying instrument.

Basis Point: One hundredth of 1%. A measure normally used in the statement of interest ratee.g., a change from 5.75% to 5.81% is a change of 6 basis points.

Bear Markets: Unfavorable markets associated with falling prices and investor pessimism. Bid-ask Spread: The difference between a dealers bid and ask price. Bid Price: The highest price offered by a dealer to purchase a given security. Blue Chips: Blue chips are unsurpassed in quality and have a long and stable record of earnings

and dividends. They are issued by large and well-established firms that have impeccable

financial credentials.

Bond: Publicly traded long-term debt securities, issued by corporations and governments,whereby the issuer agrees to pay a fixed amount of interest over a specified period of time and to

repay a fixed amount of principal at maturity.

Book Value: The amount of stockholders equity in a firm equals the amount of the firms assetsminus the firms liabilities and preferred stock. /p>

Broker: Individuals licensed by stock exchanges to enable investors to buy and sell securities. Brokerage Fee: The commission charged by a broker. Bull Markets: Favorable markets associated with rising prices and investor optimism. Call Option: The right to buy the underlying securities at a specified exercise price on or before

a specified expiration date.

Callable Bonds: Bonds that give the issuer the right to redeem the bonds before their statedmaturity.

Capital Gain: The amount by which the proceeds from the sale of a capital asset exceed itsoriginal purchase price.

Capital Markets: The market in which long-term securities such as stocks and bonds are boughtand sold.

Certificate of Deposits (CDs): Savings instrument in which funds must remain on deposit for aspecified period, and premature withdrawals incur interest penalties.

Closed-end (Mutual) Fund: A fund with a fixed number of shares issued, and all trading isdone between investors in the open market. The share prices are determined by market prices

instead of their net asset value.


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Collateral: A specific asset pledged against possible default on a bond. Mortgage bonds arebacked by claims on property. Collateral trusts bonds are backed by claims on other securities.Equipment obligation bonds are backed by claims on equipment.

Commercial Paper: Short-term and unsecured promissory notes issued by corporations withvery high credit standings.

Common Stock: Equity investment representing ownership in a corporation; each sharerepresents a fractional ownership interest in the firm.

Compound Interest: Interest paid not only on the initial deposit but also on any interestaccumulated from one period to the next.

Contract Note: A note which must accompany every security transaction which containsinformation such as the dealers name (whether he is acting as principal or agent) and the date of

contract.

Controlling Shareholder: Any person who is, or group of persons who together are, entitled toexercise or control the exercise of a certain amount of shares in a company at a level (which

differs by jurisdiction) that triggers a mandatory general offer, or more of the voting power atgeneral meetings of the issuer, or who is or are in a position to control the composition of a

majority of the board of directors of the issuer. Convertible Bond: A bond with an option, allowing the bondholder to exchange the bond for a

specified number of shares of common stock in the firm. A conversion price is the specified

value of the shares for which the bond may be exchanged. The conversion premium is the excessofthe bonds value over the conversion price.

Corporate Bond: Long-term debt issued by private corporations. Coupon: The feature on a bond that defines the amount of annual interest income. Coupon Frequency: The number of coupon payments per year. Coupon Rate: The annual rate of interest on the bonds face value that a bonds issuer promises

to pay the bondholder. It is the bonds interest payment per dollar of par value.

Covered Warrants: Derivative call warrants on shares which have been separately deposited bythe issuer so that they are available for delivery upon exercise. Credit Rating: An assessment of the likelihood of an individual or business being able to meet

its financial obligations. Credit ratings are provided by credit agencies or rating agencies toverify the financial strength of the issuer for investors.

Currency Board: A monetary system in which the monetary base is fully backed by foreignreserves. Any changes in the size of the monetary base has to be fully matched by corresponding

changes in the foreign reserves.

Current Yield: A return measure that indicates the amount of current income a bond providesrelative to its market price. It is shown as: Coupon Rate divided by Price multiplied by 100%.

Custody of Securities: Registration of securities in the name of the person to whom a bank isaccountable, or in the name of the banks nominee; plus deposition of securities in a designatedaccount with the banks bankers or with any other institution providing custodial services.

Default Risk: The possibility that a bond issuer will default ie, fail to repay principal and interestin a timely manner.

Derivative Call (Put) Warrants: Warrants issued by a third party which grant the holder theright to buy (sell) the shares of a listed company at a specified price.

Derivative Instrument: Financial instrument whose value depends on the value of another asset.


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Discount Bond: A bond selling below par, as interest in-lieu to the bondholders. Diversification: The inclusion of a number of different investment vehicles in a portfolio in

order to increase returns or be exposed to less risk.

Duration: A measure of bond price volatility, it captures both price and reinvestment risks toindicate how a bond will react to different interest rate environments.

Earnings: The total profits of a company after taxation and interest. Earnings per Share (EPS): The amount of annual earnings available to common stockholders

as stated on a per share basis.

Earnings Yield: The ratio of earnings to price (E/P). The reciprocal is price earnings ratio (P/E). Equity: Ownership of the company in the form of shares of common stock. Equity Call Warrants: Warrants issued by a company which give the holder the right to acquire

new shares in that company at a specified price and for a specified period of time.

Ex-dividend (XD): A security which no longer carries the right to the most recently declareddividend or the period of time between the announcement of the dividend and the payment

(usually two days before the record date). For transactions during the ex-dividend period, the

seller will receive the dividend, not the buyer. Ex-dividend status is usually indicated in

newspapers with an (x) next to the stocks or unit trusts name.

Face Value/ Nominal Value: The value of a financial instrument as stated on the instrument.Interest is calculated on face/nominal value.

Fixed-income Securities: Investment vehicles that offer a fixed periodic return. Fixed Rate Bonds: Bonds bearing fixed interest payments until maturity date. Floating Rate Bonds: Bonds bearing interest payments that are tied to current interest rates. Fundamental Analysis: Research to predict stock value that focuses on such determinants as

earnings and dividends prospects, expectations for future interest rates and risk evaluation of the

firm.

Future Value: The amount to which a current deposit will grow over a period of time when it isplaced in an account paying compound interest.

Future Value of an Annuity: The amount to which a stream of equal cash flows that occur inequal intervals will grow over a period of time when it is placed in an account paying compoundinterest.

Futures Contract: A commitment to deliver a certain amount of some specified item at somespecified date in the future.

Hedge: A combination of two or more securities into a single investment position for thepurpose of reducing or eliminating risk.

Income: The amount of money an individual receives in a particular time period. Index Fund: A mutual fund that holds shares in proportion to their representation in a market

index, such as the S&P 500. Initial Public Offering (IPO): An event where a company sells its shares to the public for the

first time. The company can be referred to as an IPO for a period of time after the event.

Inside Information: Non-public knowledge about a company possessed by its officers, majorowners, or other individuals with privileged access to information.

Insider Trading: The illegal use of non-public information about a company to make profitablesecurities transactions


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Intrinsic Value: The difference of the exercise price over the market price of the underlyingasset.

Investment: A vehicle for funds expected to increase its value and/or generate positive returns. Investment Adviser: A person who carries on a business which provides investment advice with

respect to securities and is registered with the relevant regulator as an investment adviser.

IPO price: The price of share set before being traded on the stock exchange. Once the companyhas gone Initial Public Offering, the stock price is determined by supply and demand.

Junk Bond: High-risk securities that have received low ratings (i.e. Standard & Poors BBBrating or below; or Moodys BBB rating or below) and as such, produce high yields, so long asthey do not go into default.

Leverage Ratio: Financial ratios that measure the amount of debt being used to supportoperations and the ability of the firm to service its debt.

Libor: The London Interbank Offered Rate (or LIBOR) is a daily reference rate based on theinterest rates at which banks offer to lend unsecured funds to other banks in the London

wholesale money market (or interbank market). The LIBOR rate is published daily by the British

Bankers Association and will be slightly higher than the London Interbank Bid Rate (LIBID),

the rate at which banks are prepared to accept deposits.

Limit Order: An order to buy (sell) securities which specifies the highest (lowest) price atwhich the order is to be transacted.

Limited Company: The passive investors in a partnership, who supply most of the capital andhave liability limited to the amount of their capital contributions.

Liquidity: The ability to convert an investment into cash quickly and with little or no loss invalue.

Listing: Quotation of the Initial Public Offering companys shares on the stock exchange forpublic trading.

Listing Date: The date on which Initial Public Offering stocks are first traded on the stockexchange by the public

Margin Call: A notice to a client that it must provide money to satisfy a minimum marginrequirement set by an Exchange or by a bank / broking firm.

Market Capitalization: The product of the number of the companys outstanding ordinaryshares and the market price of each share.

Market Maker: A dealer who maintains an inventory in one or more stocks and undertakes tomake continuous two-sided quotes.

Market Order: An order to buy or an order to sell securities which is to be executed at theprevailing market price.

Money Market: Market in which short-term securities are bought and sold. Mutual Fund: A company that invests in and professionally manages a diversified portfolio of

securities and sells shares of the portfolio to investors.

Net Asset Value: The underlying value of a share of stock in a particular mutual fund; also usedwith preferred stock.

Offer for Sale: An offer to the public by, or on behalf of, the holders of securities already inissue.

Offer for Subscription: The offer of new securities to the public by the issuer or by someone onbehalf of the issuer.


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Open-end (Mutual) Fund: There is no limit to the number of shares the fund can issue. Thefund issues new shares of stock and fills the purchase order with those new shares. Investors buytheir shares from, and sell them back to, the mutual fund itself. The share prices are determined

by their net asset value.

Open Offer: An offer to current holders of securities to subscribe for securities whether or not inproportion to their existing holdings.

Option: A security that gives the holder the right to buy or sell a certain amount of an underlyingfinancial asset at a specified price for a specified period of time.

Oversubscribed: When an Initial Public Offering has more applications than actual sharesavailable. Investors will often apply for more shares than required in anticipation of onlyreceiving a fraction of the requested number. Investors and underwriters will often look to see if

an IPO is oversubscribed as an indication of the publics perception of the business potential ofthe IPO company.

Par Bond: A bond selling at par (i.e. at its face value). Par Value: The face value of a security. Perpetual Bonds: Bonds which have no maturity date. Placing: Obtaining subscriptions for, or the sale of, primary market, where the new securities of

issuing companies are initially sold.

Portfolio: A collection of investment vehicles assembled to meet one or more investment goals. Preference Shares: A corporate security that pays a fixed dividend each period. It is senior to

ordinary shares but junior to bonds in its claims on corporate income and assets in case ofbankruptcy.

Premium (Warrants): The difference of the market price of a warrant over its intrinsic value. Premium Bond: Bond selling above par. Present Value: The amount to which a future deposit will discount back to present when it is

depreciated in an account paying compound interest.

Present Value of an Annuity: The amount to which a stream of equal cash flows that occur inequal intervals will discount back to present when it is depreciated in an account payingcompound interest.

Price/Earnings Ratio (P/E): The measure to determine how the market is pricing the companyscommon stock. The price/earnings (P/E) ratio relates the companys earnings per share (EPS) tothe market price of its stock.

Privatization: The sale of government-owned equity in nationalized industry or othercommercial enterprises to private investors.

Prospectus: A detailed report published by the Initial Public Offering company, which includesall terms and conditions, application procedures, IPO prices etc, for the IPO

Put Option: The right to sell the underlying securities at a specified exercise price on of before aspecified expiration date.

Rate of Return: A percentage showing the amount of investment gain or loss against the initialinvestment.

Real Interest Rate: The net interest rate over the inflation rate. The growth rate of purchasingpower derived from an investment.

Redemption Value: The value of a bond when redeemed.


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Reinvestment Value: The rate at which an investor assumes interest payments made on a bondwhich can be reinvested over the life of that security.

Relative Strength Index (RSI): A stocks price that changes over a period of time relative tothat of a market index such as the Standard & Poors 500, usually measured on a scale from 1 to100, 1 being the worst and 100 being the best.

Repurchase Agreement: An arrangement in which a security is sold and later bought back at anagreed price and time.

Resistance Level: A price at which sellers consistently outnumber buyers, preventing furtherprice rises.

Return: Amount of investment gain or loss. Rights Issue: An offer by way of rights to current holders of securities that allows them to

subscribe for securities in proportion to their existing holdings.

Risk-Averse, Risk-Neutral, Risk-Taking:Risk-averse describes an investor who requires greater return in exchange for greater risk.

Risk-neutral describes an investor who does not require greater return in exchange for greater

risk.

Risk-taking describes an investor who will accept a lower return in exchange for greater risk.

Senior Bond: A bond that has priority over other bonds in claiming assets and dividends. Short Hedge: A transaction that protects the value of an asset held by taking a short position in a

futures contract.

Settlement: Conclusion of a securities transaction when a customer pays a broker/dealer forsecurities purchased or delivered, securities sold, and receives from the broker the proceeds of a

sale.

Short Position: Investors sell securities in the hope that they will decrease in value and can bebought at a later date for profit.

Short Selling: The sale of borrowed securities, their eventual repurchase by the short seller at alower price and their return to the lender.

Speculation: The process of buying investment vehicles in which the future value and level ofexpected earnings are highly uncertain.

Stock Splits: Wholesale changes in the number of shares. For example, a two for one splitdoubles the number of shares but does not change the share capital.

Subordinated Bond: An issue that ranks after secured debt, debenture, and other bonds, andafter some general creditors in its claim on assets and earnings. Owners of this kind of bondstand last in line among creditors, but before equity holders, when an issuer fails financially.

Substantial Shareholder: A person acquires an interest in relevant share capital equal to, orexceeding, 10% of the share capital.

Support Level: A price at which buyers consistently outnumber sellers, preventing further pricefalls.

Technical Analysis: A method of evaluating securities by relying on the assumption that marketdata, such as charts of price, volume, and open interest, can help predict future (usually short-

term) market trends. Contrasted with fundamental analysis which involves the study of financial

accounts and other information about the company. (It is an attempt to predict movements insecurity prices from their trading volume history.)

Time Horizon: The duration of time an investment is intended for.


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Trading Rules: Stipulation of parameters for opening and intra-day quotations, permissiblespreads according to the prices of securities available for trading and board lot sizes for eachsecurity.

Trust Deed: A formal document that creates a trust. It states the purpose and terms of the nameof the trustees and beneficiaries.

Underlying Security: The security subject to being purchased or sold upon exercise of theoption contract.

Valuation: Process by which an investor determines the worth of a security using risk and returnconcept.

Warrant: An option for a longer period of time giving the buyer the right to buy a number ofshares of common stock in company at a specified price for a specified period of time.

Window Dressing: Financial adjustments made solely for the purpose of accountingpresentation, normally at the time of auditing of company accounts.

Yield (Internal rate of Return): The compound annual rate of return earned by an investment Yield to Maturity: The rate of return yield by a bond held to maturity when both compound

interest payments and the investors capital gain or loss on the security are taken into account.

Zero Coupon Bond: A bond with no coupon that is sold at a deep discount from par value.

Interest Rate: Interest is the amount paid for the use of money for a certain time.

Although interest rate is typically quoted as a yearly figure, the actualamount of interest paid per year can be more, depending on the

compounding period (see below).

Compounding: Compounding is about interest on interest. When the interest is added to

the principal to generate further interest, the interest is said to be

compounded and the frequency this happens is called the compounding

period. Interest can be compounded yearly, monthly, weekly, or even

continuously.

Points: Points are one of the ways for lenders to cover the costs of processing the

loan. Quoted as a percentage number, this is the amount added to the

principal of the loan. For example, if you borrow $100,000 with 2 points,

you owe $102,000 the moment you receive your $100,000 loan. This is

generally accepted in return for a favorable interest rate.

APR: Loans sometimes involve additional cost such as points and other fees,

which vary from lender to lender. In order to compares loans, one should

use the Annual Percentage Rate, the equivalent interest rate after all the

added cost being considered.

Annuity: A fixed annuity is a fixed amount paid at regular intervals. In spite of its

name, this interval does not have to be a year. Also the amounts may be
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variable, in which case it is called a variable annuity.

Money Factor: A term commonly used in auto leasing industry. Under typical auto leasing

terms, the interest rate can be approximated by the money factor

multiplied by 24. When a dealer quotes a money factor k, the customer

should have the confidence of knowing that he/she is getting an interestrate slightly better (lower) than 2400 k %.

business financial terms and ratios definitions

These financial terms definitions are for the most commonly used UK financialterms and ratios. They are based on UK Company Balance Sheet, Profit andLoss Account, and Cashflow Statement conventions.

Certain financial terms often mean different things to different organizationsdepending on their own particular accounting policies. Financial terms willhave slightly different interpretations in different countries. So as a generalrule for all non-financial business people, if in doubt, ask for an explanationfrom the person or organization responsible for producing the figures andusing the terms - you may be the only one to ask, but you certainly will notbe the only one wodering what it all means. Don't be intimidated by financialterminology or confusing figures and methodology. Always ask forclarification, and you will find that most financial managers and accountantsare very happy to explain.

Thebusiness dictionarycontains many other business terms and definitions.

Sales related terms are in the glossary in thesales trainingsection.

acid test

A stern measure of a company's ability to pay its short term debts, in thatstock is excluded from asset value. (liquid assets/current liabilities) Alsoreferred to as the Quick Ratio.

assets

Anything owned by the company having a monetary value; eg, 'fixed' assetslike buildings, plant and machinery, vehicles (these are not assets if
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rentedand not owned) and potentially including intangibles like trade marksand brand names, and 'current' assets, such as stock, debtors and cash.

asset turnover

Measure of operational efficiency - shows how much revenue is produced per of assets available to the business. (sales revenue/total assets less currentliabilities)

balance sheet

The Balance Sheet is one of the three essential measurement reports for theperformance and health of a company along with the Profit and Loss Accountand the Cashflow Statement. The Balance Sheet is a 'snapshot' in time of who

owns what in the company, and what assets and debts represent the value ofthe company. (It can only ever nbe a snapshot because the picture is alwayschanging.) The Balance Sheet is where to look for information about short-term and long-term debts, gearing (the ratio of debt to equity), reserves,stock values (materials and finsished goods), capital assets, cash on hand,along with the value of shareholders' funds. The term 'balance sheet' isderived from the simple purpose of detailing where the money came from,and where it is now. The balance sheet equation is fundamentally: (where themoney came from) Capital + Liabilities = Assets (where the money is now).

Hence the term 'double entry' - for every change on one side of the balancesheet, so there must be a corresponding change on the other side - it mustalways balance. The Balance Sheet does not show how much profit thecompany is making (the P&L does this), although pervious years' retainedprofits will add to the company's reserves, which are shown in the balancesheet.

budget

In a financial planning context the word 'budget' (as a noun) strictly speakingmeans an amount of money that is planned to spend on a particularly activityor resource, usually over a trading year, although budgets apply to shorterand longer periods. An overall organizational plan therefore contains thebudgets within it for all the different departments and costs held by them.The verb 'to budget' means to calculate and set a budget, although in a loosercontext it also means to be careful with money and find reductions


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(effectively by setting a lower budgeted level of expenditure). The wordbudget is also more loosely used by many people to mean the whole plan. Inwhich context a budget means the same as a plan. For example in the UK theGovernment's annual plan is called 'The Budget'. A 'forecast' in certain

contexts means the same as a budget - either a planned individualactivity/resource cost, or a whole business/ corporate/organizational plan. A'forecast' more commonly (and precisely in my view) means a prediction ofperformance - costs and/or revenues, or other data such as headcount, %performance, etc., especially when the 'forecast' is made during the tradingperiod, and normally after the plan or 'budget' has been approved. In simpleterms: budget = plan or a cost element within a plan; forecast = updatedbudget or plan. The verb forms are also used, meaning the act of calculatingthe budget or forecast.

capital employed

The value of all resources available to the company, typically comprisingshare capital, retained profits and reserves, long-term loans and deferredtaxation. Viewed from the other side of the balance sheet, capital employedcomprises fixed assets, investments and the net investment in working capital(current assets less current liabilities). In other words: the total long-termfunds invested in or lent to the business and used by it in carrying out itsoperations.

cashflow

The movement of cash in and out of a business from day-to-day direct tradingand other non-trading or indirect effects, such as capital expenditure, tax anddividend payments.

cashflow statement

One of the three essential reporting and measurement systems for anycompany. The cashflow statement provides a third perspective alongside theProfit and Loss account and Balance Sheet. The Cashflow statement showsthe movement and availability of cash through and to the business over agiven period, certainly for a trading year, and often also monthly andcumulatively. The availability of cash in a company that is necessary to meetpayments to suppliers, staff and other creditors is essential for any business


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to survive, and so the reliable forecasting and reporting of cash movementand availability is crucial.

cost of debt ratio (average cost of debt ratio)

Despite the different variations used for this term (cost of debt, cost of debtratio, average cost of debt ratio, etc) the term normally and simply refers tothe interest expense over a given period as a percentage of the averageoutstanding debt over the same period, ie., cost of interest divided byaverage outstanding debt.

cost of goods sold (COGS)

The directly attributable costs of products or services sold, (usually materials,

labour, and direct production costs). Sales less COGS = gross profit. Effetivelythe same as cost of sales (COS) see below for fuller explanation.

cost of sales (COS)

Commonly arrived at via the formula: opening stock + stock purchased -closing stock.

Cost of sales is the value, at cost, of the goods or services sold during the

period in question, usually the financial year, as shown in a Profit and LossAccount (P&L). In all accounts, particularly the P&L (trading account) it'simportant that costs are attributed reliably to the relevant revenues, or thereport is distorted and potentially meaningless. To use simply the total valueof stock purchases during the period in question would not produce thecorrect and relevant figure, as some product sold was already held in stockbefore the period began, and some product bought during the period remainsunsold at the end of it. Some stock held before the period often remainsunsold at the end of it too. The formula is the most logical way of calculatingthe value at cost of all goods sold, irrespective of when the stock was

purchased. The value of the stock attributable to the sales in the period (costof sales) is the total of what we started with in stock (opening stock), andwhat we purchased (stock purchases), minus what stock we have left over atthe end of the period (closing stock).

current assets


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Cash and anything that is expected to be converted into cash within twelvemonths of the balance sheet date.

current ratio

The relationship between current assets and current liabilities, indicating theliquidity of a business, ie its ability to meet its short-term obligations. Alsoreferred to as the Liquidity Ratio.

current liabilities

Money owed by the business that is generally due for payment within 12months of balance sheet date. Examples: creditors, bank overdraft, taxation.

depreciation

The apportionment of cost of a (usually large) capital item over an agreedperiod, (based on life expectancy or obsolescence), for example, a piece ofequipment costing 10k having a life of five years might be depreciated overfive years at a cost of 2k per year. (In which case the P&L would show adepreciation cost of 2k per year; the balance sheet would show an assetvalue of 8k at the end of year one, reducing by 2k per year; and thecashflow statement would show all 10k being used to pay for it in year one.)

dividend

A dividend is a payment made per share, to a company's shareholders by acompany, based on the profits of the year, but not necessarily all of theprofits, arrived at by the directors and voted at the company's annual generalmeeting. A company can choose to pay a dividend from reserves following aloss-making year, and conversely a company can choose to pay no dividendafter a profit-making year, depending on what is believed to be in the best

interests of the company. Keeping shareholders happy and committed to theirinvestment is always an issue in deciding dividend payments. Along with theincrease in value of a stock or share, the annual dividend provides theshareholder with a return on the shareholding investment.

earnings before..


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There are several 'Earnings Before..' ratios and acronyms: EBT = EarningsBefore Taxes; EBIT = Earnings Before Interest and Taxes; EBIAT = EarningsBefore Interest after Taxes; EBITD = Earnings Before Interest, Taxes andDepreciation; and EBITDA = Earnings Before Interest, Taxes, Depreciation,

and Amortization. (Earnings = operating and non-operating profits (eginterest, dividends received from other investments). Depreciation is the non-cash charge to the balance sheet which is made in writing off an asset over aperiod. Amortisation is the payment of a loan in instalments.

fixed assets

Assets held for use by the business rather than for sale or conversion intocash, eg, fixtures and fittings, equipment, buildings.

fixed cost

A cost which does not vary with changing sales or production volumes, eg,building lease costs, permanent staff wages, rates, depreciation of capitalitems.

FOB - 'free on board'

The FOB (Free On Board) abbreviation is an import/export term relating to

the point at which responsibility for goods passes from seller (exporter) tobuyer (importer). It's in this listing because it's commonly misunderstood andalso has potentially significant financial implications. FOB meant originally(and depending on the context stills generally means) that the seller is liablefor the goods and is responsible for all costs of transport, insurance, etc., untiland including the goods being loaded at the (nominated FOB) port. Animporting buyer would typically ask for the FOB price, (which is now nowoften linked to a port name, eg., FOB Hamburg or FOB Vancouver), knowingthat this price is 'free' or inclusive of all costs and liabilities of getting the

goods from the seller to the port and on board the craft or vessel. LogicallyFOB also meant and still means that the seller is liable for any loss or damageup to the point that the goods are loaded onto the vessel at the FOB port, andthat thereafter the buyer assumes responsibility for the goods and the costsof transport and the liability. From the seller's point of view an FOB price musttherefore include/recover his costs of transport from factory or warehouse,insurance and loading, because the seller is unable to charge these costs as


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Any surplus money paid to acquire a company that exceeds its net tangibleassets value.

gross profit

Sales less cost of goods or services sold. Also referred to as gross profitmargin, or gross profit, and often abbreviated to simply 'margin'. See also 'netprofit'.

initial public offering (ipo)

An Initial Public Offering (IPO being the Stock Exchange and corporateacronym) is the first sale of privately owned equity (stock or shares) in acompany via the issue of shares to the public and other investing institutions.

In other words an IPO is the first sale of stock by a private company to thepublic. IPOs typically involve small, young companies raising capital to financegrowth. For investors IPOs can risky as it is difficult to predict the value of thestock (shares) when they open for trading. An IPO is effectively 'going public'or 'taking a company public'.

letters of credit

These mechanisms are used by exporters and importers, and usually provided

by the importing company's bank to the exporter to safeguard the contractualexpectations and particularly financial exposure of the exporter of the goodsor services. (Also called 'export letters of credit, and 'import letters of credit'.)

When an exporter agrees to supply a customer in another country, theexporter needs to know that the goods will be paid for.

The common system, which has been in use for many years, is for thecustomer's bank to issue a 'letter of credit' at the request of the buyer, to theseller. The letter of credit essentially guarantees that the bank will pay the

seller's invoice (using the customer's money of course) provided the goods orservices are supplied in accordance with the terms stipulated in the letter,which should obviously reflect the agreement between the seller and buyer.This gives the supplier an assurance that their invoice will be paid, beyondany other assurances or contracts made with the customer. Letters of creditare often complex documents that require careful drafting to protect the


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interests of buyer and seller. The customer's bank charges a fee to issue aletter of credit, and the customer pays this cost.

The seller should also approve the wording of the buyer's letter of credit, andoften should seek professional advice and guarantees to this effect from their

own financial services provider.

In short, a letter of credit is a guarantee from the issuing bank's to the sellerthat if compliant documents are presented by the seller to the buyer's bank,then the buyer's bank will pay the seller the amount due. The 'compliance' ofthe seller's documentation covers not only the goods or services supplied, butalso the timescales involved, method for, format of and place at which thedocuments are presented. It is common for exporters to experience delays inobtaining payment against letters of credit because they have either failed tounderstand the terms within the letter of credit, failed to meet the terms, orboth. It is important therefore for sellers to understand all aspects of letters ofcredit and to ensure letters of credit are properly drafted, checked, approvedand their conditions met. It is also important for sellers to use appropriateprofessional services to validate the authenticity of any unknown bank issuinga letter of credit.

letters of guarantee

There are many types of letters of guarantee. These types of letters of

guarantee are concerned with providing safeguards to buyers that supplierswill meet their obligations or vice-versa, and are issued by the supplier's orcustomer's bank depending on which party seeks the guarantee. While aletter of credit essentially guarantees payment to the exporter, a letter ofguarantee provides safeguard that other aspects of the supplier's orcustomer's obligations will be met. The supplier's or customer's bank iseffectively giving a direct guarantee on behalf of the supplier or customer thatthe supplier's or customer's obligations will be met, and in the event of thesupplier's or customer's failure to meet obligations to the other party then the

bank undertakes the responsibility for those obligations.Typical obligations covered by letters of guarantee are concerned with:

Tender Guarantees (Bid Bonds) - whereby the bank assures the buyer thatthe supplier will not refuse a contract if awarded.

Performance Guarantee - This guarantees that the goods or services aredelivered in accordance with contract terms and timescales.


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Advance Payment Guarantee - This guarantees that any advance paymentreceived by the supplier will be used by the supplier in accordance with theterms of contract between seller and buyer.

There are other types of letters of guarantee, including obligations concerningcustoms and tax, etc, and as with letters of credit, these are complexdocuments with extremely serious implications. For this reasons suppliers andcustomers alike must check and obtain necessary validation of any issuedletters of guarantee.

liabilities

General term for what the business owes. Liabilities are long-term loans of thetype used to finance the business and short-term debts or money owing as a

result of trading activities to date . Long term liabilities, along with ShareCapital and Reserves make up one side of the balance sheet equationshowing where the money came from. The other side of the balance sheetwill show Current Liabilities along with various Assets, showing where themoney is now.

liquidity ratio

Indicates the company's ability to pay its short term debts, by measuring the

relationship between current assets (ie those which can be turned into cash)against the short-term debt value. (current assets/current liabilities) Alsoreferred to as the Current Ratio.

net assets (also called total net assets)

Total assets (fixed and current) less current liabilities and long-term liabilitiesthat have not been capitalised (eg, short-term loans).

net current assetsCurrent Assets less Current Liabilities.

net present value (npv)


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complex concept - it's a guide to use alongside other indicators, not anabsolute measure to rely on by itself. The P/E ratio is arrived at by dividingthe stock or share price by the earnings per share (profit after tax andinterest divided by the number of ordinary shares in issue). As earnings per

share are a yearly total, the P/E ratio is also an expression of how many yearsit will take for earnings to cover the stock price investment. P/E ratios arebest viewed over time so that they can be seen as a trend. A steadilyincreasing P/E ratio is seen by the investors as increasingly speculative (highrisk) because it takes longer for earnings to cover the stock price. Obviouslywhenever the stock price changes, so does the P/E ratio. More meaningful P/Eanalysis is conducted by looking at earnings over a period of several years.P/E ratios should also be compared over time, with other company's P/E ratiosin the same market sector, and with the market as a whole. Step by step, tocalculate the P/E ratio:

1. Establish total profit after tax and interest for the past year.2. Divide this by the number of shares issued.3. This gives you the earnings per share.4. Divide the price of the stock or share by the earnings per share.5. This gives the Price/Earnings or P/E ratio.

profit and loss account (P&L)

One of the three principal business reporting and measuring tools (along withthe balance sheet and cashflow statement). The P&L is essentially a tradingaccount for a period, usually a year, but also can be monthly and cumulative.It shows profit performance, which often has little to do with cash, stocks andassets (which must be viewed from a separate perspective using balancesheet and cashflow statement). The P&L typically shows sales revenues, costof sales/cost of goods sold, generally a gross profit margin (sometimes called'contribution'), fixed overheads and or operating expenses, and then a profitbefore tax figure (PBT). A fully detailed P&L can be highly complex, but onlybecause of all the weird and wonderful policies and conventions that thecompany employs. Basically the P&L shows how well the company hasperformed in its trading activities.

overhead


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An expense that cannot be attributed to any one single part of the company'sactivities.

quick ratio

Same as the Acid Test. The relationship between current assets readilyconvertible into cash (usually current assets less stock) and current liabilities.A sterner test of liquidity.

reserves

The accumulated and retained difference between profits and losses year onyear since the company's formation.

restricted funds

These are funds used by an organisation that are restricted or earmarked by adonor for a specific purpose, which can be extremely specific or quite broad,eg., endowment or pensions investment; research (in the case of donations toa charity or research organisation); or a particular project with agreed termsof reference and outputs such as to meet the criteria or terms of the donationor award or grant. The source of restricted funds can be from government,foundations and trusts, grant-awarding bodies, philanthropic organisations,

private donations, bequests from wills, etc. The practical implication is thatrestricted funds are ring-fenced and must not be used for any other than theirdesignated purpose, which may also entail specific reporting and timescales,with which the organisation using the funds must comply. A glaring exampleof misuse of restricted funds would be when Maxwell spent Mirror Grouppension funds on Mirror Group development.

return on capital employed (ROCE)

A fundamental financial performance measure. A percentage figurerepresenting profit before interest against the money that is invested in thebusiness. (profit before interest and tax, divided by capital employed, x 100 toproduce percentage figure.)

return on investment


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t/t (telegraphic transfer)

Interntional banking payment method: a telegraphic transfer payment,commonly used/required for import/export trade, between a bank and an

overseas party enabling transfer of local or foreign currency by telegraph,cable or telex. Also called a cable transfer. The terminology dates from timeswhen such communications were literally 'wired' - before wirelesscommunications technology.

variable cost

A cost which varies with sales or operational volumes, eg materials, fuel,commission payments.

working capital

Current assets less current liabilities, representing the required investment,continually circulating, to finance stock, debtors, and work in progress.

Key Financial Terms

Documents

Transcript of Key Financial Terms