Business Glossary

ByABC News

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accounts payable — The amount a company owes for goods already received.Not unlike a person’s credit card balance; you’ve got the VCR, but youhaven’t taken the money out of the bank yet.

accounts receivable — The amount a company is owed for goods it sold oncredit.

accrual method of accounting — Used for most corporate financialstatements. Revenues are counted during the time they’re earned, andexpenses are counted during the time they’re incurred. Cash doesn’t need tochange hands to be recorded. This is a fuller way of looking at financialhealth. It’s as if you kept records not just of checks you’d written anddeposits you made, but also of what you owed on your credit cards and whatyou were owed by others. You can feel pretty rich if your checking accountis flush, but if you owe thousands on your credit card and don’t take thatinto account, you can spend yourself into trouble.

allowance for bad debt — The amount of debt a company expects not tocollect. This is subtracted from what the company is owed for goods it soldon credit (accounts receivable), so the balance sheet better reflects thecompany’s true economic health.

arbitration — One method of settling disputes, including union-employerbattles. The parties choose a third party to settle their disagreement.This is called binding arbitration when the parties also agree to abide bythe arbitrator’s decision.

assets — Things a company controls, which usually means it owns theseitems. A car company’s assets would include everything from computers usedby the accounting department, to cars not yet sold, to the factory wherethe autos are made. Items must have value and must have been obtained for ameasurable cost; broken computers that can’t be repaired don’t count, nor does a company’s reputation.

automatic teller machine (ATM) — The machines that let you do your bankingwithout dealing with a person. At ATMs, you can take cash from youraccount, make deposits and move money between accounts. All you need is apassword you key in and an access card.

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balance of trade — An accounting of a country’s exports versus imports.

balance sheet — A reckoning of a company’s financial health at a given time. Lists assets, liabilities and equities.

bankruptcy — A word you don’t want to hear if a company or person owes you a lot of money. The person or company is considered bankrupt if they’re unable to pay their debts. The U.S. Bankruptcy Court tries to sort out the financial troubles and get creditors paid. Companies filing for protection under Chapter 7 of the bankruptcy code are shut down and their assets handed over to the creditors. Under Chapter 11, companies try to rework their debts and stay in business.

binding arbitration — Better really mean it when you use this method of solving a dispute. Warring parties—like a union and employer—agree to argue their cases before a neutral party and accept the outsider’s decision.

board of directors — A group of people chosen by stockholders to watch over a company and its executives, and to set overall corporate policy. Their job is to try to keep the company healthy and ensure stockholders get a good return on their money.

bond — A written promise to repay a loan plus interest, usually more than one year after the bond is issued. Investors buy bonds from a company or government entity, essentially loaning the company or government thatmoney.

buying on margin — For those who don’t have lots of money, but believe that’s what it takes to make a killing on the stock market. Stock buyers purchase stocks with borrowed money, gambling the share price will rise enough to pay off the loan and then some.

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call — An option to buy a certain amount of stock at a specific price during a specific time.

capital — Money needed to start or grow a business. This pool can come from securities offerings and retained earnings.

capital budget — Shows plans for buying long-term assets—machinery and other things you expect to last several years—and estimates the costs of those purchases.

cash flow — Money coming into a company and being paid out by the company. Ideally you’d want to take in at least as much as you pay out. On a personal level, you’re having a cash-flow problem if you can’t make your mortgage payments. You’re not necessarily poor; your house might be worth a lot if sold, but you’re still having cash-flow problems.

cease and desist order — Federal Trade Commission ruling that orders a stop to an unfair business practice.

certificates of deposit (CDs) — Generally considered conservative investments. You purchase the CDs from financial institutions–essentially loaning your money–and they promise to pay you back on a fixed date, usually with interest. You can invest for several months, butlonger investments generally earn higher interest.

Clayton Act — One of the United States’ antitrust laws. This one forbids price discrimination.

closed-end fund — A mutual fund that sells a limited number of shares.

collective bargaining — The process by which labor leaders and management iron out agreements on pay and working conditions.

commercial paper — Short term unsecured debt, with maturity up to 270 days. Banks, corporations and others raise money by issuing commercial paper to investors.

commission broker — A person who does the trades for a stock broker’s clients, receiving a commission for the work. The stock broker places orders with them.

common stock — Regular old stock. Owners of this bottom rung of stocks have a piece of the company and get to vote for the board of directors and on corporate policy. But they have to queue up behind owners of preferred stock both to receive dividends and, usually, to receive assets if a company is liquidated.

consumer price index (CPI) — Measures price changes of common goods and services, including such things as housing and food. What you quote when you’re trying to convince your boss you need a raise to keep up with inflation.

corporation — A business owned by shareholders.

cost of goods sold — How much it cost the seller to make or buy the goods sold. Same as “cost of sales.”

cost-of-living adjustment (COLA) — A type of raise workers can get to reflect the higher cost of consumer goods. Also a sort of corporate hardship pay for employees sent to live and work in expensive places.

coupon — A detachable part of traditional bond certificates. You present these to the issuer to collect your interest payments.

coupon rate — A bond’s annual interest rate, stated as a percentage of what was originally paid for the bond. Gets its name from traditional bond certificates, which have coupons you detach and return to the issuer to collect your interest payments.

cumulative preferred — Preferred stock that is due dividends, even if payments are delayed until the company can afford them. The amount owed builds until the dividends are paid. Owners are entitled to their payments before common-stock owners can collect theirs.

current assets — Cash and assets that are expected to be used, sold or converted to cash in the near future, usually one year. A sporting goods store’s current assets would include the money in the register and its bicycles, as well as short-term insurance policies and marketablesecurities—securities expected to be turned into cash in one year.

current liabilities — These liabilities must be paid in a relatively short time, usually one year. Taxes are one example.

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debentures — You need to trust in a company and its strength to give this type of loan, which isn’t backed by collateral.

debt-to-net-worth ratio — Also debt-equity ratio. To get it, you divide liabilities by stockholders’ equity. This is a general measure of how safe creditors can feel about their loans. Creditors often avoid lending to companies with a high debt-equity ratio.

deflation — Opposite of inflation. Decrease in the general price of consumer goods and services.

demand deposit — Checking account. So named because you can demand your money—or write a checkwithout clearing it with the bank first.

depreciation — Dividing the cost of an asset over that asset’s usable life. When dealing with a $200,000 factory expected to be used for 10 years, you would count $20,000 a year as expenses. Assets are considered unusable if they don’t work well anymore or are obsolete.

derivative — A type of investment whose value depends on the value of other investments, indices or assets. A stock option is a common type of derivative.

discount brokers — Discount stock brokers are to full-service brokers as warehouse stores are to boutiques. You don’t expect much, if any, advice from your discount broker on what to buy. She or he usually doesn’t expect you to pay as much as you would at full-service brokers. A discount broker’s main job is to carry out your requests to buy and sell.

diversification — An investing technique. The idea is to buy lots of different types of investments so if the value of one nose dives, you’re not suicidal.

dividends — Payments corporations make to their shareholders. The per-share amount is determined by corporate earnings.

dollar-cost-averaging — A system of buying securities at regular intervals with a fixed-dollar amount. The investor buys by the dollar’s worth rather than by the number of shares. If the number of dollars stays constant, investments buy more shares when prices are low and fewer when prices are high. Temporary downswings in price benefit the investor who continues to buy in good times and bad, as the price at which shares are sold exceeds the average purchase price.

Dow Jones Industrial Average — An important stock market indicator, usedto judge the stock market’s general well-being and how well your stocks aredoing comparatively. It measures the performance of 30 industrial stocks.When the media reports that the market rose 20 points, they’re reallysaying the Dow rose 20 points.

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earnings per share — The amount of money a company makes per share of common stock. This figure is calculated by taking net income and dividing it by the number of common shares outstanding.

export — A domestically produced good sold abroad. What Japan made its fortunes on–exports to the U.S. and elsewhere.

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Fair Labor Standards Act — One of the key federal laws protecting workers. This is the one you drop into conversation if your boss wants you not to claim all that overtime you’re working. Established minimum wage and 40-hour work week. States that workersget 1.5 times regular hourly pay if they work more than 40 hours in a week.

Federal Deposit Insurance Corporation (FDIC) — A child of the GreatDepression, this independent federal agency is supposed to inspireconfidence in banks. It insures deposits up to $100,000 in membercommercial banks, so depositors can get their money back if a bank goesbelly up.

Federal Reserve System — Group of banks that regulate the U.S. moneysupply, sets rules designed to keep commercial and savings banks solventand provides emergency loans to those banks. Overseen by a board appointedby U.S. presidents. The chairman of that board is very powerful, and hisactions are closely watched by investors.

Federal Trade Commission Act — Law that established the Federal TradeCommission to enforce antitrust rules. The act gave the FTC the right todefine unfair methods of competition and make rules to prevent suchpractices.

fixed assets — A company’s nonliquid assets, such as its office buildingor factory.

fixed costs — Costs that don’t vary with sales volume. Rent is a fixedcost; companies need to pay it whether they make money that month or not.Other fixed costs are insurance payments and executives’ salaries.

fixed-rate loans — A loan whose interest rate doesn’t change. Aconventional mortgage is an example.

float — Provides financial breathing room if you’re short of cash. This isthe value of the money that stays in your account until a check you wroteis processed.

franchising — Setting up a system like McDonald’s. A company (thefranchiser) grants the right to use its name and sell its products to aperson or group (the franchisee).

full-service brokers — Like the full-service island at the gas station.You usually pay more, but you also get more–in this case a wide range ofservices including advice on what stocks to buy and sell. The “self-serve”variety of broker is called a discount broker, who generally just handlestrades.

futures contract — An agreement to buy or sell a commodity or financialinstrument at a specific price and on a set date. Unlike an option, in thatthe seller must sell and the buyer must buy at the established time.Futures can be traded among parties.

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General Agreement on Tariffs and Trade (GATT) — An international accordmeant to stimulate trade. It encourages lowering tariffs and abolishingquotas that restrict imports.

general partner — General partners are liable for all of theirpartnership’s debts.

generally accepted accounting principles (GAAP) — Rules and proceduresgenerally accepted by accountants. The rules guide them in assessing andreporting on a company’s finances.

gross domestic product (GDP) — Key indicator of an economy’s health, thisis the value of all the goods and services produced by a country in a givenperiod of time. Used to be called Gross National Product, or GNP.

gross national product (GNP) — Out-of-date name for gross domestic product(GDP). GDP is a key indicator of an economy’s health; it’s the value of allthe goods and services produced by a country in a given period of time.

gross profit — Sales revenue minus the cost of making or buying the thingsthat were sold (cost of goods sold). If a manufacturer sold 10 bikes for$300 a piece, and each bike cost him $250 to make, the companys grossprofit is $500.

gross sales — Revenue from a company’s total sales before deducting forreturns and discounts.

growth funds — Mutual funds that invest in companies that pay little orno dividends and reinvest their profits in expansion and in research anddevelopment. You buy these if you’re willing to give up dividend income inreturn for a chance at big gains in the stock price over time.

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income from continuing operations — Revenue minus expenses, includingtaxes. This doesn’t include income from discontinued operations, like aclosed arm of the corporation; extraordinary items or the financial effectof a change in accounting principles.

individual retirement account (IRA) — You may place $2,000 a year in theseaccounts, which are used to invest in stocks, certificates of deposit, etc.The contributions may be tax deductible depending on whether you’re coveredby a company retirement plan and whether your adjusted gross income is lowenough. IRAs accumulate money tax-deferred.

inflation — An increase in the general price of consumer goods andservices. What the Federal Reserve chairman is always trying to keep undercontrol so it doesn’t harm the economy.

injunctions — Courts issue these to stop a person or group from doingsomething that might cause future harm.

interest — What a borrower pays for the privilege of using someoneelse’s money for a given period of time.

International Monetary Fund (IMF) — An international lending institutionthat focuses on stabilizing currencies. The United States contributesheavily to the fund and has the greatest number of votes about where tolend money. This is the group trying to resuscitate Asia’s troubledeconomies by pouring in billions so the countries can repay debt.

investment bankers — Companies that help other companies raise capitalthrough the sale of new stock and bonds.

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Labor-Management Relations Act — Also known as the Taft-Hartley Act. Thelaw governs unions’ behavior. Among other things, it forbids unions fromforcing prospective employees to become union members in order to gethired. It also forbids using dues to run campaigns for national unionelections.

leveraged buyout (LBO) — The purchase of a company using borrowed money.Usually the buyer secures the loan with the assets of the company to bepurchased.

limited partner — An owner in a limited partnership who’s liable only upto the amount of money invested.

line of credit — Financial institutions offer this to some customers. Itallows the customer to borrow up to a certain amount of money withoutapplying for another loan.

load fund — A mutual fund that charges a commission for the stockbroker orfinancial planner who’s marketing it.

lockout — When union-management disagreements get ugly. Managementprevents union employees from entering the workplace and doing their jobs.

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margin — The amount a customer deposits in a special account kept by astockbroker. The customer uses the money in this margin account, combined with money borrowedfrom the broker, to purchase stock (called buying on margin).

market — The group of people who can and want to buy a product now orlater. As in, is there a market for this $3,000 bicycle?

marketable securities — Securities, like government bonds, that can besold easily. On balance sheets, they are listed as current assets becausethey’re expected to be converted to cash in the near future, usually oneyear.

market share — A company’s or product’s portion of the total market forthat good.

mediation — Using a neutral third party to settle a dispute by fosteringcompromise among battling groups. Can be used in labor-management disputes.

money market deposit accounts — A bank account that pays a variable rateof interest based loosely on market rates. Often used by people who need tokeep money readily available, but want to try for a higher return than onregular bank accounts. Added bonus: they’re federally insured.

money market funds — Funds that put their money in short-term investments.Considered pretty safe because the funds invest in such things as U.S.government securities and bank certificates of deposit.

monopoly — What you tried for in the game with the same name: completedomination of a market. When you have a monopoly, you have no competitorsfor what you’re selling.

municipal bond — These bonds are issued by state or local governmententities, such as cities and counties. Interest earned is generallytax-free.

mutual funds — These funds pool money from many investors, and fundmanagers invest the money in specific types of securities. Money marketfunds are a type of mutual fund.

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NASDAQ (The National Association of Securities Dealers Automated QuotationsSystem) — A computerized system that lists price quotes for manyover-the-counter stocks, as well as some other stocks.

National Labor Relations Act — Federal law that created the National LaborRelations Board to supervise union elections and that banned certain unfairlabor practices by employers. The NLRB can rule on whether labor practicesare unfair, although the decisions are appealable to the courts.

net income — The bottom line, after everything is paid up, including taxes.What’s left after all expenses are deducted from total revenue. Dividendsare paid from net income.

net worth — Equity. Fair market value of total assets minus total liabilities.

no-load fund — Mutual fund that doesn’t charge a commission.

nonprofit corporations — Or simply nonprofits. Organizations that don’texist to make a profit. Usually, the groups are dedicated to charitable oreducational efforts; they are, therefore, exempted from income taxes.

note receivable — What you put on the books if you’re owed money bysomeone who has signed a promissory note, which states you will be paid acertain amount by a certain time.

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Occupational Safety and Health Administration (OSHA) — An arm of the U.S.Department of Labor that attempts to keep people safe in their workplaceby setting safety standards and enforcing them. OSHA will inspect for suchproblems as contaminants in a factory’s air.

oligopoly — Not quite a monopoly, but getting there. A small group oflarge suppliers dominate a market, providing similar versions of a product,like cars.

open-end fund — Mutual fund that doesn’t limit its number of shares.

option — The right to buy or sell stock at a given price within a certainperiod of time. Options are often traded.

over-the-counter market (OTC) — A virtual marketplace for tradingsecurities. Dealers conduct transactions via computer or telephone, ratherthan through an auction at a central location, like the New York StockExchange.

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partnership — Business owned by two or more people who share profits andlosses. Owners are personally liable for the partnership’s debt.

poison pill — Companies resort to poison pills when someone is trying totake them over. To discourage the suitor, the takeover prospect takes on aheap of new debt or does something else to make the stock less attractive.

preferred stock — If you own this higher class of stock, you get your dividends before commonstockholders. If the company folds, you also get assets before commonstockholders do. The one thing you usually don't have is voting rights.

price-earnings ratio — One measure of how much faith investors have in aparticular stock, it shows how much they’re willing to pay for each shareof a corporation’s earnings. You calculate it by dividing the current priceper share by the earnings per share for the last year.

primary market — Market where new issues of securities, like stocks, aresold and the proceeds go to the issuer. A secondary market is where peopletrade securities after they’ve been bought from the issuing company.

prime rate — Interest rate banks charge their most credit-worthy commercialcustomers for loans. Often given to large corporations.

productivity — What plummeted nationwide during the PresidentClinton-Monica Lewinsky controversy. Productivity measures how much work youget done in a given period of time.

profit — Same as income, the difference between revenue and expenses,before taxes.

profit margin — A good measure of a company’s efficiency, this essentiallytells you how much the company makes off sales after expenses are paid.Generally, the higher the profit margin, the more efficient the company.Net profit margin is net income divided by net sales. Gross profit marginis gross profit divided by net sales.

profit-sharing plan — If your company’s doing well, this is one greatperk. The company gives employees bonuses tied to the amount of profit itmakes.

pro forma income statement — A statement of revenue and expenses thatincludes some hypothetical values. It shows what could be expected tohappen if a corporation decided to go through with a takeover, for example.

proxy — A shareholder’s written statement designating someone else to votefor him or her at a corporate meeting.

put — An option to sell a certain amount of stock at a specific priceduring a specific time.

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raw materials — Raw as in unfinished. The stuff finished products are made of.

recession — A time when business is slow, people lose jobs and sittingpresidents worry about their re-election prospects as people tend to blamethem for economic woes. Technically speaking, six months or more of adecline in the gross domestic product.

regional exchanges — National securities exchanges not in New York City.These exchanges are registered with the U.S. Securities and ExchangeCommission. Chicago has one.

reserve requirements — Set by the Federal Reserve, these rules requiremember banks to keep a certain amount of cash and other liquid assets onhand or at a nearby Federal Reserve bank. The amount is stated as apercentage of deposits. The rules help the Fed control lending and thenation’s money supply.

retained earnings — What’s left of earnings after dividends are paid.These are cumulative; they’re additions to capital earned since a company’sbirth.

return on owners’ equity — A measure of profitability. Net income isdivided by common stock equity.

revolving credit agreement — You have one of these for your charge cards.The lender lets you borrow up to a certain amount again and again; once youpay off part of the loan you can reborrow that part. In other words, onceyou pay off one shopping spree, you can start on another.

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secondary boycott — When a union puts the squeeze on. It organizes aboycott of companies that do business with the company the union isbattling. The idea is to isolate the company fighting with the union,hurting its business by cutting off supplies or buyers.

secondary market — Where securities are traded after their initialissuance. Money from trades goes to dealers and sellers, not to the companythat originally issued the security. Secondary markets include exchanges,as well as virtual marketplaces–the over-the-counter markets of computerand telephone lines.

secured bonds — Bonds backed by collateral or a lien. If the bond issuerdefaults, he or she must hand over whatever asset was pledged–such as ahouse–so the creditor can recoup the loss on the bond.

secured loan — To get one, you have to promise to hand over specificassets if you default.

securities — Stocks, bonds and a host of other investments, includingcertificates of deposit. Investments for consumers; ways of raising cashfor the issuer, including corporations and governments.

selling short — Gamblers love this technique that lets them bet a stockprice will drop. It works this way: you borrow stock from your broker andsell it. If the price drops, you buy the shares you owe the broker andreturn them, pocketing the difference between what you sold them for andwhat you bought them back for. You’re in trouble if the price rises since youstill owe the broker his shares.

Sharpe ratio — A formula developed by Nobel Laureate Bill Sharpe that attempts to measure how a fund performs relative to the risk it takes. Take a fund’s returns in excess of a guaranteed investment (a 90-day T-bill) and divide by the standard deviation of those returns. The bigger the Sharpe ratio, the better a fund performed considering its riskiness.

Sherman Act — First U.S. antitrust law. Outlawed price-fixing—whencompeting companies collude to set similar, high prices.

Small Business Administration (SBA) — U.S. agency that nurtures smallbusinesses. Provides low-interest loans.

Standard & Poor's 500 (S&P 500) — A stock-market thermometer of sorts.Helps gauges the health of the overall market by measuring the performanceof 500 popular common stocks.

stockbroker — Person in charge of a client’s stock trades. If the stock istraded on an exchange, the broker relays buy and sell orders torepresentatives on the exchange floor. Full-service brokers give advice onwhich stocks to buy; discount brokers generally charge less, but usuallydon't offer advice.

stock insurance companies — An insurance company owned by stockholders.

stock market indicators — Indexes of stock-market performance, includingthe S&P 500 and the Dow Jones Industrial Average. Indicators help investorsfigure out if their mutual fund or stock is doing as well as the rest ofthe market.

stock option — Popular form of employee compensation, most often given toexecutives. The options allow executives to buy stock for a number of yearsat or below the share price when the option was granted. This is an addedincentive for executives to maximize company profit and increase shareprices.

stock split — Corporations do this to make shares more affordable. Theymultiply the number of shares, while keeping the aggregate value of stockeven. In a 2-for-1 split of shares worth $50, an investor would have twiceas many shares as he had, but each would be worth $25.

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tariff — A federal tax on imports or exports. Japan's import tariffs driveU.S. trade negotiators nuts. The tariffs protect Japan’s domesticindustries by raising foreign producers’ expenses–and usually the priceof their goods.

term loans — Loans that are generally several years’ long.

trade deficit — What the U.S. has with Japan. Imports exceed exports–orwe buy more than we sell. Opposite of trade surplus.

trade surplus — Exports exceed imports–or you sell more than you buy.Opposite of trade deficit.

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underwriting — Buying an initial stock or bond offering and selling it tothe public. Investment bankers are underwriters; they make money bycharging more for the stock or bonds than they paid for the securities.

Uniform Commercial Code (UCC) — A comprehensive set of business lawsadopted by almost all the states. The idea was to make the rules ofcommercial transactions–such as the sales of goods–universal.

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value added — The amount added to sales value through production. It’sconsidered good for an economy to produce lots of value-added goods, whichadds jobs, rather than shipping raw materials elsewhere to be processed.Smoked salmon is a value-added product because it’s processed and moreexpensive than regular salmon.

variable-rate loan — A loan with an interest rate that changes, trackingmarket conditions.

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World Bank — This international bank focuses its lending on helpingdeveloping countries develop.