Business Matters: Getting a handle on the terminology of finance

By Kevin FitzGerald

As I look at the many business newspapers and magazines, I frequently come across terms like PE or dividend yield and I’m not sure of their meaning. Could you give us some definitions of the finance terms?

— M.S., Manhattan

There are entire dictionaries of finance terms. However, I’ve picked a few that are frequently used (one good source I use is The Wall Street Journal Guide to Understanding Money & Investing).

Bid and Asked Quotes: Certain stocks and all Treasury securities trade on the over-the-counter market. Transactions occur completely on the telephone since there isn’t any central facility where buyers and sellers meet. With transactions taking place on a dealer-to-dealer basis and with more than one dealer frequently trading the same security, a system was developed to display the highest bid (offered) by buyers and lowest price being asked by sellers. If you want to purchase a stock quoted this way, you will pay the asked price, if you wish to sell, you should expect to receive the bid price. Many ADRs (foreign stocks that also trade in the U.S.) are traded on the over-the-counter market (Ryan Air, for example).

Dividend Yield: Many companies pay dividends to their stockholders (quarterly). If you look at most stock tables in the newspapers, the annual dollar amount (per share) of the dividend will be listed. The dividend yield is the dollar amount of the dividend expressed as a percent of the price of the stock. For example, XYZ Corp. currently trades at $60/share and offers an annual dividend of $1.5/share. The dividend yield is 2.5 percent ($1.5/$60 X 100 = 2.5 percent). The dividend yield allows comparisons among companies with different selling prices and dividends. A word of caution — a high dividend yield should not be the only gauge of value — the share price may recently have fallen. Also some growth companies offer no dividends.

Earnings Per Share (EPS): As a stockholder, you are a part owner of the business. Earning per share is the total profits of the company divided by the number of shares outstanding (shares issued by the company that are traded). If all company profits were paid out to shareholders, EPS would measure the amount each share would receive.

Mutual Funds — Open-End: Mutual funds can invest in stocks or bonds (or a combination of the two). Most funds are open-end, which means that as investors invest, the fund issues additional shares and grows in size. Investors wishing to sell their shares, sell them back to the fund and the outstanding shares of that fund shrink by that amount. Money market funds are another example of open-end funds.

Mutual Funds — Closed-End: These funds also invest in a variety of securities (both stocks and bonds). However, the fund only raises money once and therefore offers only a fixed number of shares that trade on an exchange to provide liquidity. The market price of the fund is driven both by investor demand as well as the value of funds holdings. Therefore, closed-end funds have a market price and a net asset value where these two numbers are not usually the save: that is, the market price could be at a premium or discount to the net asset value. An example of this type of fund is the Irish Investment Fund which trades on the New York Stock Exchange.

Net Asset Value: Mutual funds (both open and closed) quote a net asset value (NAV). A fund’s NAV is the value of one share of stock in the fund. It is calculated by adding the values of all the fund’s holding and then dividing that total value by the number of shares.

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The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

International investing presents certain risks not associated with investing solely in the U.S., such as currency fluctuation, political and economic change, social unrest, changes in government regulations, differences in accounting and the lesser degree of accurate public information available.

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Kevin FitzGerald is first vice president-investments with PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. His office is at 1251 Avenue of the Americas (50th Street). He can be reached at (212) 626-8634.

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