Preferred stock—an equity security senior in priority to common stock with a specified entitlement to dividend payments

Plan of reorganization—the terms under which a company expects to emerge from Chapter 11 bankruptcy

Opportunity cost—the loss represented by forgone opportunities

Net operating-loss carryforward (NOL)—the carryforward of past losses for tax purposes, enabling a company to shield future income from taxation

Internal rate of return (IRR)—calculation of the rate of return of an investment that assumes reinvestment of cash flows at the same rate of return the investment itself offers

Interest—payment for the use of borrowed money

Interest-coverage ratio—the ratio of pretax earnings to interest expense

Maturity—the date on which the face value of a debt security is due and payable

Margin of safety—investing at considerable discounts from underlying value, an individual provides himself or herself room for imprecision, bad luck, or analytical error (i.e., a “margin of safety”) while avoiding sizable losses

Making a market—acting as a securities dealer by simultaneously bidding for and offering a security

Liquidating distribution—cash or securities distributed to shareholders by a company in the process of liquidation

Liquidating trust—an entity established to complete a corporate liquidation

Liquidation value—the expected proceeds if the assets of a company were sold off, but not as part of an ongoing enterprise

Leveraged buyout (LBO)—acquisition of a business by an investor group relying heavily on debt financing

Investment grade—fixed income security rated BBB or higher

Junk bond - fixed-income security rated below investment grade

Net-net working capital—net working capital less all long-term liabilities

Principal— the face amount or par value of a debt security

Coupon—the specified interest payment on a bond expressed as a percentage

Private-market value—the price that a sophisticated businessperson would be likely to pay for a business based on the valuation multiples paid on similar transactions

Proxy contest—a fight for corporate control through the solicitation of proxies or the election of directors

Friendly takeover—corporate acquisition in which the buyer and seller both support the transaction enthusiastically

Pro forma financial information —earnings and book value adjusted to reflect a recent or proposed merger, recapitalization, tender offer, or other extraordinary transaction

Interest-only mortgage security (IO)—interest payments stripped from a pool of mortgages which, for a given change in interest rates, fluctuates in value inversely to conventional mortgages (see principal-only mortgage security)

Principal-only mortgage security (PO)—principal payments stripped from a pool of mortgages which, in response to changes in interest rates, fluctuate in value in the same direction as conventional mortgages but with greater volatility

Investment banking—profession involving raising capital for companies as well as underwriting and trading securities, arranging for the purchase and sale of entire companies, providing financial advice, and opining on the fairness of specific transactions

Merchant banking—an activity whereby Wall Street firms commit their own capital while acting as principal in investment banking transactions

Short-term relative-performance derby—manifestation of the tendency by institutional investors to measure investment results, not against an absolute standard, but against broad stock market indices resulting in an often speculative orientation.

Absolute-performance orientation—the tendency to evaluate investment results by measuring one’s investment performance against an absolute standard such as the risk-free rate of return

Relative-performance orientation—the tendency to evaluate investment results by comparing one’s investment performance with that of the market as a whole

Spinoff—the distribution of the shares of a subsidiary company to the shareholders of the parent company

Stock—a marketable piece of paper representing the fractional ownership of an underlying business

Tactical-asset allocation—computer program designed to indicate whether stocks or bonds are a better buy

Takeover multiple— multiple of earnings, cash flow, or revenues paid to acquire a company

Investment—an asset purchased to provide a return; investments, in contrast to speculations, eventually generate cash flow for the benefit of the owners (see speculation)

Speculation—an asset having no underlying economics and throwing off no cash flow to the benefit of its owner (see investment)

Intangible asset—an asset without physical presence; examples include intellectual property rights (patents) or going-concern value (goodwill)

Tangible asset—an asset physically in existence

Institutional investors —money managers, pension fund managers, and managers of mutual funds

Employee Retirement Income Security Act of 1974 (ERISA)—legislation that requires institutional investors to act as fiduciaries for future retirees by adopting the “prudent-man standard” (see prudent-man standard)

Prudent-man standard—the obligation under ERISA to restrict one’s investments to those a “prudent” (conservative) person would make (see Employee Retirement Income Security Act of 1974 (ERISA)

Equity “stubs”—low priced, highly leveraged stocks, often resulting from a corporate recapitalization (see recapitalization)

Recapitalization—financial restructuring of a company whereby the company borrows against its assets and distributes the proceeds to shareholders

Exchange offer—an offer made by a company to its security holders to exchange new, less-onerous securities for those outstanding

Goodwill amortization—the gradual expensing of the intangible asset known as goodwill, which comes into existence when a company is purchased for more than its tangible book value

Illiquid security—a security that trades infrequently, usually with a large spread between the bid and asked prices (see liquid security)

Liquid security—a security that trades frequently and within a narrow spread between the bid and asked prices

Hedge—an investment that, by appreciating (depreciating) inversely to another, has the effect of cushioning price changes in the latter

Going long —buying a security (see short-selling)

Short-selling—the sale of a borrowed security (see going long)

Fundamental analysis— analyzing securities based on the operating performance (fundamentals) of the underlying business

Technical analysis—analysis of past security-price fluctuations using charts

Full position—ownership of as much of a given security as an investor is willing to hold

Financial distress—the condition of a business experiencing a shortfall of cash to meet operating needs and scheduled debt-service requirements

Covered-call writing—the practice of purchasing common stocks and then selling call options against them

Dividend—cash distributed by a company to its shareholders out of after-tax earnings

Discount rate—the rate of interest that would make an investor indifferent between present and future dollars

Depreciation—an accounting procedure by which long-lived assets are capitalized and then expensed over time.

Credit cycle—the ebb and flow in the availability of credit

Bankruptcy—a legal state wherein a debtor (borrower) is temporarily protected from creditors (lenders); under Chapter 11 of the federal bankruptcy code, companies may continue to operate

Chapter 11—a section of the federal bankruptcy code whereby a debtor is reorganized as a going concern rather than liquidated (see bankruptcy)

Catalyst—an internally or externally instigated corporate event that results in security holders realizing some or all of a company’s underlying value

Asked price (offer)—the price at which a security is offered for sale (see bid price)

Bid price—the price a potential buyer is willing to pay for a security (see asked price)

Arbitrage— the practice of investing in risk-free transactions to take advantage of pricing discrepancies between markets (see risk arbitrage)

Risk arbitrage—a specialized area involving investment in far-from-risk-free takeovers as well as spinoffs, liquidations, and other extraordinary corporate transactions.

Arbitrageur—investor in risk-arbitrage transactions

Cash-pay securities—securities required to make interest or dividend payments in cash (see non-cash-pay securities)

Non-cash-pay securities—securities permitted to pay interest or dividends in kind or at a later date rather than in cash as due (see cash-pay securities, pay-in-kind, and zero-coupon bond)

Pay-in-kind (PIK)—a security paying interest or dividends in kind rather than in cash

Zero-coupon bond—a bond that accrues interest until maturity rather than paying it in cash

Cash flow—the cash gain or loss experienced by a business during a particular period of operations

Breakup value—the expected proceeds if the assets of a company were sold to the highest bidder, whether as a going concern or not (see liquidation value)

Liquidation value—the expected proceeds if the assets of a company were sold off, but not as part of an ongoing enterprise

Call option—a contract enabling the owner to purchase a security at a fixed price on a particular date (see put option)

Put option—a contract enabling the purchaser to sell a security at a fixed price on a particular date