2

Is a chart line that tracks the average price of the stock for the past 40 weeks. It is less sensitive to short-term fluctuations and it offers a better picture of the stock's long-term trend. There are many theories concerning the interaction of day-to-day stock price movements and the trend of the 200-day moving average as an aid to predicting the future. We know of only one that has a better-than-chance record. This theory--it might more appropriately be called a rule-of-thumb--is useful primarily in forecasting the course of highly volatile growth stocks. It holds that when the 200-day moving average flattens out after a rise and is penetrated by a stock price decline, it is a major sell signal. Conversely, if the line flattens out after a decline and is penetrated by an advance in the price of shares, it is a major buy signal. Unfortunately, the market is never so accommodating as to provide investors with a fool-proof buy-sell indicator. Like most other indicators, this one works best when the market as a whole is changing direction. At other times it can be misleading. The important point to remember is that when one of these signals appears, it pays to investigate.

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A

Is the original price paid for an investment, adjusted to exclude commissions and other acquisition costs.

These are investments that are not found in a typical securities portfolio of stocks, bonds and cash. For most individual investors these assets would include art, antiques, precious metals, and rare collectibles like coins, paper currency and stamps, or other non-traditional collectibles such as sports cards, autographs, books, wine, music, toys and other such ephemera. Other larger, more complex, alternative assets such as hedge funds, venture capital pools, major infrastructure projects, etc. tend to be the purview of institutional investors or accredited high net worth individuals.

Is the systematic repayment of a debt or loan (i.e., a bond or mortgage) over a specific time period.

Are everything that has monetary value. In the case of companies, Assets reflect everything a company owns, including unrealized assets (such as yet-to-be-sold inventory). The figure tells you what the company would be worth if everything it owned were turned into cash today.

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B

Generally speaking, the purchase of assets for less than their fair market value is considered to be a bargain purchase. A stock that is considered to be a bargain must trade for less than it's worth based on the per-share value of its assets. But judging value or worth of a stock also involves a matter of opinion about such things as the potential for growth of sales, earnings, cash flow, etc. Selecting stocks that are perceived to be a bargain is also known as value investing.

These are the most prudent stocks to invest in. They represent large, dependable, financially sound companies involved in fields that are unlikely to become obsolete any time soon. They are market leaders in their categories and generally rank in the top three companies in their sector. Good quality investments such as blue chips often tend to do better over the long run than stocks of lower quality and they help you sleep better at night. They almost always pay a dividend. Their performance is particularly stable in times of uncertainty. And blue chip stocks are rarely troubled by lack of demand that holders of low quality stocks often find when they go to sell but find no buyers. This does not mean that you can buy them and forget them. Sometimes, even the best companies cannot survive severe stress. Canadians will remember Dome Petroleum, Moore Corp. and Nortel among others. And sometimes a blue chip company may no longer be a blue chip stock if its shares get overvalued. Many high-tech giants reached share price levels during the dot.com boom that they have never regained since the tech bubble burst. As Warren Buffet says: "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. I would rather be certain of a good result than hopeful of a great one.” The term ‘blue chip’ is thought to have been coined by Dow Jones employees in the 1920s and derives from poker. Sets of poker chips usually consisted of white, red and blue chips. Traditionally, the blue chips represented the highest value.

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C

Are the dividends declared by a company’s board of directors and paid, usually quarterly, to all of the firm’s shareholders of common stock. They do not include the dividends paid on preferred shares of the company’s stock. (See also Preferred Dividends and Total Dividends.)

Is the unit of ownership in all public corporations. Those who hold common stock have the right to vote on the company’s selection of directors and receive dividends on their holdings. (See also Preferred Stock.)

Are the shares of companies whose future health and prosperity are tied to the success or failure of an untried and unproven concept. They may deserve a place in your portfolio, but only if you can accept the large measure of risk which they carry. Unfortunately, concept stocks are often purchased by wishful thinkers who tell themselves that they have bought "junior growth stocks". A concept stock may have a limited record of growth, but by definition it has not proved itself under the rigorous test of time. Concept stocks are speculative by nature, after all, and thus are inappropriate for many portfolios. (See also Glamour Stocks and Growth Stocks.)

An investment strategy aimed at long-term capital appreciation with low risk; it will likely involve a high percentage of blue chip stocks with low turnover and infrequent trading

Is a sector of the economy represented in a diversified portfolio by household and leisure goods producers, food processing and beverage makers, automobiles, electronics and other light manufacturing and retail companies. This is a somewhat defensive sector which tends to lag in uptrends but to hold well in sagging markets. When the economy is growing there tends to be an increased demand for higher-end and luxury products. A contracting economy will produce demand for products to satisfy value-conscious consumers. And some products, such as food, are consumer necessities no matter the economic conditions. (See also Sector Investing, Finance Sector, Utility Sector, Manufacturing Sector, Resource Sector and Multi-Sector.)

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D

Is a decrease in the value of an asset such as a building or equipment.

Stock funds fall generally into two categories—diversified and specialty. Diversified funds invest in an assortment of companies that are large or small, in different industries and in different geographical regions. (See also Specialty Funds.)

Is a technique for acquiring a stock position in a company by committing to buy a fixed dollar amount of a stock on a regular schedule for a fixed time period regardless of the share price at the time of each purchase. By determining the fixed dollar amount to invest, you end up buying more shares when the price is low and fewer shares when the price is high. As a result, dollar-cost averaging can lower the average adjusted cost base per share of that investment, giving you a lower over-all cost for the shares purchased over time. The technique is sometimes known as unit-cost averaging and, not surprisingly, in the UK as pound-cost averaging.

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E

Are a key indicator of a stock’s strength. Earnings are the total net profit of a company per year, after expenses and taxes. They are also expressed as earnings per common share in the company’s income statement. (See also Price/Earnings Ratio.)

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F

Financial Stocks are issued by a range of businesses operating in the broad financial sector. The major categories of financial stock issuers include banks, insurance companies (both life and property and casualty insurers as well as independent insurance brokers), real estate investment trusts (both industrial and residential), credit services (including card issuers), investment brokers, mutual fund and asset management companies, trust companies, mortgage investment companies and consumer finance companies. Financial stocks (especially REITs which are required to pay out to shareholders the large majority of their earnings) generally offer dividend yields at the high end of the broader securities market.

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G

Gold, as a physical asset, has for centuries been regarded as an asset that will hold its value over time. It's relatively rare and its value is respected regardless of political borders. So gold ingots, bars, wafers, minted coins and jewelry with a high gold content have long been favored as safe havens for value. However, storing wealth in such a manner does have some difficulties. Safety and cost of storage are considerations and finding a buyer may be difficult, especially with jewelry and coins which may have high markups for reasons to do with aesthetics and rarity. The securities industry offers some alternatives. A simple way to use gold as part of your investing strategy is to buy units in an exchange-traded fund or ETF. A gold ETF does not, however, own any gold. Rather it holds derivative contracts that are backed by gold. Therefore the fund's units reflect the changing price of gold. When you sell, you get cash, not gold. There is another popular way to invest in gold through the stock market. There are many companies engaged in the exploration, mining and production of gold that offer their shares for sale on the stock market. However, the price of gold bullion, as it rises and falls, often has a levered effect on gold stocks. This means that the price of gold stocks is usually more volatile than the price of the underlying commodity. And while your gold stock's corporate headquarters may be situated in a safe, stable country, its mines may be located abroad and exposed to the downside of some less developed jurisdictions around the world. You may find the price of your gold stock suddenly subjected to a sudden jump in costs, a drop in ore grades, strikes, expropriations, floods and so on. Or worse. Many Canadians will remember Bre-X Minerals Ltd., a company with headquarters in Calgary, that bought a property in the jungle near the Busang River in Borneo, Indonesia. Before the supposed discovery of gold was all exposed as a fraud, Bre-X's capitalization grew to over $6 billion CAD in 1996. Its shares were soon worthless.

Growth investors look at a company in relation to its industry, competition, and especially its market. They try to estimate future prospects for a company and hence its ability to increase earnings. This approach to investing requires greater analytical emphasis on industry and consumer trends. Growth-oriented stock funds will often have portfolios with higher-than-average price/earnings and price/book values ratios. Most rapidly growing companies pay little or no dividends. That’s because they need all the cash they can get for expansion. So growth-oriented funds frequently have lower-than-average dividends. Plus, growth funds will tend to invest in smaller companies. After all, smaller, newer companies often have far greater growth potential than do older, larger companies.

Earn that designation by having at least a better-than-average rate of growth over 10 years or more in a field of endeavor which is expanding as fast as or faster than the economy as a whole. The premier growth stocks are the predominant company within their industries, are diversified geographically, have a large asset base, a sound balance sheet and a management team with proven expertise. These admittedly high standards should be kept in mind when sorting out concept and glamour stocks from growth stocks. (See also Concept Stocks and Glamour Stocks.)

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H

When investing in stocks during recessionary periods, the relatively safest places to invest are in high-quality companies with long business histories, as these should be companies that can handle prolonged periods of weakness in the market. For example, companies with strong balance sheets, including those with little debt and strong cash flows, tend to do much better than companies with significant operating leverage (or debt) and poor cash flows. A company with a strong balance sheet/cash flow is better able to handle an economic downturn and should still be able to fund its operations as it moves through the weak economic times.

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I

Is all of the income a company has earned before taxes, including earnings and indirect income, such as interest income, but not including unrealized assets or fixed assets such as plants and equipment. (See also Net income, Net fixed assets.)

Reports how much of a company’s stock its officers and directors are trading and when they’re trading it, which can be a key indicator of how the stock will do in the months ahead. (Note: You may see the term “insider trading” used very loosely to denote illegal or unethical trading by insiders. Insider trading is perfectly legal, although subject to increasingly precise regulations. It is only the breach of these insider trading regulations that is illegal.)

Adopting an appropriate investment strategy requires an investor to build a systematic plan of action to achieve his or her long term goals. The plan will determine the allocation of investable assets among stocks, bonds, cash and cash equivalents and alternative investments. The plan will consider such macro factors as economic trends, inflation and interest rates. Other factors are more personal--such as the investor's age and risk tolerance as well as future needs for income and capital expenses. Tactics to achieve these individual strategic investment goals will inevitably involve a trade-off between risk and reward parameters. The expectation of higher returns will almost certainly involve the acceptance of some risk. Investors determined to follow their plan will commit it to writing. Then, when the going gets tough in stressful financial markets, the comfort of re-reading your strategic plan will remind you that you're on the right path.

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J

Is a popular stock market theory that holds as January goes for the stock market, so goes that year. Interestingly, the theory seems to hold more frequently for years with a strong January for the markets rather than years with a poor January market. Historically, of course, stocks have a long-term propensity to rise so an up January is inherently confirmed by an up year while a down January is proven wrong as an indicator simply because of the long-term nature of stocks to rise. There is an undeniable historic pattern supporting this theory but the cause of it can only be guessed at. And it may be nothing more than an historic anomaly. To base investing decisions on it would border more on superstition than acuity.

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K

Key stocks in The Investment Reporter are selected by its Investment Planning Committee, and are recommended in the monthly supplement The Investment Planning Guide, as the main building blocks of your portfolio. Key stocks are not all buys at all times, but they are always attractive enough to hold for long-term income or appreciation. When a Key stock loses that degree of attraction, the Investment Planning Committee recommends it be sold and it is removed from The Investment Planning Guide.

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M

Is a sector of the economy represented in a diversified portfolio by heavy industry manufacturers of aircraft, hardware, motors, chemicals, rail rolling stock, etc. It is a highly cyclical sector vulnerable to unpredictable shifts in demand. However, companies in this sector can be politically favored in recessions because of their labor intensiveness. This sector tends to lead economic recoveries. (See also Sector Investing, Resource Sector, Consumer Sector, Finance Sector, Utility Sector and Multi-Sector.)

This index helps you spot undervalued growth companies. The MGI is a stock's historical compound rate of growth in earnings over recent years divided by its current p/e ratio. If the resulting number is above 1.0, the company should be thought of as being undervalued. In other words, the company's recent rate of growth exceeds the current stock price multiple of its earnings. Alternately, if the resulting ratio is under 1.0, the stock is trading at fair market value or is overvalued relative to its expected growth rate.

This index combines two of investing's long-established and most widely used ratios: the price to earnings ratio and the dividend yield. The MRI is the number you get by dividing the p/e by the dividend yield. Use the MRI to find value between income stocks. Generally speaking, the lower the MRI, the better the value. If you want to buy a bank stock, for instance, the bank with the lowest MRI represents the best value. You should hold some stocks with low MRIs in your portfolio because they help to reduce your risk in market setbacks. The MRI is a useful, investigative starting point. It is not a one-signal, buy-sell index; it should be used in combination with other financial measures--debt load, cash flows and growth in sales, earnings and dividend.

Some investors feel stock prices are driven by investor expectation. As long as such fundamentals as earnings and cash flow unfold as expected, prices will continue to rise. But at the first sign of disappointment, some portfolio managers will sell quickly—sometimes within minutes of a press release indicating lower-than-expected quarterly earnings. As business momentum builds, these managers hold. But when momentum is interrupted, they sell. They often describe their style as “buy high, sell higher”. (See also Sector Rotation Investing and Value Investing.)

Is a sector of the economy represented in a diversified portfolio by large conglomerate companies that own separate substantial business units, often unrelated to each other, and operating in more than one sector of the economy. Conglomerates are large and often multi-national corporations. They have become much less popular over the past years as it has become increasingly difficult to manage such large unrelated businesses effectively. Many of them have been broken into separate companies to increase value and management's effectiveness. (See also Sector Investing, Finance Sector, Utility Sector, Manufacturing Sector, Resource Sector and Consumer Sector.)

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N

Is a company’s gross income minus total expenses.

Is an informal term used to refer to 50 popular large-cap stocks traded on the New York Stock Exchange in the 1960s and early 1970s that were widely regarded as solid buy-and-hold growth stocks. Companies in this group demonstrated consistent earnings growth and traded at high P/E ratios. The nifty fifty included fast-growers like Polaroid, Sony, McDonald's and Disney. The idea of buying large proven companies makes sense (they have better access to financing, they are more diversified, they attract the best and brightest managers and governments are more likely to bail out companies deemed "too big to fail"). But even great stocks are a bad bet if you pay too much. By 1972, Polaroid traded at 90 times its earnings, Sony at 92 times, McDonald's 83 times and Walt Disney 76 times. When the nifty fifty crashed, they reduced the returns of big stocks and a nine-year period of unusually strong growth for small-cap stocks ensued.

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O

Describes a market condition when prices have risen too far too fast and are ripe for a downward correction. (See also Oversold.)

describes a market condition when prices have fallen too far too fast and are ripe for an upward correction. (See also Overbought.)

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P

are the dividends paid out on a stock’s preferred shares. Preferred Dividend Coverage is a nice measure of the long-term buoyancy of a company’s financial resources. It is net income after interest and taxes (but before common stock dividends) divided by the dollar amount of preferred stock dividends. The result indicates how many times over the preferred dividend requirement is covered by current earnings. (See also Common Dividends and Total Dividends.)

are shares that pay dividends at a specified rate. (When a company’s directors declare a new dividend rate in the common stock, it does not affect preferred stock.) Preferred stock takes precedence over common stock in the payment of dividends and liquidation of assets. Preferred stock does not usually confer voting rights for its shareholders. (See also Common Stock.)

Is calculated by dividing the per-share price of a company's stock by its per-share operating cash flow. Cash flow is earnings plus all non-cash deductions from earnings, such as depreciation, depletion, deferred taxes, etc. and therefore it is almost always higher than earnings; thus a p/cf for a company's stock will invariably be at least equal to or lower than its p/e ratio. Some investors favour the use of p/cf as an evaluation tool because accounting rules and guidelines make it less easy to manipulate the reporting of cash flow and it also helps investors compare companies internationally by removing varying jurisdictional practices from the calculation of deductions from earnings. Investors should also be aware that some companies include changes in current assets and current liabilities when they calculate their cash flow. This approach is apt to misrepresent their true cash flow and underlying financial performance. In these cases, investors should add back the "Changes in non-cash operating working capital" when calculating cash flow.

Is the ratio of a company's per-share price to its per-share net earnings. There are two common variations of the p/e ratio--the trailing p/e and the forward p/e. The trailing p/e is the current per-share price divided by the latest 12-month earnings per share. The forward p/e is the current per-share price divided by the estimated net earnings for the next 12 months. Estimates are published by qualified securities analysts who are known to follow the stock. In general, the higher the p/e ratio, the less a stock’s potential for growth. A company with a low p/e ratio may be undervalued, or the market may sense it's a company in decline, or its recent earnings may have been bolstered by an unusual or extraordinary event. A company with a high p/e ratio may be overvalued, or the market may sense it's a company that's a growth stock with earnings expected to rise substantially in the future, or it's the subject of some market speculation such as a possible take-over offer. The p/e ratio is most useful when comparing a company to its own historical ratio, to others in its own industry and its sector, and to the market in general. A weakness of the p/e ratio is that the earnings (i.e. the denominator) are subject to accounting rules and guidelines that can be frequently manipulated and may reflect varying international standards.

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Q

measure a company’s investment quality and ability to withstand risk over the long term. We use our own proprietary Quality Ratings, which have proved to be a very effective measuring stick over the years. They rank companies on the basis of assets. In some cases, our Investment Planning Committee may move the rating up or down a notch based on the firm’s economic sector, capital structure, etc. Here are our quality ratings, based on assets: Very Conservative over $1.5 billion; Conservative $750 million to $1.5 billion; Average $150 million to $750 million; Higher Risk $75 million to $150 million; Speculative under $75 million. Due to the much larger size of the United States market, we multiply each of these figures by 10 for U.S. stocks.

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R

Is a momentum oscillator that measures the speed and magnitude of a stock's price changes. Based on its average trading patterns, you can find out whether the stock has been overbought or oversold. RSI oscillates on a scale between zero and 100. A stock is considered overbought when its RSI rises above 70, indicating that it may be getting overvalued. It is considered oversold when the RSI drops below 30, indicating that it is likely becoming undervalued.

Is a sector of the economy represented in a diversified portfolio by mining, forestry, oil and gas companies, etc. and major service suppliers to those companies such as drilling contractors and heavy equipment suppliers. This sector is cyclical and often lags behind the over-all market by a year or so. The proportional importance of this sector to Canada's economy is unusually large among fully developed countries. (See also Sector Investing, Finance Sector, Consumer Sector, Manufacturing Sector, Utility Sector and Multi-Sector.)

reflect the income a company has earned less the dividends it has paid during the period. In short, these are the earnings a company retains to put back into the business itself.

This handy rule provides a speedy method of determining the amount of time required to double your principal at a given rate of compound interest. Simply divide the number 72 by the annual return expressed in percentage form. The answer is the number of years required for the principal amount to double. For example, a security yielding 8% compounded annually, assuming no capital gain or loss, would double your principal in 9 (72÷8) years.

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S

Is a stock allocation system designed to achieve portfolio diversification with exposure to all the important areas of the economy. Advice For Investors' affiliated investment advisory publication, The Investment Reporter, divides the Canadian economy into five major sectors--Manufacturing, Resource, Consumer, Finance and Utility. Some giant conglomerate corporations are assigned a Multi-Sector status. These Multi-Sector stocks are often good choices when trying to balance a portfolio's allocation among the five major sectors. The Investment Reporter advises investors to put at least 10 per cent but no more than 30 per cent of their stock money into each sector and also to diversify within each economic sector. Within the Finance Sector, for instance, you might buy one bank, one life insurer and one mutual fund company. (See also Manufacturing Sector, Resource Sector, Consumer Sector, Finance Sector, Utility Sector and Multi-Sector.)

Involves borrowing shares from a broker, selling them on the market, and then buying the stock back when the price falls. The buyer reaps the profits from the difference between the two prices, less commission, dividends and interest. If the stock rises in price, the “shorts” lose. When investors are selling a stock short, they’re betting that it will go down in price soon. But heavy short selling indicates that a stock will also be heavily re-bought. This will stabilize the price and possibly even generate some serious upward momentum. The ratio of short shares to total volume of shares can be a very revealing indicator. When a stock shows a high ratio of short positions, this may well suggest that the stock will be heavily bought in the near future. If it goes up in price, brokers will call in short positions to realize a profit. If the share price falls, the “shorts” will purchase the stocks to realize their own profits.

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Stock funds fall generally into two categories—diversified and specialty. Specialty funds narrow their scope of investment to a particular industry, such as precious metals or technology companies, a geographic region such as Asia or Europe, or a type of security such as high-dividend stocks. (See also Diversified Funds.)

is the amount the company has spent in repurchasing its own stock during the reporting period. (See also Sale of Company Stock.)

Allows you to uncover stocks that fit the performance profile you want. You enter a series of criteria into a model and the screen shows you all the stocks that match those criteria. You can call up companies by fundamental criteria and technical factors.

Is a nonsensical concept for a stock market predictor that, amazingly, has been right about 80 per cent of the time. The theory holds that if a team from the NFL's National Football Conference wins, then there will be a bull market that year. If a team from the American Football Conference wins, it's a bear market to follow. Since the winner of a football game and the stock market's performance have no relationship, this indicator's success rate is just an amazing coincidence. Or, as the more statistically- and scientifically-inclined may put it: "Correlation does not imply causation".

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T

Includes all the money a company has earned over the course of the reporting period, including “indirect” sources of income, such as interest income. (See also Annual Revenue.)

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V

Value investors look for companies they can buy for less than their estimate of present value. That estimate often uses financial-statement criteria such as book value, sales, cash flows or earnings. Value investors may look further for hidden value such as management ownership of a company’s stock, patents or special market niches for a company’s products. They may even look at what a company is worth in a possible takeover. A value fund manager will tend to have a portfolio of companies that trade at below-average price/earnings and price/book value ratios. What’s more, many companies in value portfolios pay higher-than-average dividends. (See also Momentum Investing and Sector Rotation Investing.)

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W

Warrants are derivative securities issued and guaranteed by a company that give the holder the right to purchase other securities (usually stock) from the issuing company at a set price within a specified time period. Warrants are often attached to a new securities issue to sweeten the offer. When a stock, bond, preferred share or some other security is too speculative, too low-yielding, or unattractive for some other reason, a company will often attach a warrant to it. It’s a little something extra to entice you to buy. Warrants are detachable after the initial sale, either immediately or after a stated length of time. Eventually you can trade them separately. Some--but not many--high-quality stocks have warrants. Sometimes that’s because they issued them before they reached their current status. Or, they may have issued warrants as part of a merger or acquisition. The important thing to remember is this: in most cases (though not always), warrants give you the right to buy lower-quality shares.