The mix of stocks, bonds, cash equivalents and other assets in which your capital is invested.

 

The sum of a corporation's long-term debt, stock and retained earnings. Also, the market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share (this is called market capitalization, or "market cap").

 

An industry whose performance is closely tied to the overall economy and thus highly sensitive to business cycles. Examples are autos, chemicals, construction, paper, steel and heavy equipment.

 

The capital markets of countries whose economies are mature, such as the U.S., most of Western Europe and Japan; the term also refers to the countries themselves. The most commonly used index of the developed foreign markets, the EAFE index of Europe, Australia and the Far East, comprises some 20 countries. (By contrast, "emerging markets" are those in the developmental stage, such as Brazil, Thailand and Turkey.)

 

A measure of the value of an investment, taking account of its current price and the estimated future cash flow to the investor. The higher the current price in relation to future estimated cash flow, the lower the expected return; the lower the price in relation to future cash flow, the higher the expected return.

 

When a stock reaches a price that reflects the market's full recognition of the underlying company's fundamental earnings power, in the judgment of. securities analysts, it is said to be fully valued. If the price goes up from that level, the stock is called overvalued; if it goes down, it is termed undervalued.

 

A method of valuing securities that involves closely examining a company's financial and operating condition, especially sales, earnings, growth potential, assets, debt, management, products and competition.

 

Stocks of companies prized for the prospect of fast sales and earnings growth, often selling at higher prices than the average stock in the market (the kind of stocks favored by growth investors).

 

Eliminating some or all of one's exposure to a foreign currency by trading that currency for U.S. dollars.

 

A benchmark against which investment or economic performance is measured. Examples include both the Standard & Poor's 500-stock index and the Consumer Price Index.

 

Switching out of, or into, stocks or bonds according to one's prognostication of how the markets will do in the short run. History shows this rarely works.

 

Companies mostly in Internet, technology, telecommunications and other "new" businesses heavily reliant on technical innovation and intellectual capital. Until recently these businesses were thought by many to be immune from cyclical fluctuations. The stock "bubble" of the late Nineties-and its deflation in 2000-developed in this arena of industry.

 

Companies in the traditional sectors of the economy, including heavy industry, industrial resources, utilities and the like- thought by many to be outmoded slow-growers until the "new-economy" bubble burst.

 

Said of securities perceived to be too expensive (see "Fully valued").

 

A stock's capitalization divided by its book value. The ratio is the same whether the calculation is done for the whole company or on a per-share basis. A lower price/book-value ratio than that of the average stock is often an indication of superior investment value, and vice versa.

 

The ratio of a stock's current price to its earnings per share, either actual or forecast. A lower P/E ratio than that of the average stock is often associated with superior investment value, and vice versa.

 

A company whose primary business is to own and operate or finance real estate. REITs offer their investors the growth potential of the properties together with participation in the income generated by their rents. Payments are made to investors in the form of dividends, enhanced by the fact that most REITs pay no corporate income tax (though REIT dividends are taxable to the investor). Designed to combine the appreciation characteristics of stocks with the steady income of bonds, but weakly correlated with both, REITs can be excellent vehicles for portfolio diversification.

 

The relation between risk and return that usually holds, in which investors must be willing to accept greater risk if they want to pursue greater returns.

 

Stock indexes used as touchstones for value stocks and growth stocks (see glossary entries). There are several such indexes, constructed in line with valuation and sometimes other factors. The most commonly used style benchmarks among money managers are the Russell 1000 Growth and Russell 1000 Value Indexes, in which the thousand largest stocks in the U.S. market are assigned to one or the other index-or in some cases divided between them if they're judged as straddling the middle. The rationale for style indexes is to evaluate a money manager's performance by comparing "apples to apples," since the market alternates between cycles friendly to either value or growth, respectively.

 

A security selling for less than securities analysts believe it should be, based on the underlying company's fundamental earnings power. A company's stock may be undervalued because its industry is out of favor, because the company has encountered temporary problems that investors have overreacted to, because it has a history of erratic earnings, or because of many other reasons (see "Fully valued").

 

Stocks selling at low prices in relation to company assets, sales and earnings power (the kind of stocks favored by value investors).

 

Variability; fluctuation. In investing, the range of outcomes for a given investment over a period of time. The smaller the range of an investment's returns, the lower the investment's volatility, and vice versa. One of the most common measures of investment risk.

 

One component of investment return. A high yield is often an indication of superior investment value. In fixed-income investments, current yield, one type of yield calculation, represents the interest payments of a security expressed as a percentage of its current market price. Yield to maturity, another widely quoted measure, uses a more complex formula that also factors in the difference between a security's current price and its par value at , maturity. Regardless, yield and total return often differ because return is affected by changes in interest rates, changes in credit quality and other events that cause capital gain or loss in bonds. In stocks, yield means the current annual dividend expressed as a percentage of the current price of the stock. Here, too, yield and total return differ, since return also includes price appreciation or loss. High yield in a stock means dividends are high in relation to current price.