Back-End Load
A load (fee) paid when you redeem your shares of a fund. Most funds drop the load if you hold for a specified period of time, usually several years.
Backlog
Backlog includes any order a supplier may have on its books, even if product is scheduled to be shipped a year in advance. It’s in contrast to futures orders, which cover a specified time period.
When oil was discovered in Titusville, Pa., in 1859, it was loaded into the only large containers available — whiskey barrels. Over the years the industry standard came to be the 42-gallon barrel, which is still the standard paper measurement for pricing and pumping purposes, although oil rarely sees the inside of a barrel anymore. But in an odd forecasting of today’s equipment shortage, the first shortage in Titusville’s 1859 oil boom was barrels in which to store oil.
Basic Earnings
Earnings per share calculated as net income divided by the number of common shares. The number of common shares outstanding is usually easy to find in an income statement. Diluted earnings, however, are thought to be a better overall measure than basic earnings.
Basis Points
A basis point is a hundredth of a percentage point, or 0.01% — a key concept in discussing bond yields. The term is used mainly when quantifying changes in yields, or the difference in yield between two bonds.
For example, say that a bond’s price drops, causing its yield to rise from 6% to 6.10%. One would say its yield rose by 10 basis points.
Another example: Say one bond has a yield of 6.5% and another has a yield of 6.75%. The difference can be expressed as 25 basis points.
Beige Book
The Federal Reserve’s “Beige Book” report summarizes anecdotal information collected by the District Federal Reserve Banks from key businessmen, economists, market experts and other sources. Used at the meetings of the Federal Open Market Committee (the Fed’s monetary policymaking arm).
Source: One of the 12 District Federal Reserve Banks, on a rotating basis.
Frequency: Eight times a year
Released when? Two Wednesdays before every FOMC meeting at 2 p.m. Eastern.
Market importance: Some. Used in conjunction with recent economic indicators to gauge the strength of economy. Occasionally moves markets, but the Beige Book is not a commentary on the views of Fed members.
Beta
This volatility measure is supposed to give you some sense of how far the fund will fall if the market takes a dive and how high the fund will rise if the bull starts to climb. A fund with a beta greater than 1 is considered more volatile than the market; less than 1 means less volatile.
So say your fund gets a beta of 1.15 — it has a history of fluctuating 15% more than the S&P. If the market is up, the fund should outperform by 15%. If the market heads lower, the fund should fall by 15% more.
Problem: For funds that don’t correlate well to the S&P, beta just doesn’t tell you much.
Bid (Price)
The bid is the price a buyer is willing to pay for a security; the ask is the price for which a seller is willing to sell.
Bid-to-Cover Ratio
This is the key measure of demand in an auction of Treasury bills, notes or bonds. It compares the volume of securities that dealers enter bids for to the volume offered for sale. For example, if the Treasury offers $10 billion of securities for sale and dealers enter bids for a total of $20 billion, the auction produces a bid-to-cover ratio of 2.
An auction is judged successful if it produces a bid-to-cover ratio significantly higher than the average bid-to-cover ratio for the previous dozen auctions of securities of that type.
Black-Scholes Model
A methodology for valuing options that takes into account whether an option is in the money or out of the money, the volatility of the underlying asset, the time to expiration of the option, whether the option is a put or a call and the current rate of return on a risk-free asset such as a Treasury bill.
Blue Chips
In poker, the blue chips are the most expensive chips. In investing, blue-chip companies are the ones with the big market capitalizations — the Cokes and Exxon-Mobils of the world. The phrase is typically used to describe the Dow Jones Industrial Average.
Bond
In its simplest and most common form, a bond is a security that pays its holder a fixed sum on a regular schedule for a fixed term.
Bonds are debt securities. Bond investors are lenders; bond issuers are borrowers. To issue a bond is to borrow money from investors for a fixed term at a fixed interest rate. At the end of the term, the issuer returns the principal portion of the loan.
Principal is typically $1000 per bond, or some multiple thereof. This is also known as a bond’s face value.
A typical bond pays interest on its face value, or principal, twice a year at a rate called its coupon. A $1000 bond with a 6% coupon pays $60 a year in two installments. This is why bonds are also called fixed-income securities.
A bond’s coupon rate is a function of two things — its term and its credit quality.
Longer-term bonds typically have higher coupons to compensate the investor for the risk that interest rates will rise before the bond matures. This is interest-rate risk. Most bonds mature in 30 years or less.
Credit quality refers to the issuer’s ability and willingness to pay interest and repay principal on schedule. Most bonds carry ratings (triple-A is the highest) indicating their credit quality. Low-quality bonds carry large coupons to compensate investors for the risk that the issuer will default, or fail to make timely payments. This is credit risk.
There are three main classes of bond issuers: Treasury securities are issued by the federal government; municipal bonds are issued by states and local governments; and corporate bonds are issued by companies. Other types of bonds include high-yield bonds, agency securities, mortgage-backed securities and asset-backed securities. Except for municipal bonds, all the other types are collectively referred to as spread product.
Bottom-Up Investing
This describes an investing approach in which a manager focuses first and foremost on the prospects of an individual company, rather than overall economic or market trends.
Breakout
A point when the stock’s price moves above resistance or below support.
Bucket Shop
An unscrupulous brokerage firm, typically one that engages in aggressive, often fraudulent telephone sales tactics. Also called a “boiler room,” or “chop shop.”
Business Inventories
Official name: Manufacturing and Trade Inventories and Sales
What exactly? The sum of inventories at each of the three stages of production: manufacturing, wholesaling and retailing. This report also includes business sales (the sum of sales at each of the three stages of production).
Source: Census Bureau
Frequency: Monthly
Released when? Around the 13th of the month at 10:00 a.m. Eastern. Data for two months prior.
Market importance: Little. Rarely moves markets. It is used to help predict the inventory portion of gross domestic product — but most of the components of this report are already known by the time it is released.
Other notes: (a) Inventories at the retail level are the only unknown before this report is released. Retail sales have already been released. So have inventories and sales at the wholesale level (in the wholesale trade report) and at the manufacturing level (in the factory orders report). (b) The headline number is the percent change in business inventories from the prior month, but we also graph the year-on-year change alongside the year-on-year change in business sales because it provides clues about the path of production in the future.
Butterfly Spread
A strategy involving four options with three strike prices. For a call strategy, an investor can buy one call at the lowest price, sell two calls at the middle strike price and buy one call at the highest strike price.
A butterfly spread put strategy can be developed by buying one put at the highest price, selling two at the middle price and buying one put at the lowest price. Confused yet?
Because of the different positions, both risk and return are somewhat limited. What’s not limited is the amount of commissions you’ll pay your broker on eight options transactions, making butterfly spreads a strategy that should be avoided by most individual investors.
Buy-Side
The buy side comprises all the money management firms — mutual funds, pension funds, hedge funds, etc. — which profit from buying and selling stocks. The buy side firms have their own stock and sector analysts, too, but they are far less public. They don’t publish reports or put out buy and sell recommendations. They simply do research for the portfolio managers within their firms.