Okay, so we dont have much of a life. We have been hearing the U.S. Securities and Exchange Commission talk seemingly forever about the need for financial information to be written in plain English. And for almost as long, we have heard people on Wall Street say they are going to comply. Since we are naturally curiousand since we dont have anything better to dowe figured wed cruise through a handful of prospectuses, to see if they have heeded the call.
The verdict? For the most part, while these things are not as bad as they used to be, Stephen King, Tom Clancy and Dan Brown (no relation I am sad to say, given the recent performance of the stock market) still dont have much to worry about it. These are far from page turners.
Even though there have been some improvement, financial documents are still confusing. To simplify things, lets go over a couple of terms here. (For further help, you can visit Yahoo (www.yahoo.com) which has a comprehensiveif slightly formalglossary. Vanguard (www.vanguard.com) has a glossary containing just about every term you are likely to encounter and is easily accessible, even if you are not a customer.
But before you click there, lets go over a couple of terms here.
Large-cap, mid-cap and small-cap stocks. This is a way to classify companies by their market value. Market value, or capitalization as it is sometimes called, is easy to figure out. You multiple the number of shares a company has outstanding by its stock price, and you get its capitalization. A $15 stock that has 10 million shares outstanding would have a market value of $150 million. That would make it a small cap. There is no hard and fast definition, but these days companies with market value of more than $10 billion are usually large caps; between $1 billion and $10 billion companies are called mid-caps and anything under a billion is classified as small cap. Like everything else, these values have grown over time.
Price/Earnings Ratio (P/E): The value of a companys stock, divided by its earnings per share. This can give you a sense of how much youre paying for a companys earning potential. The higher this ratio, the more youre willing to pay for potential earnings down the road. Young, immature companies tend to have high P/E ratios, in the 30s, 40s and 50s, because a) they dont have much in the way of earnings and b) people are betting they will, at some point.More mature companies can have P/E ratios in the teens or even lower, given current market conditions. Some Internet companies had P/E ratios in the 100s, or beyondright before the tech bubble burst.Tax Deferred: An investment whose earnings go untaxed until you withdraw them. IRAs, 401(k)s, annuities and even U.S. Savings Bonds are tax-deferred investments.Tax-Exempt or Tax-free: Investments that pay income thats free from taxes. Municipal bond yields, for example, are free of federal taxes. So, too, are earnings in a Roth IRA.In reading financial material, you can easily feel that you are in Alices Wonderland where, as the Queen put it, words mean whatever I say they mean. These definitions, along with the glossaries we mentioned, will help you become more comfortable with the world of investing.
