Earnings
The amount of profit a company realizes after all costs, expenses and taxes have been paid. It is calculated by subtracting business, depreciation, interest and tax costs from revenues. Earnings are the supreme measure of value as far as the market is concerned. The market rewards both fast earnings growth and stable earnings growth. Earnings are also called profit or net income. See "What Is A Stock Anyway?"
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Earnings growth
The percentage change in a company's quarterly earnings per share versus the same period from the previous year. For example, a company that earned $1.00 a share in the second quarter of 1998, then earned $1.25 in the second quarter of 1999 would have experienced a 25% growth in earnings. To gauge how successful a company is at growing its earnings, you should compare its earnings growth to other companies in its industry.
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Earnings per share
The portion of the company's earnings allocated to each share outstanding. EPS, as it is called, is a company's net income divided by its number of outstanding shares. If a company earning $2 million in one year had 2 million shares of stock outstanding, its EPS would be $1 per share. In calculating EPS, the company often uses a weighted average of shares outstanding over the reporting term. EPS is the denominator in the price-to-earnings ratio.
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Earnings yield
A company's per-share earnings expressed as a percentage of its stock price. This provides a yardstick for comparing stocks with bonds, as well as with other stocks.
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EBIT
Earnings before interest and taxes. EBIT is calculated by subtracting costs of sales and operating expenses from revenues. The figures are often used to gauge the financial performance of companies with high levels of debt and interest expenses.
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Ebitda
Earnings before interest, taxes, depreciation and amortization. Also known as operating cash flow, Ebitda is calculated by subtracting costs of sales and operating expenses from revenues. Depreciation and amortization expenses aren't included in the costs. Ebitda is a useful measure of cash flow for companies that have low earnings because of large restructuring, capital build-out or acquisition costs. See "Margins."
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Economic indicators
Key statistics used to analyze business conditions and make forecasts. Among them are the unemployment rate, inflation rate, factory utilization rate and balance of trade. Also see Leading economic indicators.
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Emerging markets
The financial markets of developing countries. Examples include Mexico, Malaysia, Chile, Thailand and Philippines. Emerging-market securities are the most volatile in the world. They have tremendous growth potential, but also pose significant risks — political upheaval, corruption and currency collapse, to name just a few. See "Foreign-Stock Funds."
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Employee stock ownership plan
A program encouraging employees to buy stock in their company and thereby have a greater stake in its financial performance. Abbreviated as ESOP
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Endorsement
In some forms of insurance, a provision added to a policy to add to or alter the coverage.
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Entitlements
Government benefits such as Social Security and Medicare that must be paid to anyone meeting specific eligibility requirements.
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Equity
Ownership interest possessed by shareholders in a corporation — stocks as opposed to bonds. It is the part of a company's net worth that belongs to shareholders. See "What Is a Stock Anyway?"
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Equity income funds
Funds that seek current income by investing a minimum of 65% of their assets in dividend-paying securities. Equity income funds are most akin to value funds in their investment philosophy because stocks with high dividend yields tend to be the cheapest stocks. Since dividends are the primary criterion by which these funds select stocks, they often lose out on capital appreciation. This means that as the market rallies, these funds will often lag. Conversely, when the market declines, the income generated by the stocks held in equity income funds provides a buffer against losses. See "Investment Strategy."
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Erisa
Acronym for the Employee Retirement Income Security Act, a law governing most private pension and benefit plans.
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Escalator clause
A clause in a contract providing for increases in costs such as labor expenses and materials.
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Estate planning
Planning for the disposition and administration of an estate when the owner dies. Estate planning includes drawing up a will, setting up trusts, and minimizing estate taxes, perhaps by passing property to heirs before death.
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Estate taxes
Taxes levied by the federal and state governments on the transfer of your assets after you die. Uncle Sam levies estate taxes on the world-wide assets of both U.S. citizens and U.S. residents. Under the Economic Recovery Act of 1981, there is no estate tax on transfers of property between spouses.
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Eurobonds
Bonds issued and traded outside the country whose currency they are denominated in, and outside the regulations of a single country; usually bonds issued by a non-European company for sale in Europe. Also called global bonds.
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Eurocurrency
A deposit in a bank outside the depositor's country of origin. Most deposits are U.S. dollar deposits, although nearly all major Western currencies are represented.
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Eurodollars
U.S. currency held in banks outside the United States, mainly in Europe, and commonly used for settling international transactions. Some securities are issued in Eurodollars — that is, with a promise to pay interest in dollars deposited in foreign bank accounts.
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Euroloans
Loans of dollar-denominated deposits in banks outside the U.S. and of other deposits in banks outside the depositor's country of origin.
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Euromarkets
A general term for the Eurobond and Euroloan markets.
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European Currency Unit
A monetary unit created in 1979 by nine European nations to promote currency stability in the European Union. The European Currency Unit consists of weighted amounts of the national currencies of members of the European Monetary System. The value of the European Currency Unit in relation to other currencies is published daily in newspapers. Also called the ECU.
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European Monetary System
An exchange-rate system adopted by European Union members in an effort to move toward a unified European currency.
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European-style option
An option that may be exercised only on its expiration date.
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European Union
An economic association of European countries founded by the Treaty of Rome in 1957 as a common market for six nations. It was known as the European Community before 1993 and is currently comprised of 15 European countries. Its goals are a single market for goods and services without any economic barriers and a common currency with one monetary authority. The EU was known as the European Community until Jan. 1, 1994.
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Exchange
A centralized place for trading securities and commodities, usually involving an auction process. Examples include the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).
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Ex-dividend
A period of time immediately before a dividend is paid, during which new investors in the stock are not entitled to receive the dividend. A stock's price is revised lower to reflect the dividend value on the first day of this period. On that day, a stock is said to "go ex-dividend." Usually indicated in newspapers with an x next to the stock's or mutual fund's name.
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Executor
The person named in your will to handle the settlement of your estate.
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Existing home sales
The existing homes report provides information on the level of sales for existing homes. Statistics are provided monthly by the National Association of Realtors and reflect the demand for housing.
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Exotic option
Any of a wide variety of options with unusual underlying assets or terms. For example, rainbow options depend on the amount by which one asset outperforms another.
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Expense ratio
The percentage of mutual fund assets deducted each year for expenses, which include management fees, operating costs, administrative fees, 12b-1 fees and all other costs incurred by the fund. Recently, the average expense ratio for domestic equity funds was 1.4%. For fixed-income funds it was 1.1%. International funds have higher expense ratios, averaging around 1.9%. There is no reason to buy funds with expense ratios higher than that. Sometimes the fund's management may elect to waive part of the expenses charged to shareholders in order to boost returns. But this is usually a temporary waiver, so be careful because such funds often raise their expenses once the waiver period ends. See "Cost Control."
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Expiration date
The date after which an option may no longer be exercised.
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Export-Import Bank of the U.S.
An independent bank established by Congress which encourages U.S. trade with foreign countries by financing imports and exports, and extending credit and insurance. The bank is financed by the Treasury Department.
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Exports
Goods and services one country produces and sells to others. The opposite of imports, strong exports are necessary to have a favorable balance of trade.
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Extension risk
For mortgage-backed securities, the risk that rising interest rates may slow down mortgage prepayment. Because investors' money is tied up in the securities, they may miss the opportunity to earn a higher rate of interest on a different investment.
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Extraordinary items
A nonrecurring event that must be explained to stockholders in an annual or quarterly report. Examples include expenses related to acquisitions or plant shutdowns, results of legal proceedings or unanticipated tax benefits. Earnings are usually reported before and after taking into account the effects of extraordinary items. Pay close attention to these items because they can make earnings look better or worse than they actually are.
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