Glossary of Business, Corporate Finance
and Investment Terms

If you are considering the formation of a business entity, we urge you to first read the following glossary of terms.

Accounts Receivable Financing

Short term loan where accounts receivable are pledged as security for the loan.


Accredited Investor

An investor wealthy enough to be exempt from SEC registration requirements. Generally, individuals or married couples need a minimum net worth of one million dollars or annual income of $200,000 for an individual, or $300,000 for a married couple for each of the two most recent years with the reasonable expectation that the minimum requirement will be met in the current year.



Two corporations are affiliated when one owns less than a majority of the voting stock of the other, or when they are both subsidiaries of the same corporation. A Subsidiary is always an Affiliate, but Subsidiary is always the preferred term.


Affiliated Person or Control Person

Someone who is in a position to exert direct control over the actions of a corporation. These persons include owners of 10% or more of the voting stock, senior level officers, directors, and people who are in a position to exert influence through them.



Refers to trading of a security after the Initial Public Offering.



American Institute of Certified Public Accountants.


Air Pocket Stock

A stock that falls sharply usually after negative publicity, unexpected low earnings, or a loss.


Alien Corporation

A corporation incorporated under the laws of another country but operating in the United States. Compare to Foreign Corporation.



A contract sold by a life insurance company that guarantees a fixed or variable payment at a determined point in time.


Asset Play

A stock that is desirable to purchase because the current price does not reflect the corporation's assets. Asset Play stocks are often takeover targets because they provide a way to acquire assets inexpensively.


Asset Stripper

This is a corporate raider that sells off major assets after acquiring control of a company. The proceeds are usually used to repay debt resulting from the acquisition. The object is to pay off the debt and still own a valuable operating company or other valuable assets.


Authorized Shares or Authorized Stock

The maximum number of shares of stock a corporation can issue under the terms of its Articles of Incorporation. A corporation is not required to issue all of its authorized shares of stock. Sometimes a corporation will hold back authorized stock for future acquisitions or other purposes.



A bank's agreement with a corporation attempting a takeover that it will not provide financing to support the bid of another firm.



The trading of goods and / or services for other goods and / or services. The use of money is not required except to possibly balance accounts. The use of barter is growing all over the world.


Bearer Bonds or Coupon Bonds

Bonds not registered in the records of the issuing corporation. Bearer bonds are negotiable without endorsement. They are transferred by simple endorsement. Bearer Bonds have coupons attached which must be presented to the corporation before dividends will be paid. Most bonds are registered.


Bearer Stock

Stock not registered in the records of the issuing corporation. Bearer Stock certificates are negotiable without endorsement. They are transferred by simple delivery. All stock of California corporations is registered.


Blue Chip Stock

Stock of a nationally known corporation with a long history of growth, profits, and reliable dividends. Such firms also have a reputation for having high quality management, products, and services.


Bottom Fisher

Investor who buys stocks that have fallen to a very low level. Sometimes Bottom Fishers buy stocks of corporations that are facing possible bankruptcy because of the extremely low price per share.


Capital Asset

An asset not purchased or sold in the normal operation of the business. It is considered a long term asset or fixed asset. Examples include buildings, equipment, and furniture.


Captive Finance Company

This is usually a Subsidiary of a corporation used to finance the purchase of goods from the parent company. An example would be Ford Motor Credit.


Certified Financial Statements

These are financial statements accompanied by an opinion from a Certified Public Accountant.


Cigar Butts

Refers to corporations that have little value but are still good investments because the share price is far below the book value per share. The strategy of acquiring Cigar Butt corporations is used almost exclusively by liquidators. The comparison to a Cigar Butt is made because the corporation usually has "one puff of smoke remaining."


Closed Corporation or Privately Held Corporation

A Closed Corporation is a corporation with only a few shareholders often members of a family. There is no public market for such stock.


Closely Held Corporation

A Closely Held Corporation is a corporation where most of the voting stock is owned by only a few stockholders but some shares are owned publicly.


Commercial Paper

Short term notes with maturities of 2 to 270 days issued by corporations with excess cash. The notes are unsecured and are usually sold at a discount. Corporations that issue Commercial Paper usually have a line of credit as a backup. Commercial Paper interest rates are generally lower than bank rates.



This is a corporation consisting of divisions or subsidiaries involved in a wide variety of businesses. These businesses may or may not be related to each other from an operations standpoint.


Consolidated Financial Statement

A financial statement that consolidates all income, expenses, assets and liabilities of a Parent Corporation and its Subsidiaries.


Contingent Liability

A liability that arises only upon the happening of a defined event. An example would be a guarantor of a loan becomes liable if the borrower defaults.


Corporate Pyramid Structure

In a corporate pyramid, one corporation controls a second corporation while the second corporation controls a third corporation and so on. For example, Corporation A owns 51% of the stock of Corporation B and thus controls it. Corporation B owns 51% of the stock of Corporation C and thus controls it. The person that owns 51% of the stock of Corporation A now controls all three corporations.



A corporation is a legal entity created under the laws of each state having its own privileges and liabilities separate from those of its stockholders. Stockholders have limited liability, elect directors who elect the officers, and can receive dividends if the corporation is profitable.


Credit Enhancements

These are techniques used by issuers of bonds or notes to improve the credit rating of the debt thus reducing the interest rate paid.


Cross Holdings

Exist when a corporation owns another corporation's stock. Double counting must be eliminated from Consolidated Financial Statements when Cross Holdings exist.


Crown Jewel Defense

A Poison Pill strategy in which a takeover target spins off or sells a valuable asset to discourage the takeover.


Daisy Chain

A series of stock trades among market manipulators to create the appearance of high trading volume. The purpose is to increase the price of the stock so the manipulators can sell at a profit. After the manipulators sell their stock, the price usually returns to the previously lower price.


Domestic Corporation

A corporation doing business in the state in which it was incorporated.


Effective Control

Effective Control or Working Control by a stockholder owning less than a majority of the stock is possible, and even common, when the balance of the stock is widely dispersed. Sometimes stockholders with as little as 10% of the stock have Effective Control.


Fallen Angels

Bonds that were investment grade when issued that have declined below investment grade. Fallen Angels become the equivalent of junk bonds.


Finance Company

A firm that lends money to individuals and businesses. Unlike commercial banks, Finance Companies do not take in deposits. Their funds generally come from their own capital, bank lines of credit, insurance companies, and sometimes Commercial Paper. Finance Companies usually charge slightly higher rates than commercial banks, but generally offer loans that many banks will not make. Most well capitalized Finance Companies can borrow from their banks at the lowest rates available in the market.



This is a general term for a business. It could be a corporation, partnership or other entity.


Foreign Corporation or Out of State Corporation

A corporation incorporated under the laws of a state other than the one in which it is conducting business. Out of State Corporation is preferred since it is less likely to be confused with Alien Corporation.


Friendly Takeover

A merger or acquisition made with the support of the management and board of directors. It exists where the board recommends the proposed transaction to the shareholders because they believe it is in the best interest of the stockholders to accept it. Compare to Hostile Takeover.


Godfather Offer

This is a takeover offer that is so generous that the board of the target corporation can't refuse it for fear of encouraging a stockholder lawsuit.


Hidden Reserves or Hidden Values

These are undervalued assets owned by a corporation that are not reflected in its stock price. Examples can be trademarks, patents, licenses, and land. Sometimes these undervalued assets become recognized for their true value resulting in the stock price increasing.


Hostile Takeover

The takeover of a corporation against the desire of its board of directors and senior management.



Refers to the pledging of personal property to secure a loan. It does not transfer title. It transfers the right to sell the property in the event of a default on the loan payments. The sales proceeds are then applied toward repayment of the loan.


Initial Public Offering (IPO)

A corporation's first or initial offering of stock to be sold to the public. IPOs are an opportunity for the stockholders of a corporation to make a large profit if the market believes the corporation will earn profits and grow.


Internal Auditor (IA)

An employee who usually reports to the board of directors of a corporation. The IA guards against any wrong - doing on the part of management and reports whether management is following the board's directives, including company policies and procedures.


Jonestown Defense

Defensive tactics taken by management to discourage a hostile takeover that are so severe they are perceived to be suicidal for the corporation.



A tenant or company leasing equipment owned by the Lessor.



A landlord or company leasing its equipment.



Leverage is a technique that can multiply gains and losses. The most common leverage method involves borrowing funds in order to reduce the need for equity capital when making an investment. Leverage always involves increasing risk.


Leveraged Buyont (LBO)

A LBO of a corporation exists when the buyer uses borrowed funds that are secured by the assets of the company being acquired. The buyer may be required to use other funds to supplement the LBO funds.


Liquid Assets

Cash or assets readily converted into cash. Examples would be U.S. Treasury Bills and investment quality corporate bonds or other marketable securities.


Multi - level Marketing (MLM)

Multi - level marketing is a marketing strategy whereby salespeople are compensated for both their sales and the sales of others they have recruited for the firm. MLM creates a downline of salespeople and a hierarchy of levels of compensation. MLM is sometimes referred to as network marketing, referral marketing, and pyramid selling. MLM strategies vary considerably. Most are legitimate business strategies. A few border on Pyramid Schemes. Examples of firms that utilize MLM are Amway, Avon Products, Herbalife, Mary Kay, Pre - Paid Legal Services, Primerica, and Shaklee Corporation.


Nonrecourse Loan

A loan where the repayment obligation is tied directly and exclusively to the security for the loan. A loan where no personal guaranty is provided.



The right to purchase property, for a defined price, that is granted for consideration called the option price or option fee. If the option is not exercised by a certain date, it expires.


Outside Director

A director of a corporation who is not employed by the corporation. Outside Directors receive a fee for their service. They bring value to the board and corporation as a result of their knowledge, experience and sometimes relationships with third parties. Outside Directors are also usually unbiased.


Parent Corporation

An operating corporation that owns or controls one or more subsidiary corporations through the ownership of voting stock. If the corporation is not an operating company, it is referred to as a Holding Company.


Poison Pill

Refers to various strategies of takeover targets to avoid a Hostile Takeover. One such strategy is a Stockholder Rights Plan. Another is the Crown Jewel Defense.


Poop and Scoop

This refers to an illegal act whereby unfavorable information about a stock is circulated on the internet and through other means in order to depress the price so it can be purchased at a low price and later resold at a profit. The opposite is called Pump and Dump.


Private Placement

Sale of securities directly to an institutional investor such as an insurance company. A private placement does not have to be registered with the SEC if the securities are purchased for investment and not for resale to the public.



A written power of attorney by a stockholder authorizing another person to vote on his or her behalf.



Individual investors as opposed to institutional investors such as insurance companies and mutual funds.


Public Offering Price or Offering Price

This is the price at which a new issue of securities is offered to the public by underwriters.


Publicly Held Corporation

A corporation with stock owned by members of the public.


Publicly Traded Stock

Publicly Traded Stock is stock purchased and sold by members of the public sometimes utilizing the services of a stock exchange.


Public Offering

The offering of stock to the public after meeting all registration and disclosure requirements.


Pump and Dump

Refer to Poop and Scoop


Pyramid Scheme

An illegal, non - sustainable business strategy that involves paying participants primarily for recruiting other people rather than providing valuable goods and services to the public. The scheme involves having each participant pay a fee or purchase inventory to get started. The fee and / or sale of the inventory to each participant is the real source of profit. Examples include Charles Ponzi and Bernie Madoff.


Quick Assets

These are cash, marketable securities, and accounts receivable.



A corporate investor who intends to take over a corporation by acquiring a controlling interest in its voting stock and then changing its senior management. Raiders who acquire 5% or more of the voting stock of a target corporation must report the acquisition to the SEC, the listing exchange, and the target corporation.


Self - Directed IRA Account

An IRA that can be actively managed by the account owner who designates a custodian to carry out his or her investment instructions. Many account owners use their IRA accounts to invest in trust deeds and real estate limited partnership interests.


Shelf Corporation

A Shelf Corporation is a corporation created and placed on the "shelf" to "age" and then be sold. Common reasons for buying a shelf corporation include:

To save the time necessary to form a new corporation;
To create the appearance that the new business has an operating history; and
To use the appearance of an operating history to obtain corporate credit and investment capital


Sleeping Beauty

This is a takeover target that has not yet been contacted by an acquirer. Sleeping Beauty corporations usually own undervalued assets and large amounts of cash or marketable securities.


Spin - off

A corporation divestiture where a subsidiary or division becomes a separate and independent company. Sometimes the stock of the new corporation is distributed to the shareholders of the former Parent Corporation pro - rata. Other times, the new corporation is sold and the cash used by the former Parent Corporation.


Stockholder Rights Plan

This is one of many Poison Pill defenses against a Hostile Takeover. The target corporation issues rights to existing stockholders (excluding the takeover bidder) to acquire additional voting stock if anyone acquires more than a set amount of the voting stock. This dilutes the percentage of voting stock acquired by the bidder and makes it more costly to acquire control of the target corporation.


Stock Option

The right to purchase or sell stock at a specified price within a stated period of time. Stock Options may be very valuable or worth nothing depending upon the terms of the option agreement and whether the price of the stock is increasing or decreasing.


Stock Purchase Plan

A plan whereby employees of a corporation can purchase stock of the corporation. Sometimes the corporation will contribute to the purchase price as part of its compensation plan.


Stock Repurchase or Buyback

A Stock Repurchase takes place when a corporation pays cash for the stock owned by one or more stockholders. The effect is to reduce the shares outstanding while paying cash (not a taxable dividend) to the stockholder(s). The corporation either retires the stock or keeps it as Treasury Stock.



This is a corporation where more than 50% of the voting shares of its stock is owned by another corporation called the Parent Corporation.



The exchange of one security of a corporation for another security of the same corporation. For example, bonds may be swapped for preferred stock.



This is a change in the voting or controlling interest of a corporation.


Treasury Stock

This is stock purchased by the corporation from stockholders, thus reducing the amount of outstanding stock. The stock is purchased for cash and held for possible issuance or sale in the future. The cash received by the seller is not taxed as dividend income. Treasury Stock has no voting rights and receives no dividends.


Vertical Merger

A merger between a corporation that supplies goods and / or services, and a corporation that uses those goods and / or services.


War Chest

Liquid assets set aside by a corporation to be used to takeover another corporation or defend against a possible takeover.


Working Control

See Effective Control


Zero Coupon Bond or Note

A bond or note that makes no periodic interest payments but is sold at a discount in order to yield a return.



A company that continues to operate even though it is insolvent and heading towards bankruptcy.




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