1.4 Acronyms in Finance

Many disciplines have lingo, slogans, and terms that participants use and outsiders do not. This can make any field intimidating to a beginner, and perhaps no area of inside jargon can seem more confusing than acronyms. In this section, we want to clue you in on some of the most frequently seen acronyms in finance.

Upper Management

The full-time employees of corporations almost always include the following managers. They are almost always referred to by these acronyms, rather than their full titles.

Chief Executive Officer (CEO): The lead manager of a corporation

Chief Financial Officer (CFO): The head of the financial side of the corporation including areas like investor relations, accounting, and capital budgeting. He or she reports directly to the CEO.

Chief Operating Officer (COO): The head of the operational side of the corporation including areas like marketing, production, and human resources. Reports directly to the CEO

Corporate Stock/Accounting

Initial Public Offering (IPO): The first sale of stock to "outsider" owners (i.e. those with no foundational or operational relationship with the corporation). This is often referred to as "going public." This action is usually taken to raise considerable cash for a corporation so that it might expand.

Earnings Per Share (EPS): The income of a business divided amongst the number of shares. In this context, "income" refers specifically to the formal net income on a corporation's income statement. For example, if a company's net income in a year is $4 million and its ownership is spread among 10 million shares, the company's EPS is $0.40 per share. EPS is often calculated in order to compare a company's profitability to its peers or over its own lifespan.

Price to Earnings Ratio (PE Ratio): The price of a share of stock in the market place relative to the EPS of the company. For example, if a share of company stock sells for $20 per share at the end of a year, and its EPS in that year was $0.40 per share, the PE ratio of the company is $20 per share / $0.40 per share or 50. The PE ratio has no units (notice the dollars per share in the numerator an denominator above "cancel" each other out). The PE ratio is often used to consider how expensive it is to buy a share of company stock relative to the profitability level it displays.

Stock Exchanges

New York Stock Exchange (NYSE): The largest, preeminent stock exchange of the United States. The majority of the largest, most popular corporations in the US have their shares traded on the NYSE. Its physical headquarters are on Wall Street in New York City. Traditionally this was so that brokers could come together to trade (buy and sell) shares of the most important corporations. With most trades now completed completely electronically, its physical presence serves as more of a media headquarters and meeting location.

National Association of Securities Dealers Automated Quotations (NASDAQ): Has no physical headquarters. All trades involving NASDAQ-listed stocks have always been done electronically. As it has from its beginning, it features technology-related stocks; however other companies trade on the NASDAQ as well.

Over-the-Counter (OTC): Stocks that do not trade on a formal stock exchange. Typically these are stocks of small public companies.

Government Agencies

Securities and Exchange Commission (SEC): Federal agency responsible for enforcing securities laws and regulating exchanges. Items like the creation of publicly traded stock require SEC approval, and the SEC monitors stock trading activity to ensure it is legal. This is a civil agency, however, and thus serious criminal violations are typically forwarded by the SEC to the US Department of Justice.

Federal Deposit Insurance Corporation (FDIC): Provides deposit insurance to the customers of banks. This guarantees that US bank depositors (up to a $250,000 limit) will have guaranteed access to their money, even if a bank fails. To create this program, the FDIC demands banks comply with their regulations in order to by licensed and covered by the insurance program. The FDIC supervises and tests the banks it oversees to ensure continued compliance.

National Credit Union Administration (NCUA): Provides similar functions for credit unions as the FDIC does for banks.

Bureau of Labor Statistics (BLS): Collects, analyzes, and provides data regarding US economic matters like inflation and employment. This allows for policy and planning decisions by companies and governments.

Economic Matters

Gross Domestic Product (GDP): The value of all goods and services produced in a country's economy.

Consumer Price Index (CPI): Measures the price of goods. Used to measure inflation by comparing levels over time.

International Monetary Fund (IMF): Member countries make funds available for lending to other member countries. Encourages international growth and stability beneficial throughout investors and consumers throughout the world.