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Investing 101

Alpha: is a statistical way to evaluate the risk-adjusted momentum of an investment. Alpha incorporates both risk and reward.

Annuity: A form of investment contract sold by life insurance companies, which guarantees a fixed or variable payment to the annuitant at some specified time in the future, usually retirement.

Asset Allocation (or Allocation Mix): Allocation is the process of deciding which investment option, or combination of investment options, are best aligned with your financial goals, needs and time horizon, followed by the distribution of your assets accordingly. Asset allocation allows you to control your risk-level, potentially maximizing your return.

Back-End Load: A redemption charge commonly incurred when you withdraw from certain mutual funds. We recommend only mutual funds that charge no loads - either on the front end or back end. This gives you the maximum flexibility to switch investments as the fund's performance or market conditions change.

Basis Point: Each percentage point of the yield in bonds equals 100 basis points: one basis point is1/100 of 1.0% (0.01%).

Beta: measures a stock's volatility when compared to the volatility of the market as a whole. Stocks with a beta of more than one are more volatile than the market. Those with a beta of less than one have lower volatility and tend to move at a slower pace than the market.

At Weiss Capital Management, as one of our tools for selecting investments to buy or sell short, we look at the alpha divided by the beta. This gives us what we consider to be a sound measure of the potential reward adjusted for the potential risk.

Bear Market: A prolonged period of falling stock prices, typically by 20% or more off the peak price. Based on the recent declines in the Nasdaq and the S&P 500 indexes, we feel that a bear market has already begun and will be a defining event of the 21st century. The most recent rally was fully expected and does not alter our view.

Blue Sky Laws are state securities laws. These laws apply to the registration of sales personnel (registered representatives) and the registration and sale of securities. Weiss Capital Management is duly registered with all federal and state regulators.

Bull Market: A period of market conditions that are steadily reflecting growth in the economy with climbing stock prices. We believe that the bull market of the 1990's, the strongest of the 20th century, ended in early 2000.

Capital Gain: The difference between your sale price and your cost, when you sell an investment for a profit. Many investors hesitate to sell an investment for a profit because they are reluctant to pay the federal taxes on these capital gains. However, we believe that you should (1) think of your portfolio value net of any future capital gains taxes and (2) make your sell decisions based strictly on the merits of the investment itself - regardless of any tax consequences.

Capital Loss: Many investors also hesitate to sell for the opposite reason - because they are unwilling to accept a capital loss or any other loss for that matter. In our opinion, you should avoid false hopes for a recovery. Instead, base your sell decision on today's reality and what is most likely to happen in the months ahead. And never forget: You can use capital losses to reduce or offset any taxes on your capital gains.

Dead-Cat Bounce: A temporary recovery by a market after a prolonged decline (or bear market). In most cases, the recovery is short-lived and the market decline will soon resume. We believe that the most recent rally in the Dow is a good example.

Derivatives: are products, instruments, or securities which are derived from another security. Many derivatives - such as futures and options - are traded on specialized and regulated exchanges and can be bought freely by investors.

But there are also hundreds of different kinds of derivatives that are private, one-on-one contracts between two banks or other financial institutions, which are not as closely regulated.

These institutions seem to believe they are in full control of the risks involved.

But we think they often underestimate the potential dangers because they do not adequately account for the possibility of dramatic, unexpected future events that can impact the economy or the financial markets.

Diversification: A way to help balance the risk of losses by spreading out your assets among various investments such as stocks, bonds and money market funds. A decline in one investment may be offset by a rise in another. Many advisors believe that diversification among different sectors of the stock market is adequate. We feel that your diversification should be broader, including bonds and other lower risk investments.

Dividend: A dividend is a portioned distribution of a company's earnings, cash flow or capital to shareholders, in either cash or additional stock. We feel that most analysts have underestimated their importance, focusing too heavily on stock appreciation.

Economic Indicators: There are several economic indicators that help give insight on what's going on with the economy and what we can likely expect next. Indicators typically focus on employment, consumer spending, and industrial production levels. The top ten are: Consumer confidence, expectations index, advance retail sales, purchasing managers index, industrial production, number of new jobs, help wanted index, consumer price index, and the most visible -- the unemployment rate.

To get a glimpse of the future, most economists check out the increase in "non farm payroll employment" the first Friday of each month. Generally, job growth is a good sign of economic growth, if one is down, it is very likely, the other will be down as well. If you'd like to see the Nation's current unemployment rate for yourself, visit the Department of Labor's website at http://www.dol.gov/opa/media/press/eta/ui/current.htm.

Consumer spending also gives you an idea on what your fellow American's buying habits are during various types of market conditions. Consumer sentiment is usually the engine that fuels economic growth. You see, employment data can let you know about consumers' ability to spent but not how eager they are to part with their money. The Consumer Confidence Index is released the last Tuesday of each month and thru a poll on 5,000 households, tries to determine how people feel about current and future business and job market conditions.

Equity Options: Securities that give the holder the right, but not the obligation, to buy (call) or sell (put) a specific number of shares, at a specific price (see Strike Price), for a specific time period. Typically, one option contract is for 100 shares. The options may be for individual stocks, or they may be tied to stock market indexes such as the S&P 500 or the Nasdaq-100. The advantage of purchasing options is that your risk is strictly limited to the price you pay for them. The disadvantage is that, in order to profit from options, the expected market move must take place before the option expires.

Euro: The new European currency, which was designed with the goal of helping to unite the economies of Western Europe and potentially compete with the U.S. dollar as an international currency. The euro was launched strictly for interbank transactions in January, 1999. Starting in January, 2002, it was launched as an actual currency. We have grave concerns that the transition will be anything but smooth.

Eurodollar: Not to be confused with the new European currency, eurodollars are strictly U.S. dollar time deposits (much like CDs) that are held in overseas banks, mostly in Europe. These deposits are so large and so actively traded that the Chicago Board of Trade has created futures contracts for institutions and investors that want to trade in eurodollars; and these contracts have become one of the most actively traded instruments in the world.

Hedge: is an investment designed to help protect against losses in another investment or position. For example, if you hold a large portfolio of stocks that you fear will lose value in the months ahead, but you cannot sell, you can buy investments designed to go up as stocks decline. Put options or specialized mutual funds provide some of the most common vehicles.

Net Asset Value (NAV): The value of a fund's underlying securities. It is calculated at the end of the trading day. For a mutual fund, the net asset value per share usually represents the fund's market price, subject to a possible sales or redemption charge.

OTC: Over-the-Counter (OTC) is a market outside an organized exchange in which transactions are conducted through a telephone or computer network connecting dealers such as the Nasdaq.

Price/Earnings (P/E) Ratio: The P/E ratio represents the relationship between a company's stock price and earnings. For example, a P/E of 10 means that the company is selling for ten times its current earnings per share. Also known as "multiple," the ratio is calculated by dividing the current price of the stock by the current earnings per share.

Sleeper: Stock in which there is little investor interest, but which has significant potential to gain in price once its attractions are recognized.

Strike Price: Also known as the exercise price. The price at which the holder (buyer) of an option can purchase (call) or sell (put) the underlying stock.

Time Horizon: The anticipated amount of time you will be investing in order to meet your individual financial goals. Generally speaking, the longer your time horizon, the better situated you are to recover from unfavorable investment decisions.

Volatility: A measure of fluctuation in the market price of a security. A volatile stock or fund has frequent and large price swings. Statistically, the measure most commonly used for volatility is "standard deviation," the amount the price of a stock or mutual fund varies over time.

Yield: There are many uses for this term, so be sure not to confuse them:

(1) Current Yield on Bonds: This is the "coupon rate" - the interest rate stated in the description of the bond, divided by the purchase price. For example, if you are buying a U.S. Treasury 5% bond for a price of 80 (out of a 100 points), the current yield is 5 divided by 80 x 100 = 6.25%.

(2) Yield to Maturity on Bonds: This is a more complicated formula. It considers all aspects including purchase price, redemption, value, time remaining to maturity, etc. You can find it in most bond listings of various financial newspapers.

(3) Yield on Stocks: This is the dividend per share paid by the company in proportion to the current cost of each share. For example, if you buy a stock for an average price of $65, and the stock paid $1.43 in dividends last year, the dividend yield on this stock is 2.2% ($1.43 dividend per share divided by the average price of $65 per share).

Weiss Capital Management, Inc.
7111 Fairway Drive, Suite 102
Palm Beach Gardens, FL 33418
Toll Free: 800-814-3045
Tel: 561-515-8558
Fax: 561-627-1011
E-mail: WCM@WeissCM.com
Member of the Chamber of Commerce of the Palm Beaches