(NOTE REGARDING THIS SAMPLE FILE: Some of the hyper-links in this
file may be to other chapters of this strategy manual, which are not accessible
from this web site, since only this file and the Table of Contents file
are provided as free samples on this web site. -- M. Jenkins, author)
300% RULE--A rule in Wall Street Raider, based on
the U.S. Investment Company Act of 1940, which requires that
certain investment companies (ETFs in Wall Street Raider)
must maintain a 300% ratio of net asset value to total
indebtedness (loans owed and bonds issued). If the fund's
assets decline in value so that net asset value is less
than three times total indebtedness, the fund must pay off
some of the debt and, if necessary, sell off some of its
assets. Wall Street Raider applies this rule to ETFs in the
simulation.
ACCOUNTANT--A shy, retiring, denizen of large downtown office
buildings, the species Beancounteris self-effacius is often deceptively
obsequious in appearance and eager to please, yet potentially dangerous
to the financial health of those who must deal with members of this odd
clan. This mainly nocturnal, balding creature frequently is known for
its uncanny creativity in arranging and presenting financial numbers in
novel and complex ways that totally conceal and obscure the underlying
reality from civilians. Its victims, who are often confused and lulled
into a false sense of security by the bland assurances of these seemingly
mild-mannered and trustworthy creatures of the night, will awaken one
morning to find themselves suddenly impoverished, while the beancounter
has migrated to its usual nesting place and sanctuary, Brazil. See also,
"Assassins, Certified Public."
AFFILIATE--In Wall Street Raider, a company is an "affiliate"
of another company if both companies are under control of the same player
or company. A company that DIRECTLY owns 20% or more of another company
will include that percentage of the subsidiary's income or loss in its
net income, and will do so even if the company whose stock it owns is not
an "affiliate," such as when ABC owns 22% of XYZ, but an unrelated company
or opposing player owns 23% of XYZ, and controls XYZ. Nevertheless, ABC
will include 22% of XYZ's income or loss in its reported income, even
though it does not control XYZ.
ANTITRUST LAWS--Laws designed to prevent unfair
business practices, including monopolies or other activities
intended to reduce competition. In Wall Street Raider, as
in the real world, your company may be sued by competitors
for antitrust damages or by the public for price-fixing, and
may also be restrained by various government enforcement
agencies from taking over competing companies in an
industry that your company or companies already dominate.
In both the real world and Wall Street Raider, the main effect
of such laws is usually to punish companies that are too
successful and well-run.
BACKWARDATION--A term used in commodity futures
trading to describe the very unusual situation where the
prices of futures contracts for a commodity are less than
the current "spot" price. The more normal condition, where
futures prices are higher than the spot price, is referred
to as "contango." Backwardation only occurs, generally,
when interest rates are very low, or when the price of
a commodity is widely expected to decline in future months.
Backwardation almost never occurs in such non-perishable
commodities as gold and silver.
BAD DEBT RESERVE--For banks, an accounting entry on
their books, designed to be a "reserve" for anticipated future
bad debt losses. The reserve is evaluated each quarter and
if it is too low, an amount is added to the reserve and
charged as an expense against operating income of the bank.
Actual bad debts, when incurred, are thus applied against
(reduce) the reserve, rather than being charged directly
against income. Thus, bad debt expenses tend to be spread
out more evenly, over a period of years, rather than all
bunched in the year when the debt is recognized as having
gone bad. This generally allows a banker to sleep better
at night when a big loan goes bad.
BALANCE SHEET--A financial statement that shows a
company's (or player's) assets, liabilities, and net worth,
with net worth being what is left after subtracting total
liabilities from total assets. In Wall Street Raider, the
"Finncial Profile" consists partly of a balance sheet, in
addition to other relevant financial information about a
player or company.
BANKRUPTCY--In simple terms, going broke; either
because the debtor (a person or a corporation) can't pay
debts as they come due, or in some cases because the value of
remaining assets is far below the amount owed, even though
the debtor may still have considerable amounts of cash.
In Wall Street Raider, a player is ejected from the game
in utter disgrace if he or she goes bankrupt. If a corporation
goes completely bankrupt, all of its assets are used to pay
off as much of its debt as possible, and the lenders (bank
and any bondholders) take bad debt losses on the rest; all
stock of shareholders usually becomes worthless and is canceled.
In a "Chapter 11" bankruptcy, the company continues in business,
while its capital structure is "reorganized." See "CHAPTER
11 BANKRUPTCY" below.
BEAR MARKET--A grim, pitiless stock market, where
all your stocks are plunging to new depths every day, and
where everyone else is losing gobs of money, too. This is
different from a BULL MARKET, where all your stocks are
plunging to new depths every day, while everyone else, from
your barber to the cabbie to the shoeshine boy, is bragging
about how they are getting filthy rich in the stock market.
BOOK VALUE--Net worth. In the real world, "book"
value usually refers to the COST of a company's assets, as
carried on its books, less the amount of its debts. (Cost
doesn't necessarily bear any relationship to what the assets
are currently worth.) In Wall Street Raider, most marketable
assets (stocks and commodities) are reflected at current market
value, so "book value" or "net book value" in Wall Street Raider
more nearly reflects a company's net worth and creditworthiness
than in real-world accounting. Bonds are reflected in a bank, or
insurance company, or ETF's book value at the adjusted cost
("tax basis") of the bonds, which is original cost, plus or
minus the amortization of discount or premium. However, if
bonds are in default ("D" credit rating), they are valued at
their current market value, if less than adjusted cost.
A company's stock may trade at much more or somewhat less
than its "book value," depending on whether its business is highly
profitable or not, the degree of leverage in its financial
structure, and other factors.
BUBBLE--The name given to a rip-roaring bull market
in retrospect, after the souffle has collapsed and everyone but
the insiders who got out early has been left with nothing more
than the sleeves of the vest. A "bubble" is invariably followed
by years of plunging stock prices, soaring unemployment, angry
recriminations, and endless government hearings and investigations
by the same foxes who were supposed to be guarding the hen house
while the bubble inflated to grotesque proportions.
BUSINESS ASSETS--In Wall $treet Raider, the operating
assets (sometimes referred to as "capital assets") of a business;
a catchall term to describe plant and equipment, trucks, planes,
ships or whatever kind of operating assets a company invests money
in to increase the size of its business and its sales -- other
than "working capital," such as inventory and accounts receivable.
In Wall $treet Raider, $1 of business assets is assumed to generate
$1 per year of sales. ("Non-business assets" in Wall $treet Raider
would include working capital, cash, T-bills, bonds, stocks of other
companies, derivatives contracts such as options, futures or interest
rate swaps, or, in the case of a bank, its loan portfolio. These are
all "intangible" assets, except to the extent "working capital"
included inventory items.)
BUYBACK--A transaction, such as an LBO ("leveraged
buy-out") or a "Greenmail" buyback, in which a corporation
buys (and cancels) its own stock from certain shareholders,
which will tend to increase the per share value of the
remaining shareholders' stock, if the company's stock is
bought back at a discount to net worth per share.
CD'S OR CERTIFICATES OF DEPOSIT--Interest-earning
deposits in a bank. In earlier versions of Wall Street Raider,
all cash of companies (except banks) and players was assumed to
be fully invested at all times in CD's, earning interest quarterly.
In newer versions, players and companies hold their "cash" as
either Treasury bills (T-bills) that earn a low rate of interest
or in bank demand deposits that pay no interest. In the newer
versions, CDs are only relevant to banks, which have some of
the deposits by "the Public" in the form of CD's that the banks
must pay interest on, at the "CD Rate." The "CD Rate" is the rate
of interest players and companies earn on their cash, and is the
rate that banks pay out on CD deposits, which is a higher rate
for banks with weaker credit ratings than for banks with stronger
credit ratings.
CALL OPTION--An option to buy a stock at a specified
price over an agreed period of time. The person who buys a
call option is betting that the underlying stock is going
to go up. The person who sells, or sells short, a call option
is betting that the stock will either go down, go nowhere, or
only will go up slightly.
CAPACITY GROWTH--Growth in "business assets" such as
plant and equipment. In Wall Street Raider, as in the real world,
an industry's profitability will tend to suffer if industry-wide
capacity (supply) grows faster than demand for that industry's
product for very long (or will tend to improve if demand grows
faster than supply). An example would be the airline industry,
when there are too many aircraft in service, and not enough
paying passengers to fill most of the seats.
CAPITAL ASSETS--In W$R, the same as "business
assets." It is assumed in W$R that each dollar of investment
in business/capital assets generates a dollar of sales. Thus,
100 million of business assets that generates 100 million
of sales might have a "return on capital" of 12 million,
or 12%. This is essentially the same as the profit margin
on sales, since W$R assumes sales=capital assets. It does
not take into account any non-operating expenses (or CEO
salaries), such as interest, taxes, gains or losses on
disposition of assets, or other types of income such as
interest or dividends. "Return on capital assets" in W$R
has very little relation to "return on equity." See the
definition of RETURN ON EQUITY for more details.
CAPITAL CONTRIBUTION--Money injected into, or
"contributed" to a subsidiary corporation by its controlling
shareholder. In Wall Street Raider, the controlling
shareholder must own 100% of the subsidiary's stock before
it is allowed to make a contribution of capital to the
subsidiary. A capital contribution is used to move money
from a parent corporation to a subsidiary when the subsidiary
needs the funds for some reason, such as when the subsidiary
has a tax loss carryover that will shelter any income it may
earn from investing the funds or other assets.
CHAPTER 11 BANKRUPTCY--Also sometimes referred to
as "operating bankruptcy," where the debtor continues in
operation, rather than being dismantled. A less severe
form of corporate bankruptcy, Chapter 11 Bankruptcy (or
reorganization) is sort of a "halfway house" where the
troubled corporation gets some relief from its debts, in
the hope that it may survive. In Wall Street Raider, this
means that the stockholders and junk bond holders have to
write off part or all of their stock or what the company
owes them, and the bank writes off a (smaller) percentage
of what the bankrupt company owed the bank.
In Wall Street Raider, as in the real world, the shareholders
are usually completely wiped out in a bankruptcy reorganization,
and the bondholders take a much larger hit than the banks. The
bank loans are "senior" to the bond indebtedness owed to
bondholders. In practical terms, this means that bank presidents
don't want to give up riding to work in chauffeured limousines,
so you and other small investors need to lose your savings you
invested in the bankrupt's bonds, and give up eating regularly,
rather than have their bank suffer a loss along with you.
COLLECTIVE BARGAINING--Bargaining between companies
and labor unions that represent employees, regarding wages and
working conditions. As practiced between governments and
government employee unions, it is sometimes described as
collusive bargaining.
CONSOLIDATED TAX RETURNS--In Wall Street Raider, as
in the real world, a company that owns 80% or more of another
company will generally file "consolidated" tax returns with
the subsidiary company, where the taxable income of the two
is combined, and a single tax is paid. If one company has
taxable income, and the other a loss, corporate law usually
provides (and Wall Street Raider requires) that the company
that has taxable income compensate the "loss company" for the
taxes saved by utilizing some or all of the "loss company's"
tax losses. This is all done automatically in Wall Street
Raider.
In the real world, consolidated tax returns can't always
be filed, such as in situations where the parent company is
incorporated in a different country than the subsidiary, but
Wall Street Raider does not impose that limitation. All 80%-owned
(or greater) subsidiaries pay tax on a "consolidated return"
basis with their parent company in Wall Street Raider and
any tax credits of a subsidiary are passed up to the parent
company, which pays the subsidiary $1 for each $1 of tax
credits, whether the parent can currently utilized the credits
or not.
CONTANGO--In commodity futures trading, contango is the
usual situation where futures prices for a commodity are
somewhat higher than the "spot" price, a condition which
tends to reflect the time value of money and the costs of
storing a commodity until it is delivered at a future date.
The much less usual situation, where futures prices are
actually lower than the spot (current delivery) price, is
referred to as "backwardation."
CONTROLLED CORPORATION--In Wall Street Raider, a
corporation that is at least 20% owned by a player (and by
companies he or she controls), or by a single corporation, is
considered to be under the control of its largest shareholder
(and of whomever might also control that shareholder company,
if anyone). Thus, if you own 51% of company ABC, you control it.
If you also own 10% of company XYZ, and ABC owns another 10%,
you will also control company XYZ, unless some other player or
corporation owns 20% or more of XYZ.
CONVERTIBLE BONDS--These are bonds that some companies
issue that have an equity feature, by being convertible into
stock of the company if the stock rises above a specified
level. Convertibles are usually issued at significantly lower
interest rates than "straight" bonds that do not offer an
"equity kicker." For example, a company that would otherwise
have to pay 10% interest if it issued straight bonds, might
be able to issue convertibles at a 6% interest rate.
If the company's stock is, e.g., 35, the bonds may
be convertible in the event the stock rises above 40. Thus,
each $1,000 bond would be convertible into 25 shares of
stock ($1,000 / $40). If the stock rises above 40 and the
company calls the bonds, either at maturity or before,
the bondholders would generally receive stock instead of
the call price or face value ($1,000, or in some cases of
an early call, something slightly more than $1,000, like
$1,050). For example, if the stock had gone up to 50,
each bond would be worth $50 x 25 shares, or $1,250,
so bondholders would choose to receive the stock worth
$1,250 instead of the $1,000 face value or $1,050 or less
call price in cash. In Wall Street Raider, the conversion
into stock is immediately followed by an automatic deemed
sale of the stock at the current stock market price by the
recipient if the recipient's holding is very small -- that
is, if it would be less than 2% of the company's issued stock.
Because the value of a convertible bond increases as the
underlying stock rises (although generally not as fast as
the stock), convertibles are often a good alternative to
stock investing, if the stock price is near or above the
bond's conversion price. In addition, if the stock plummets,
the bond will offer downside protection, since it will
eventually be paid off at 100 (barring a bankruptcy).
This means convertibles offer some interesting arbitrage
possibilities, such as selling call options on a stock and
buying the convertible bonds instead of buying the stock,
which would be an alternative to selling "covered calls."
Likewise, some savvy traders will buy convertible bonds,
trading near par (100), convertible into, e.g., 2,000 shares
of a stock, while selling 1,000 shares of the stock short,
in which case a profit may be made if the stock goes up a
lot OR down or lot, and you at least earn interest on the
bonds if the stock doesn't fluctuate much (but may have to
pay the amount of any dividends the company pays on the
stock you have sold short, if the stock pays dividends).
COVERED CALL--Covered calls are call options a person
sells short, while also buying (or already owning) a number of
shares of the underlying stock equal to the number of shares
"covered" by the call options. Each call option (or put option)
gives the purchaser of the option the right to buy (or sell) 100
shares of a specific stock at a specified price (the "strike
price") over a certain period of time, such as a month, 6 months,
or a year or longer. Thus, if you buy 200 shares of XYZ Corporation
and sell short two call options on XYZ, those two call options will
be considered "covered calls."
CPA--Certified Public Assassin. A CPA firm is a
supposedly independent outside auditor, paid handsomely by
the company that it audits, to "certify" that it has reviewed
a company's financial statements, and has blessed the numbers
that the company's financial officers have made up, no matter
how absurd and outlandish those numbers may be, and no matter
how close to its financial deathbed the company issuing the
rosy financial statements may be.
CYCLICAL--As applied to an industry, an up-and-down
or boom-and-bust cycle that is typical of the industry, where
demand grows very rapidly for a while, and then stops or
shrinks for a while. In other words, an industry that is not
characterized by steady or predictable growth.
DEBT-TO-EQUITY RATIO--A decimal amount that shows
the ratio of a company's total debts to its net worth.
For example, if a company has 1400 million of assets,
less 400 million of debts, its net worth ("equity")
would be the difference, or 1000 million. Thus, its
debt-to-equity ratio would be .40, or 40%, the ratio
of its 400 million of debt to its 1000 million of equity.
In general, the higher the ratio, the more "leveraged"
and risky the company is likely to be, with such a capital
structure. A very high debt-to-equity ratio, such as
5-to-1, would indicate that the company is VERY highly
leveraged, and that only a modest period of losses could
wipe out its thin amount of "equity" and perhaps push it
into bankruptcy.
In W$R, companies can (generally) borrow up to at least 1
times (100% of) their net worth, under a bank line of credit,
though a line of credit may be frozen if the company's bank
loan exceeds 25% of the lending bank's total business loan
portfolio. However, for this purpose, any options owned by the
borrower are not counted as part of a borrower's net worth,
except to the extent any such options are "in-the-money." For
example, a $30 call option might have a market value of $9
when the stock is trading for $35 a share, but only its $5 of
"intrinsic value" ($35 – $30) would be
counted when computing its debt-to-equity ratio.
DEMAND DEPOSITS--Non-interest-bearing deposits in
a bank, which the bank can lend out at interest. In Wall Street
Raider, banks' demand deposits usually grow at a rate of about 3
to 5% per year, and in newer versions, all uninvested cash of
players and corporations is deemed to be a demand deposit at
the bank that the player or company borrows from. See
"CD's OR CERTIFICATES OF DEPOSIT" above.
DIVIDEND--A distribution of profits by a corporation
to its shareholders, usually in the form of cash. In Wall Street
Raider, dividends are always in cash, except for distributions
which occur in the liquidation of a subsidiary into its parent
corporation, or when a company does a "spin-off" of stock of a
subsidiary, to its shareholders.
DIVIDEND PAYOUT RATIO--The percentage of a company's
annual reported earnings that is paid out to shareholders
as regular dividends. State or national laws usually prohibit
a company from paying out dividends when net worth is negative,
although an exception is generally made for dividends paid out
of current earnings, where the company is currently profitable
("springing dividends"). In Wall Street Raider, dividends
cannot be paid if the company has a negative net worth.
DIVIDEND YIELD--The rate of return on investment in a
stock, based on the dividends it pays, expressed as a percent
of the current value of the stock. For example, if a stock
sells for $100 a share and pays an annual dividend at the
rate of $6 per share, the dividend yield would be 6% (6/100).
EBITDA--An acronym, meaning "earnings before interest,
taxes, depreciation, and amortization," which some investment analysts
prefer to look to in valuing a stock, rather than simply looking
at net income. EBITDA can provide investors a better view of
short-term operational efficiency than the net income figure,
since it excludes extraneous factors such as the cost of financing
(interest expense), which will largely depend on how much has
been borrowed, rather than operational efficiency. Similarly,
taxes may depend on factors such as the geographic locations
where the business is conducted, and non-cash expenses such as
depreciation or amortization are simply accounting adjustments
that reflect previous historical transactions that are being
written off, rather than current operating expenses.
EBITDA is most often useful in determining the ratio of EBITDA
earnings to interest expense, as a way of evaluating how capable
the company is likely to be in meeting its debt obligations.
The main weakness of the EBITDA number as an analytical tool is
that it does not take into account capital spending requirements,
which may be higher for companies in some industries, in order
for them to remain competitive.
In Wall Street Raider, EBITDA can't be precisely calculated,
since Wall Street Raider does not break out depreciation expense
separately, due to the massive amount of accounting that would
be required for every capital expenditure. As a shortcut, in Wall
Street Raider the capital spending rate is a just considered to
be the net amount of the increase or decrease in capital assets;
that is, gross capital spending less depreciation. Shrinkage in
the asset base in the simulation generates cash, like a business
that is not making capital investments, and letting its capital
assets gradually become obsolescent.
EPS--An abbreviation for "earnings per share." If a
company in Wall Street Raider has 100 million shares of stock
outstanding, and it earns $4.00 per share, that means it earned
a total of $400 million. A company's EPS is usually a major
determinant of its stock price, in the real world as well as in
Wall Street Raider.
EQUITY METHOD OF ACCOUNTING--A recognized method
for corporations to account for their investment in subsidiary
corporations, usually subsidiaries in which they own at least
20% of the stock, but not enough stock to "consolidate" the
subsidiary's finances with the parent company's in full.
However, the parent is allowed to include its percentage share
of the subsidiary's earnings (or losses) in the parent's
reported earnings. Wall Street Raider adopts this latter
rule for any company that owns 20% or more of another company
(even if it does not control the other company). Where
earnings or losses from stock holdings in another company
are reported on the equity method, dividends received from
the other company are not treated as income to the recipient
(as taxable income or otherwise).
ETF (EXCHANGE-TRADED FUND)--An investment company
that invests in a diversified portfolio of stocks or, in some
cases, other assets, such as options or commodities. In Wall
Street Raider, there are 15 "sector" ETF's, each of which invests
in certain industry sectors, such as technology, energy, retail,
consumer goods companies, natural resources, transport, etc.
Releases 9.0 and later include 5 more ETFs (3 bond funds and
two triple-leveraged stock index funds).
EXCESS LOSS ACCOUNT--A tax term, which refers to a
negative tax basis (cost, as adjusted) for the stock of
an 80% (or greater) owned subsidiary, due to losses that
have flowed up to the parent company/shareholder. If
the parent company's ownership of the sub falls below
80% (due to sale of the sub's stock, or taxable
liquidation or bankruptcy of the sub), the parent
must "recapture" the amount of the excess loss account
as taxable income (since the parent got the benefit
of losses that were greater than its investment in
the sub's stock).
FDIC--Abbreviation for "Federal Deposit Insurance
Corporation," the U.S. federal agency that insures bank
deposits, in case a bank goes broke. In Wall Street Raider,
the FDIC may force a bank to cut or eliminate dividend payments
if in financial trouble. Or, as in the real world, if a bank
gets in too deep a financial pit, the FDIC may pull the plug
by taking over the bank, canceling the stock held by its
stockholders and reviving the bank, under new ownership, often
after an injection of new capital and cancellation of some
percentage of deposits in the bank, to restore the bank to
solvency. While small depositors usually don't lose any of
their deposits, large depositors often lose some percentage
of their deposits at the bank that are in excess of the amount
the FDIC insures.
In the real world, the FDIC is usually poorly funded, and will
run out of money very quickly if a significant number of banks
ever fail, in which case, the most likely outcome will be the "Cyprus
Solution," in which the depositors, other than very small
depositors, all take a "haircut" by having a significant percentage
of their deposits "bailed in" (confiscated) in lieu of a "bail out"
by the FDIC. As in the real world, most major transactions in Wall
Street Raider can only be consummated after running through a political
gauntlet.
FTC--Abbreviation for the U.S. "Federal Trade Commission,"
the federal agency that acts as a watchdog (more often as a
sleeping lapdog) to prevent consumer fraud and other unfair
trade practices. It also may occasionally wake up long enough to
block mergers and takeover attempts that it feels could tend to
reduce competition in the marketplace, or just to create the
appearance that it is actually doing something, rather than just
sleeping on the job. In Wall Street Raider, various U.S. or
foreign government agencies may also intervene to block planned
mergers, liquidations, spin-offs, or LBO/Greenmail transactions.
FEDERAL FUNDS--Funds banks borrow from each other to
meet certain Federal Reserve requirements, usually on a very
temporary basis. In Wall Street Raider, this term refers to
money that banks borrow from each other or elsewhere when they
run short of funds and have no more bonds to sell off. "Federal
Funds" or "interbank borrowings" are quickly paid off in Wall
Street Raider when a borrowing bank obtains the money to do so.
FEDERAL RESERVE BANK--The U.S.'s central bank, whose
job it is to print money -- endlessly -- when the U.S. Treasury
can't borrow enough money to pay its bills. The Federal Reserve
is a government-licensed counterfeiting operation, as well as
America's largest printer of bad paper.
FRAUD--The chief industry on Wall Street, Fleet Street, Bay
Street, and other major bourses/gambling dens around the world,
responsible for creating thousands of extremely lucrative jobs, all
of them funded by sucking up the life savings of millions of the
"little people" -- those unfortunate souls who actually work for a
living -- and redistributing the booty to the rich and well-connected.
For performing this necessary service to society (separating the weak
and the stupid from their loot on a mass scale), the most successful
cads, cons, liars, frauds, poltroons and mountebanks are frequently
awarded honorary doctorates at places like Harvard and Oxford.
GDP--Abbreviation for "Gross Domestic Product." See
definition of "GROSS DOMESTIC PRODUCT" below. (Formerly GNP,
Gross National Product)
GOLDEN PARACHUTE--Large sums of money and benefits paid
to departing executives of large companies, typically paid to reward
them for running their company into the ground, or thoroughly
looting it. Managers who steal over $100 million rarely go
to prison; more often, they are given honorary doctorates at
prestigious universities, for being generous enough to share
some of their ill-gotten loot.
GOODWILL--In accounting terminology, "goodwill" is
an intangible asset to which part of the purchase price of
a business, or part of a business, may be allocated, which
reflects the superior earning power of the acquired business
assets. For example, if you were to acquire a profitable
service business for $100,000, which had no "real" assets other
than a few dollars worth of office supplies and a few beat-up
pieces of furniture, most of your purchase price would have to
be allocated to goodwill (assuming the paper clips and a few
old desks aren't worth very much).
In W$R, if your company purchases 1000M of business
assets from another company, and such assets are currently
earning an above-average rate of return on investment (above
10%, ignoring the seller's market share and spending on
R&D or marketing/advertising), you will have to pay an
additional price, depending on the level of profitability
of the acquired assets. Thus, you might have to pay 1200M,
for the 1000M of assets, or a premium of 200M.
That premium is called "goodwill" and will show up on the
buyer's financial statements as an asset, called "Unamortized
Goodwill." Realistically, it is not a "real" asset, except
under accounting theory -- it generates no income, and has to
be written off (expensed), sooner or later. In W$R, this asset
is expensed (or "amortized") gradually, at 5.4% per quarter
(equal to about 20% annually, on the remaining balance of that
account). Thus, if acquiring 200M of goodwill, the buyer would
amortize (write-off) about 40M in the first year, reducing the
Unamortized Goodwill balance to 160M. In the next year, it
would write off 20% of that, or 32M, and so on.
GREENMAIL--A practice made popular in recent years
by certain corporate raiders who take a large position in a
target company's stock. Management of the target company,
fearful of a takeover that would cause them to lose their
jobs, stock options, chauffeured limousines, palatial homes,
Learjets and other God-given rights paid for by the stockholders,
quite consistently find it to be in the company's best interest
to buy back the raider's stock holdings for a price well above
current market prices, in exchange for a promise by the raider
to go away and pick on some other mismanaged company. The money
extracted from the target company is frequently referred to as
"greenmail," perhaps due to the uncanny resemblance of such a
payment to its somewhat less savory cousin, blackmail.
In Wall Street Raider, a "greenmail" buyback can be made
of the stock held by a non-controlling corporate shareholder,
but not of stock held by a player, and not of stock held by
a company controlled by the same player whose company is
paying the greenmail. That would be a blatant form of fraud --
not merely immoral, but illegal. Too blatant, even for
Wall Street.
GROSS DOMESTIC PRODUCT-- An economic statistic that
represents the estimated value of all goods and services
produced in a country in a year, which is a measure of an
economy's overall size and its level of activity.
HOLDING/TRADING COMPANY--A corporation that does not
actively engage in business itself, but instead holds the stocks
of one or more operating subsidiaries. In Wall Street Raider,
any company, other than a bank or insurance company, that no longer
has any "business assets," is classified as a "holding/trading
company." In Wall Street Raider, once a company has become a holding
company, it can enter into any industry you choose for it, other
than banking or insurance, by using the "Buy Corporate Assets"
command button on the Buy/Sell Menu to acquire business assets from
an existing company in that industry or acquire new assets. Another
way such a company can acquire business assets and enter an industry
is if it is a 100%-owned subsidiary of another company that drops
down some of its business assets to the subsidiary as a capital
contribution, using the "Capital Contribution" button on the Finance
Menu to do so.
However, if the holding company has tax loss carryovers, they
will be lost if it enters a new line of business by acquiring
business assets. In Wall $treet Raider, holding/trading companies
are allowed to buy and sell put and call options and trade
commodity futures, physical commodities, and interest rate swaps,
as well as investing in stocks of other companies.
INDEX FUND--An investment fund, such as an ETF, designed
to track the movements of a stock index. Some index funds,
such as those in this simulation, are leveraged by buying or
shorting large amounts of index futures, in order to magnify
the effects of movements of the actual index by some
multiple, usually 2 or 3 times the movement of the underlying
index. In this simulation, as in the real investment world,
leveraged index funds are useful as high-powered short-term
trading vehicles, but are generally abysmal as long-term
investments, due to their incessant trading of futures,
resulting in commissions and other trading costs that rapidly
deplete the assets of such funds, in normal circumstances.
INSURANCE IN FORCE--A technical term used in the insurance
industry to describe the amount of insurance a company has
written, and which is still in force. In Wall Street Raider,
it is used more loosely, and is deemed to be equal to the
insurance company's "policy reserves." See definition of
"POLICY RESERVES" below.
INTRINSIC VALUE OF OPTIONS--This refers to the
value of a put or call option other than its "time value,"
such as at the date the option is expiring. A call option's
intrinsic value is the excess of the underlying stock's
price over the exercise ("strike") price of the option.
For example, if the stock price is $60 and the strike
price is $50, the intrinsic value of the call option is
$10. However, if the stock price is $50 or less, the
intrinsic value is zero.
For a put option, the intrinsic value is the strike price
minus the stock price. Thus, if the strike price of a put
is $50 and the stock is down to $40, the put has an intrinsic
value of $10, or has no intrinsic value if the stock price
is $50 or higher.
When an option has time remaining before it expires, it
will also have "time value," in addition to any intrinsic
value. For example, a $50 call might have zero intrinsic
value if the stock is at $49, but might trade at $5 if
the option does not expire for several months, all $5
of which would be "time value." Or, if the stock is at
$52, the intrinsic value would be $2, but the option
might trade at $6, having a time value of $4 in addition
to its intrinsic value. See also the definition of
TIME VALUE OF OPTIONS below.
INVESTMENT ANALYST--On Wall Street, a highly-paid, highly
skilled specialist, one whose job it is to analyze the investment
outlook for companies and to get caught napping when a company
surprises everyone by filing for bankruptcy, shortly after the
investment analyst has issued a "strong buy" on the company's
stock, and attested to the company being "sound as the dollar."
Synonyms: "Eternal optimist; soothsayer; scoundrel; huckster;
dreamer; charlatan." To the child and the investment analyst,
all things are possible.
JUNK BONDS--In Street language, high-yielding,
high-risk bonds issued by companies of dubious creditworthiness,
often for the purpose of taking over another company or for a
"leveraged buy out" in which the company buys back most of its
own stock, allowing holders of a few shares (usually management)
to become the only remaining shareholders.
In Wall Street Raider, junk bonds are any bonds issued by a
highly-leveraged, risky corporation; they pay interest at a rate
that depends on their credit rating. As in the real world, companies
in Wall Street Raider that issue a lot of junk bonds face a high
risk of bankruptcy if their business hits a few rough spots.
Not all corporate bonds are considered junk -- if a company's credit
rating is BBB, A, AA, or AAA, the corporate bonds are not "junk,"
but are considered to be "investment grade" bonds. (At least
until they are later downgraded to "junk," after the skeletons
come out of the closet.)
Any bonds rated BB or lower (B, CCC, CC, C, or D) are very
risky, however, and are thus quite properly called "junk bonds."
To Wall Street insiders, "junk bonds" are those that are issued
with neither the expectation nor the intention of ever paying
back the principal amount thereof to the investors/suckers who
are unfortunate enough to buy the stuff.
To certain churlish types, who have repeatedly been badly
burned by investments in these unsavory securities, junk bonds
are known as "certificates of confiscation."
LAWYER--The larval form of a politician.
LBO OR LEVERAGED BUY OUT--A transaction in which one
or a few people buy a small part of the stock of a company
and then have the company borrow enough money to buy out
all of the other shareholders, so that the buyers obtain
most or all of the stock of the company with little or no
investment on their part. In some cases, they may even
extract dividends from the company afterwards, in order to
quickly recoup part or all of their investment (or more).
In Wall Street Raider, a player (or a company controlled by
the player) can sometimes do an LBO by buying minimal control
of a target company (say 20%), and then having the company
borrow or issue junk bonds to finance a buyback of the
other 80% of its stock (using the "LBO" command
button on the Buy/Sell Menu), leaving the acquiring
player or company with 100% ownership of a highly leveraged
corporation.
An LBO can be a great strategy if the company does
well. If things don't work out, though, all the added debt
(leverage) can result in a financial meltdown for the LBO'd
company -- which happens more often than not when a company
is that massively leveraged with debt.
LIBOR RATE--The name given to a benchmark interest
rate, usually quite low, which is the rate banks charge each
other for overnight loans. LIBOR is an acronym, which stands
for "London Interbank Offer Rate." In the real world, various
interest rates on loan instruments are based on the LIBOR rate.
As recent (2012) news has disclosed, the LIBOR rate has been
rigged for years by crooks at 20 or more of the world's largest
banks, manipulated to increase their profitability on various
debt instruments.
Accordingly, in the real world, the LIBOR rate was to be phased
out at the end of 2021, possibly to be replaced by the Secured
Overnight Financing (SOFR) Rate and Overnight Index Swap (OIS)
Rate, and possibly by other alternative standard reference rates
to be used in loan instruments and interest rate swap transactions.
In fact, LIBOR has been phased out after June 30, 2023 and
generally replaced by SOFR, in the real world, and we have also
replaced LIBOR references in Wall Street Raider with references
to SOFT.
In Wall Street Raider, the "SOFR rate" is used only as the
rate at which banks pay interest on interbank loans, and is
loosely related to the Prime Rate and rates paid on CD's. Banks
with less-than-Sterling credit ratings may pay somewhat more
than the SOFR rate on their interbank borrowings in Wall Street
Raider.
LIMIT ORDER--An order a customer places with a broker
to buy or sell a security, in which the customer specifies
the price he or she is willing to accept. A limit order
does not always get executed, if the stock price moves
away from you. It stands in contrast to a "market order,"
in which you indicate you will take whatever price the
stock specialist is willing to give you, like a common
beggar. In short, a limit order is often a safer way of
trading stocks or other securities, while regularly
doing market orders is a good way to become a homeless
beggar. On the other hand, the "market maker" on Wall
Street can look at all the existing limit orders on a
particular stock, and act accordingly, so it is somewhat
like playing poker where the dealer gets to see your
cards before he bets.
See "MARKET ORDER"
below.
LINE OF CREDIT--An amount a lender, such as a bank,
agrees in advance to lend to a customer, if the customer
wishes to borrow it. In Wall Street Raider, each player and
company normally has a line of credit allowing him or it to
borrow up to at least 1 times net worth (often much more when the
economy is thriving and interest rates are low). To have a line
of credit, your financial situation must demonstrate, basically,
that you don't need to borrow. Bankers are, in short, the type
of people, as Alan Abelson once put it, who will only lend you
an umbrella on a sunny day.
In W$R, a company or player can usually borrow on a line
of credit until its debt is equal to 100% of net worth.
Thus, if you have $500 million cash and no debt, you can
borrow up to $500 million on your line of credit. However,
when playing at Difficulty Level 2 or 3, a player who
controls his/her lending bank can actually have a larger
line of credit, up to either 2 or 3 times net worth. While
this might seem like an advantage of playing at a higher
difficulty level than "1," it actually increases your risk
of bankruptcy greatly, if you succumb to the temptation of
borrowing up to 2 or 3 times your net worth. Taking on that
much leverage is roughly the equivalent of being given
enough rope to hang yourself, or giving whiskey and car
keys to a teenager.
If an opposing player controls the bank you borrow from, the
player may choose to "freeze" (cut off) your line of credit
from that bank.
Note, also, that your borrowing may also be subject to a $10
billion (U.S. or equivalent) dollar limit for any player or
company, or 25% of the lending bank's loan portfolio, if that
is greater. Your line of credit will be temporarily frozen if
it goes above the greater of those two amounts.
LIQUIDATION--A corporate transaction in which a
parent corporation, in effect, merges a wholly-owned subsidiary
corporation into itself, so that all of the assets, debts, etc.
of the subsidiary become property or debts of the parent, and
the subsidiary corporation ceases to have any further activity,
and ceases to exist. In Wall Street Raider, as in the real
world, the above type of liquidation is treated as a "nontaxable"
liquidation, with no taxable gain or loss recognized.
However, it is also possible to do a "taxable liquidation"
of any company you control. In a "taxable liquidation,"
the liquidating company must first sell off all its
business assets and any stocks it owns, and then pay
off all of its debts, including bank loans, bonds issued,
accrued income taxes, and advances from players, before
it distributes its remaining cash, if any, to its stockholders,
in proportion to their percentage ownership of its stock.
Each stockholder treats the cash received for his/her/its
stock in the liquidated company as sales proceeds, and will
recognize a taxable gain or loss on the disposition of the
shares, depending on his/her/its "tax basis" for the
stock that was held.
LITIGATOR--An often despised subspecies of the much-feared reptilian
species Lex disputatis; half literate, half alligator; known for its aggressive,
ferocious, pit bull-like characteristics, and its penchant for going for the
opponent's jugular and the client's pocketbook, often simultaneously. Like
others of its species, heavy infestations of Lex disputatis intimidatum are
found in California, New York, or wherever there are large concentrations of
filthy lucre, on which it thrives.
The litigator subspecies is easily recognized by its sharp tongue and
elbows, quick reflexes, its habit of toting large briefcases (often filled
only with peanut butter sandwiches), and its highly developed aptitude for
lying to and hypnotizing judges and juries. As it multiplies at an
exponential rate under favorable breeding conditions, it is widely
considered a pest throughout its range, and large infestations are often
mistaken for clouds of devouring locusts.
LOAN PORTFOLIO--The loans made by a bank, on which
it hopes to earn interest. The value of a bank's loan
portfolio is offset by a reserve for potential bad debts.
See definition of "BAD DEBT RESERVE" above.
In the newer versions of Wall Street Raider, banks invest
some of their funds in consumer and mortgage loans, as well as
making business loans to players and corporations. Consumer
loans and "subprime" mortgage loans are made at high interest
rates, but the banks have frequent large charge offs for bad
such loans, particularly during recessions. "Prime" mortgage
loans, on the other hand, earn much lower rates, but have far
fewer bad debt charge-offs.
Corporate loans and loans to players earn interest rates
based on the banks' Prime Rate, which is the lowest rate
charged, to AAA credit-rated borrowers. Other borrowers pay
higher rates that depend on their credit rating, if not AAA.
The worse their credit rating, the higher the interest rate
they pay.
LOBBYIST--In America, a political courtesan; one who
greases the wheels of the political system; a legal bribe-giver.
Lobbyists are recognizable by their Gucci shoes, Louis Vuitton
briefcases, Beltway addresses, Aspen chalets and unlimited expense
accounts, or, more recently, by their neatly pressed Chinese People's
Liberation Army Generals' uniforms. Noted for their self-proclaimed
public spiritedness and altruism, lobbyists aver that they provide
foreign travel junkets, first-rate hookers, and suitcases full of
cash to high-ranking government and political party officials solely
out a sense of civic duty, all with no expectation whatsoever of
receiving any quid pro quo.
MARKET ORDER--An order a customer places with a
broker to buy or sell a security "at the market" -- an often
suicidal financial strategy or an invitation to be financially
raped. See "STOCK SPECIALIST"
below and "LIMIT ORDER" above.
However, it is usually safe (in the real world) to place a
market order on a heavily traded stock, where the bid/ask spread
is often only a penny or two per share, as long as you are only
buying or selling a few hundred shares.
MARKET SHARE--A company's percentage share of total
sales in a particular industry. In Wall Street Raider, this
is the same as the company's share of "business assets" in
that industry. In general, the larger a company's market
share percentage, the more profitable the company tends to
be, compared to other companies in the industry. Thus, it
is a good strategy to merge two or more companies you own
(and liquidate one into the other), if they are in the same
industry, so that they become one large company, with a
larger market share than either had alone, which will usually
improve profitability, due to economies of scale.
During the great "dot-com bubble" at the end of the 20th century,
it became the conventional wisdom that "market share" was more
important than profitability, leading many companies to expand wildly,
floating huge amounts of stock and junk bonds to finance their
rapid expansion. (Most of them are now bankrupt, or "penny stocks,"
at best.) Over-expansion works the same way in Wall Street Raider.
MERGER--In the real corporate financial world, the
term usually refers to a transaction where the assets and
liabilities of two companies are legally brought together
in a single "surviving" corporation. It also is often
used to describe stock-for-stock swaps between a company
and the shareholders of a target company, where the target
company ends up as a wholly-owned subsidiary of the acquiring
company. A "merger" in Wall Street Raider (using the "Merger"
command button on the Buy/Sell Menu) is of the latter variety.
The "Tax-free Liquidation" command button can often be used
in Wall Street Raider to effect what is essentially a merger of
the type described in the first sentence of this definition, but
only after one corporation acquires 100% of the stock of the
corporation to be liquidated, usually by purchase or merger.
NOTIONAL VALUE--The face value or agreed total contract
value for a derivatives contract, such as a commodity futures contract.
For example, a contract to buy 10,000 barrels of oil at $41 per
barrel at an agreed future date would have a notional value of
$410,000. In the interim, before the delivery date, the contract
would usually trade at a market price above or below its notional
value and at settlement (before or on the expiration date) in
W$R the difference between market value and notional value is
a gain or loss to the contracting player or company, when the
contract is closed out on the commodities exchange.
In the case of an interest rate swap contract, the notional
value is the amount on which interest is calculated at the agreed
fixed rate and the actual current rate, with the difference in
interest calculated both ways being paid by one party to the
other.
P/E RATIO--Wall Street jargon for "price/earnings
ratio," or the multiple of earnings per share that a stock
sells for. For example, a $100 stock of a company earning
$5 per share would be said to have a P/E ratio (or earnings
multiple) of 20; that is, the stock sells for 20 times its
earnings per share. Stocks of rapidly growing companies
often sell at high P/E ratios, because the stock market is
"anticipating" much higher earnings in the future. Stocks
of all companies tend to sell at lower P/E ratios when
interest rates are at high levels (and vice versa). During
major bull markets ("bubbles"), investors are always told
by the experts that earnings, and therefore P/E ratios, are
no longer important, and thus can be ignored.
POLICY RESERVES--Accounting reserves insurance
companies are required to set up on their books when they
sell an insurance policy. Policy reserves are, in effect,
estimates of how much money the insurer needs to set aside
to pay future insurance claims. They might also be considered
as a kind of "loan" (without interest) from the insurance
company's customers. Most insurance companies make most or
all of their profits from investing these reserves for the
period between the time they collect a premium and when they
eventually have to pay a claim. For example, in a given
year, an insurer might take in $100 in premiums and pay
out $103 in claims and expenses, so that it would have
an underwriting loss of $3, but might earn $10 interest,
dividends, and investment gains on the "float" during the
year, resulting in an overall profit of $7 for that year.
In Wall Street Raider, an insurer's policy reserves are
assumed to grow at the same rate as its "insurance in
force," defined above.
PRODUCTIVITY EXPENDITURES--In Wall Street Raider,
money a company spends each year on either R & D (Research &
Development), or on marketing/advertising, to try to improve
its profitability. The higher the percentage of sales or revenues
a company spends, the better its chances of improving long-term
profitability, but the high costs or R & D or marketing/advertising
will penalize the company's earnings in the short-term. It is a
form of short-term pain, for (hoped-for) long-term gain.
PUBLIC OFFERING--An issuance of securities for sale
to the public, usually (but not always) by the issuing company.
In Wall Street Raider, a Public Offering is a sale of new stock
by a corporation to the Public for cash, to raise new capital
for the corporation. An "IPO" is a private company's initial
public offering. (By contrast, a "private offering" is a sale
of stock to only one or a few investors--see "White
Knight," described in this Glossary, regarding a private stock
offering in Wall Street Raider.)
PUBLIC RELATIONS--An organized method of mass communication,
calculated to circumvent critical thinking and induce a state of
prolonged stupor; also, in politics, a term used to describe
relatives who feed at the public trough.
PUT OPTION--An option to sell a stock at a specified
price over an agreed period of time. The person who buys
a put option is betting that the underlying stock is going
to go down. The person who sells, or sells short, a put option
is betting that the stock will either go up, go nowhere, or
only will go down slightly. In Wall $treet Raider, corporations
may trade put options, but banks and insurance companies may
only use puts to hedge stocks they own.
QUANTITATIVE EASING--A very "loose" monetary policy,
one employed by central banks in order to prop up the prices
of investment assets such as stocks and bonds, by forcing
interest rates down to very low levels. In recent years,
"Q.E." has been a favorite tool of the Federal Reserve, the
European Central Bank, and the Bank of Japan, supposedly
used for the purpose of stimulating their respective economies,
but with no notable results other than economic stagnation
and growing unemployment, and creation of temporary "bubbles"
in various sectors of the financial markets.
The actual purpose of Q.E. is to allow governments to borrow money
at artificially low, zero, or even less than zero interest rates, to
facilitate their massive spending programs, i.e., vote-buying.
"Quantitative easing" is a more palatable term for money printing,
since the the practice of money printing by central banks has a
rather unsavory history and has consistently had less than salubrious
consequences, as in the German Weimar Republic's runaway inflation
in the 1920s (some said it led to the rise of Hitler). A few years ago,
unrestrained money printing resulted in insane levels of inflation
in Zimbabwe, where a loaf of bread eventually cost trillions of
Zimbabwe Dollars, courtesy of "quantitative easing" by that African
nation's Marxist government. And more recently, the socialist government
of Venezuela was equally succesful in rendering the Venezuelan currency
worthless and impoverishing what had been a large middle class in a
prosperous nation. But, in theory, Q.E. is a good thing -- in the short
run, at least. We'll see.
R & D (RESEARCH AND DEVELOPMENT)--R & D expenditures
are funds spent to create new products or production processes
or to improve existing ones. Since R & D expenses usually
penalize current earnings, even though they may greatly
increase long run profits, managements are often tempted
to cut back R & D spending in the short term to make earnings
look better. In Wall Street Raider, companies in certain
industries are faced with this same choice between short-term
vs. long-term profitability, in deciding how much money to
spend on R & D. Besides lowering current earnings, a company
runs the risk that money spent on R & D projects will not even
pay off in the long run or may not pay off soon enough to
avert bankruptcy.
RESTRUCTURING--Selling the family jewels; throwing
out the baby with the bath water. Also, in financial parlance,
"downsizing" a company by selling off assets, jettisoning
employees by the thousands, looting the company pension plan,
and using other time-honored scorched-earth tactics to improve
the bottom-line profitability of the company, if it ultimately
survives the bloodletting. As Conan the Barbarian once said,
"Zat vich doesn't kill you makes you shtronger..."
(Or was that Conan the Contrarian???)
RETURN ON CAPITAL ASSETS--In W$R, this terminology
has a very specific meaning -- the amount of profit generated
each year by a given amount of "business assets" (which we
sometimes refer to as "capital assets" in the simulation).
Thus, if a company has $100 million of business/capital
assets earning a 12% return on capital, that means it
is earning $12 million for the year. Since earnings are
computed quarterly and vary from quarter to quarter, a
$3 million profit in one quarter would be reported as an
annualized 12% "return on capital assets." Note that this
profit figure does not take into account other types of
income, such as interest, dividends, or gains on various
transactions, or expenses such as interest or taxes.
Thus, a company may have a 12% return on capital, but if
it is paying 17% interest rates on a bank loan and is highly
leveraged, it may actually have a net loss, or even if it
does have a net profit, even that will be reduced by income
taxes, so its "RETURN ON EQUITY" will bear little resemblance
to the "return on capital assets," since we are comparing
apples to oranges. In this simulation, a company's rate of
return on capital assets is directly reduced by whatever it
spends on "productivity" expenditures -- R&D or marketing.
RETURN ON EQUITY--A way of calculating a company's
level of profitability; a percentage figure determined by
dividing its net income by its net worth. Returns on equity
are typically in the 10 to 15% range for most American
corporations. Returns over 20% are considered to be unusually
good. In Wall Street Raider, returns on equity tend to be
very much in the same range as in the real world and a highly
profitable industry will tend to attract new entrants.
In W$R, when "return on equity" is shown for any company,
it is the last full year's earnings divided by its net
worth at the end of that year.
SEC--Abbreviation for "Securities and Exchange
Commission," the federal agency charged with acting as a
watchdog over investment markets in the USA, which usually
behaves more like a lap dog. Its main job seems to be to get
caught napping each time a major investment fraud is perpetrated
against millions of investors. All publicly-traded companies
are required to regularly file financial reports with the
SEC, which from time to time takes legal action to prevent
the boiler-room types from fleecing the public investors
too flagrantly.
In Wall Street Raider, the SEC is merely another annoying
government agency that may intervene at inopportune times to
block those too-clever transactions you thought you could get
away with.
SHORT SALE--Selling a stock (or other investment vehicle)
that you do not own, by borrowing the stock from a person
who owns it and selling it now, with the hopes of buying
the stock back later at a lower price, returning the
shares to the owner, and making a profit on the decline
in the price of the stock. Of course, if the stock goes
up, and you have to buy it back, you will lose money on
the transaction.
SPOT PRICE--In commodity futures trading, the spot price
is the price of the commodity for immediate delivery, as opposed
to the futures prices for future delivery. In W$R, the spot prices
of commodities are the prices displayed on the main screen.
STOCK SPECIALIST--One of the clan of wolves with yellow
eyes and sharp fangs who works tirelessly on the floor of the
stock exchange, betting against the sheep who wish to buy or sell
stocks, who must trade against these cunning beasts. Members of
the public who buy stock from or sell stock to such traders are
like players in a poker game, where the stock specialist is the
dealer and gets to see your hand before he bets. These remorseless,
feral creatures harvest much of their profits from unsuspecting,
naive investors who are foolish enough to place
"market orders" with their
stockbrokers.
STOCKBROKER--A professional person who dials for dollars,
dispensing free (nevertheless grossly overpriced) investment advice
to all who will listen, from an inexhaustible list of bad, worse, or
terrible investments, usually recommending that one buy a stock that
he or she, personally, is selling short; typically, a person who was
selling shoes or aluminum siding before the latest market frenzy, and
who will leave you dealing with pawnbrokers, not stockbrokers, once
your life savings have been reduced to pocket change.
STRADDLE OPTION--A combination of a call
option (to buy a stock at a specified price) and a
put option (to sell the stock at that same
specified price). The person who buys a straddle option is betting
that the underlying stock is going to fluctuate greatly from the
current stock price, by the time the put and the call expire, and
that either the put or the call option will be worth more at that
time than was paid for the two options. The person who sells, or
sells short, a straddle option is betting that the stock will NOT
fluctuate greatly by the time the put and call expire.
The call side of the transaction will be worthless when the
expiration date arrives, while the put side will have some value,
if the stock price is below the "strike price" (exercise price)
of the options at that time; and vice versa if the stock is above
the strike price at expiration. (Of course, neither side would
have value if the stock price is at exactly the strike price, but
that almost never happens.) The only question for the buyer and
the seller of a straddle is: How MUCH value will one side of the
straddle have at expiration? More than the price paid for the
options? Or less?
STRIKE PRICE (OR STRIKING PRICE)--The price at which a
put option or call option is exercisable. Sometimes also
called the "exercise price." This is the price you pay for a stock if
you exercise a call option, or the price you receive if you
exercise a put option.
TAKEOVER--The act of taking "control" of a corporation,
by acquiring enough of its voting stock to elect a majority
of the board of directors, thus allowing the person doing
the takeover to direct the actions of the corporation. In
Wall Street Raider, a takeover may be effected through a cash
tender offer for stock held by the Public, using the "Buy Stock"
command button on the Buy/Sell Menu, or by a stock-for-stock
merger, using the "Merger" command button on the Buy/Sell Menu.
On Wall Street, a takeover is that step which sometimes
immediately precedes the looting of a once-healthy corporation.
In Wall Street Raider, the player or company doing a takeover
must always obtain a minimum of 20% of the target company's stock
in order to gain control. Also, in Wall Street Raider, you can
buy up to 5% of a company's stock on the open market, which will
tend to run up the price of the stock somewhat. However, if you
are acquiring (in total, counting existing holdings) more than
5% of a company's stock, you have to do so by a Tender Offer at
well above the current market price. (The "Buy Stock" command
automatically computes the correct purchase price either way,
depending on whether you are making open market purchases of 5%
or less, or "tendering" to acquire more than a 5% interest in a
company.) If the stock you or your company want to buy is already
owned by another company, you can make a formal offer to buy the
stock, which will sometimes be accepted, other times refused if
the price you offer is not high enough.
TAX AUDIT--A financial proctoscopic exam, performed by
malevolent and sadistic civil servants in a medieval setting,
without benefit of anesthesia.
TAX BASIS--The cost, or price paid for an asset, a number
which is used to determine whether there is a gain or loss when it
is sold or exchanged, or becomes worthless. In Wall Street Raider,
the program keeps track of the tax basis of all stocks, bonds, and
commodities owned by players or corporations, and of all "business
assets" owned by corporations, in order to determine gain or loss
when the stock or bond is sold or becomes worthless. Note that in
Wall $treet Raider, any amount paid in excess of par (over face value)
for a bond is amortized as a non-cash expense each quarter over the
remaining life of the bond, and gradually reduces the tax basis of
the bond, until it is equal to face value (par) at the time the bond
matures (unless it is a convertible bond).
Or, if you pay less than par for a bond, the discount on the
purchase is amortized as a non-cash taxable income item each
calendar quarter, over the remaining life of the bond, gradually
increasing your tax basis for the bond until it is equal to face
value (par) at the time the bond matures. A player or company can
see the tax basis of all stocks and bonds he, she, or it owns, by
clicking on the "Tax Basis Info" button on the "ENTITY INFO" Menu,
when the player or a particular company is the currently selected
Active Entity.
TAX LOSS CARRYOVER--If a corporation has more expenses
and losses than income and gains during a year, it will usually
pay no income taxes, and the net loss becomes a "tax loss carryover"
that can be used to offset taxable income in another year. In the
real world, a corporation can in some cases carry back a tax loss to
some of the preceding years, to claim a tax refund from those years,
or carry it forward to any of the following years, until it is
"used up." In Wall Street Raider, a corporation is only allowed
to carry a tax loss forward, not backward in time. You can find
out if a company has a tax loss carryover by using the "Financial
Profile" command button on the Entity Research Menu and looking
in the "Miscellaneous Info" section of the financial profile.
In Wall Street Raider, players do not have net operating loss
carryovers, but can carry forward any net capital losses, until
offset by capital gains in subsequent years.
TENDER OFFER--An offer by a person or company to
acquire part or all of the stock of a company, usually made
at an attractive price (considerably above the current market
price of the stock). A "Tender Offer" is usually made as
part of a takeover attempt (see "TAKEOVER" above), and the
offer is usually only effective if a certain minimum number
of shares are "tendered" for sale. In Wall Street Raider,
a "Tender Offer" is made at a price well above the existing
stock price, and the offer is only effective if the buyer
has enough cash and credit to be able to acquire the
percentage of stock specified at the tendered price.
When making a tender offer to the Public in Wall Street Raider,
the program computes the tender price. However, if you make a
tender offer to buy stock from a company that you do not control,
you must decide on how much of a premium over the current market
price you wish to offer, such as 25%. The owner of the stock may
accept or reject your offer.
TICKER TAPE--In a broker's office, or on the bottom
of the TV screen in the case of financial news channels like
CNBC, the moving electronic display of stock prices which shows
the price of each trade of a stock (and the number of shares
or "lots" traded) that occurs on a stock exchange. Stock prices
are usually quoted in dollars per share and decimal amounts.
(In times past, the quotes were printed mechanically on a
narrow paper tape by a "ticker tape" machine--hence the name.)
Because of the enormous number of trades occurring every second
in modern times, tickers only show a sampling of trades.
In Wall Street Raider, the electronic "ticker tape" moves
across the bottom part of the screen, reporting a random
sampling of one of every 50 to 100 stock trades that occurs
in the 1500+ stocks that make up the Wall Street Raider
investment universe. Volume is not shown.
TIME VALUE OF OPTIONS--The part of the price of a
put or call option over and above the option's "intrinsic value."
For example, if you buy an option exercisable at $30 a share
on XYZ Corporation, when the stock is trading at $32, the
intrinsic value of the option (also called the amount it is
"in the money") is $2 a share. If you paid $5 a share for
the option, $2 of the price is for the intrinsic value, and
the other $3 is the time value. If the stock is still at $32
when the call expires, the option will only be worth its
intrinsic value of $2, and the $3 of time value will have
completely wasted away. See the definition of
INTRINSIC VALUE OF OPTIONS above.
If, on the other hand, you bought a call option that was
"out of the money," for example, a call exercisable at $30
a share when the stock was $29, the entire amount you paid
for the option (say $3.50) would be time value, since the
option has no intrinstic value when the stock trades below
the strike price (exercise price). Thus, the entire price
of the option will wither away to zero by the expiration
date unless the stock rises to a price above $30 by that
date.
UNDERWRITING RATIO--For an insurance company, the
ratio of underwriting losses to net premium income. For
example, if an insurer receives $1,000 million in insurance
premium income but pays out $1,030 million to policyholders,
its underwriting (loss) ratio would be 103%. It would need
to make enough profit on the invested premiums (interest,
dividends, capital gains) to cover that underwriting loss
and overhead expenses, in order to show an overall profit.
If it only had to pay out $980 million in claims, then it
would have a 98% underwriting ratio, meaning that it is
actually making a profit on the insurance business. Most
of an insurance company's profits, however, come from
successfully investing the "float" -- which is the money
it takes in today as premiums, which can be invested
until such time as it has to pay a claim to the
policyholder.
WALL STREET--A giant spider web, whose denizens
endlessly seek to lure hapless investors to their doom; a vast
coven of money-runners located in tall buildings in downtown
Manhattan, but with tentacles in Washington, D.C. and in
every other place where money and power are to be found.
The penultimate Wall Street firm, Goldman, Sachs, has been
described in Rolling Stone as "... a great vampire
squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like
money."
WHITE KNIGHT--A friendly or neutral company (often
quite large) that purchases a substantial percentage of
the stock of a company at the request of that company's
management, in order to keep the shares out of the hands
of a potential corporate raider who might attempt an
unfriendly takeover of the company. In Wall Street Raider,
the "Private Stock Offering" command button (on the
Financing Transactions Menu) can be used to implement the
"White Knight Defense," enabling a company to raise money
by selling a substantial block of new stock to a "neutral"
company (a "White Knight"). The funds raised can then
sometimes be used to "buy in" ("LBO" command button on the
Buy/Sell Menu) publicly-owned shares, if desired, in order
to make it even more difficult or impossible for any
opponent or other company to buy up enough stock of the
company to take control away from you. In the real financial
world, this is an important form of job security for overpaid
and poorly performing corporate executives.
WORKING CAPITAL--Money that a company has tied
up in non-productive assets such as inventory or accounts
receivable, as a necessary part of its business. In Wall
Street Raider, the more "business assets" a company has,
the larger the amount of cash it must invest in "working
capital," which, unlike cash that can be invested in T-bills
or elsewhere, does not generate any investment income. In
Wall Street Raider, the more efficient and well-managed the
company, in general, the smaller the percentage of business
assets (as little as 5%) that must be committed to working
capital; or for the worst-managed companies, as much as 20%
of business assets will be tied up in unproductive working
capital.
YIELD--The percentage rate of return on an investment, such
as the interest yield on a bond or bank deposit, or the
dividend yield on a stock. Yield is a percentage calculated
by dividing the annual income from the investment by the
value or cost of the investment. For example, a $100 stock
that pays $6.00 per share in annual dividends would be said
to have a "dividend yield" of 6% ($6 dividend / $100 stock
price = .06, or 6%).
YIELD TO MATURITY--On a bond investment, the percentage
rate of return on the investment, if the bond is held until it
is paid off at its maturity date. While the "current yield" is
merely the annual interest payment divided by the price of the
bond, the Yield to Maturity involves a number of complex present
value calculations, which take into account the fact that the
price of the bond at present is either higher or lower than the
face amount that will be paid at maturity. Thus, a 7% bond
trading at face value (100) has a current yield of 7%,
and also a Yield to Maturity of 7%. But if it matures
in one year, and trades at 97, you will earn another
3%, approximately when it pays off at 100, so the
current yield on such a bond would be 7.22% (7 divided
by 97) and the effective "Yield to Maturity" would be
10.23%, assuming semiannual interest payments.
Bonds usually pay interest twice a year, although some pay
on a quarterly or monthly basis. In Wall Street Raider, bonds
pay interest quarterly (four times a year), so an 8% bond pays
2% each calendar quarter, for example, in Wall Street Raider.
The "yield to maturity" (YTM) figure shown for bond issues in
Wall Street Raider is computed using standard present value
equations, based on quarterly payments.
