Begrippen Corporate Finance

Corporate finance: The study of how a firm answers three questions: which long-term investments to make, how to finance them, and how to manage everyday financial activities. It links business decisions to the value of the equity.
Capital budgeting: The process of planning and managing a firm's long-term investments, by evaluating the size, timing and risk of the future cash flows they generate.
Capital structure: The mixture of long-term debt and equity a firm uses to finance its operations.
Working capital: A firm's short-term assets (inventory, receivables, cash) and short-term liabilities (payables). Managing it ensures the firm can continue its daily operations.
Chief financial officer (CFO): Top financial officer who coordinates the treasurer (cash, credit, capital expenditures, financial planning) and the controller (accounting, tax, information systems).
Residual owners: Shareholders are entitled only to what is left after employees, suppliers, creditors and other claimants are paid.
Primary market: Market in which securities are sold for the first time by the issuer; the money raised goes to the issuing firm (IPO or seasoned offering).
Secondary market: Market in which investors trade existing securities with each other; the money goes to the seller. It determines share prices and makes primary issues more attractive.
Initial public offering (IPO): The first public issue of a company's shares.
Seasoned equity offering (SEO): A new issue of shares by a company whose shares are already publicly traded.
Dealer market (OTC): Secondary market in which dealers buy and sell for their own account; for shares and bonds called over-the-counter.
Auction market: Exchange with a physical location whose main purpose is to match buyers and sellers, such as the London Stock Exchange.
Private placement: A negotiated sale of securities to a specific buyer, such as an insurance company, usually without registration or underwriters.
Statement of financial position (balance sheet): Snapshot of what a firm owns (assets), owes (liabilities) and the difference (equity) at a specific date.
Net working capital (NWC): Current assets minus current liabilities. Positive NWC means enough cash should be available to pay liabilities that fall due within a year.
Book value: Value based on accounting figures, usually historical cost under accounting standards.
Market value: The price at which an asset or the equity could be sold in the market today; the value that matters for financial decisions.
Income statement: Statement that summarises performance over a period: revenue minus expenses equals income.
Matching principle: Accounting rule that expenses are recognised in the same period as the revenues they help to produce.
Non-cash items: Expenses that reduce income but do not directly affect cash flow, most importantly depreciation.
EBIT: Earnings before interest and taxes, also called operating profit.
EBITDA: Earnings before interest, taxes, depreciation and amortisation; a rough measure of cash generated from operations.
Earnings per share (EPS): Net income divided by the number of shares outstanding.
Average tax rate: Total tax bill divided by taxable income.
Marginal tax rate: The tax paid on one additional unit of income; relevant for evaluating new projects.
Statement of cash flows: Statement that splits the change in cash into cash flows from operating, investing and financing activities.
Operating cash flow: Cash generated by a firm's normal day-to-day business activities.
Current ratio: Current assets divided by current liabilities; a liquidity measure.
Quick (acid-test) ratio: Current assets minus inventory, divided by current liabilities; a stricter liquidity measure.
Debt-equity ratio: Total debt divided by total equity.
Total debt ratio: Total debt divided by total assets (debt plus equity).
Equity multiplier: Total assets divided by total equity; equals 1 plus the debt-equity ratio.
Times interest earned (TIE): EBIT divided by interest expense; measures how well interest obligations are covered.
Total asset turnover: Sales divided by total assets; measures asset use efficiency.
Profit margin: Net income divided by sales; measures operating efficiency.
Return on assets (ROA): Net income divided by total assets; profit per unit of (book) assets.
Return on equity (ROE): Net income divided by total equity; the accounting bottom-line measure for shareholders.
Price-earnings (P/E) ratio: Price per share divided by EPS; what investors pay per unit of current earnings.
Shiller P/E (CAPE): Price divided by average inflation-adjusted earnings of the past ten years; historically about 17 for the S&P 500.
Market-to-book ratio: Market value per share divided by book value per share.
Tobin's Q: Market value of a firm's assets divided by their replacement cost.
Peer group analysis: Benchmarking a firm's ratios against similar firms in the same markets.
Time trend analysis: Benchmarking a firm's ratios against its own history.
Future value (FV): The amount an investment is worth after one or more periods of earning interest.
Present value (PV): The current value of future cash flows discounted at the appropriate discount rate.
Discounting: Calculating the present value of a future amount.
Compounding: Reinvesting interest so that interest is earned on interest in later periods.
Simple interest: Interest earned only on the original principal.
Compound interest: Interest earned on both the principal and interest reinvested from earlier periods.
Future value interest factor (FVIF): (1 + r)^t; the factor by which an amount grows in t periods at rate r.
Present value interest factor (PVIF): 1/(1 + r)^t; the reciprocal of the future value factor.
Annual percentage rate (APR), stated rate: In week 1 used as the nominal or stated annual rate without compounding; the quoted rate.
Corporate governance: How a firm is managed and how that management is monitored, so that decisions serve shareholders rather than managers or a single controlling shareholder.
Sole proprietorship: Business owned by one person with unlimited liability; income taxed as personal income.
Partnership: Business of two or more owners; general partners have unlimited liability, limited partners are liable only up to their contribution.
Corporation: A legal person separate from its owners, with limited liability, transferable ownership and unlimited life; subject to double taxation.
Double taxation: Corporate profits are taxed at the firm level and dividends are taxed again at the shareholder level.
Agency relationship: A relationship in which a principal hires an agent to act on his or her behalf.
Type I agency problem: Possible conflict of interest between shareholders and managers.
Type II agency problem: Possible conflict of interest between controlling (majority) and minority shareholders.
Agency costs: Costs of the conflict of interest between principals and agents; direct (expenditures, monitoring) or indirect (lost opportunities).
Related party transaction: Trade between firms controlled by the same party, possibly on terms that benefit the controlling shareholder at the expense of minority shareholders.
Proxy: A grant of authority by a shareholder allowing another person to vote his or her shares.
Proxy fight: Attempt by a group of shareholders to collect proxies to replace management by electing their own directors.
Cumulative voting: Voting procedure in which a shareholder may cast all votes (shares x seats) for one board candidate; directors are elected all at once.
Straight voting: Voting procedure in which a shareholder may cast all votes for each candidate; directors are elected one at a time.
Staggered elections: Only part of the board is elected at a time, which reduces the effect of cumulative voting and hinders takeovers.
Pre-emptive right: Right of existing shareholders to buy new shares first, protecting their proportional ownership.
Unitary (one-tier) board: Single board with executive and non-executive directors, elected by shareholders (UK, US).
Dual (two-tier) board: A supervisory board monitors and appoints an executive board (Germany, Netherlands).
Stakeholder: Someone other than a shareholder or creditor who potentially has a claim on the firm's cash flows, such as employees or suppliers.
Common law: Legal system in which law evolves through court rulings; flexible, better investor protection.
Civil law: Legal system based on codes of law set by legislation; judges interpret but cannot change the law.
Bank-based financial system: System in which banks are the main channel of funds and actively monitor firms; ownership is concentrated.
Market-based financial system: System in which securities markets are at least as important as banks; external market discipline and fragmented ownership.
Widely held firm: Firm without a controlling shareholder (no stake above 20%); type I problems dominate.
Closely held firm: Firm with a dominant shareholder such as a family, bank or state; type II problems dominate.
Perpetuity: A level stream of cash flows that continues forever; PV = C/r.
Growing perpetuity: A stream of cash flows growing at a constant rate forever; PV = C/(r - g) with r > g.
Annuity: A level stream of cash flows for a fixed number of periods.
Ordinary annuity: An annuity whose payments occur at the end of each period.
Annuity due: An annuity whose payments occur at the beginning of each period.
Delayed annuity: An annuity whose first payment occurs later than one period from now.
Growing annuity: A finite stream of cash flows growing at a constant rate.
Annuity present value factor: [1 - 1/(1 + r)^T]/r; the PV of 1 per period for T periods.
Quoted (stated, nominal) rate: The annual interest rate quoted without taking compounding into account.
Effective annual rate (EAR): The interest rate expressed as if compounded once per year: (1 + q/m)^m - 1.
Continuous compounding: Compounding infinitely often; EAR = e^q - 1.
Annual percentage rate (APR): In the EU the legally required effective rate including all costs of a loan; in the US the stated simple rate.
Pure discount loan: Loan in which principal and interest are paid in one sum at the end, like a T-bill.
Interest-only loan: Loan in which only interest is paid each period and the principal at the end.
Amortised loan: Loan repaid with regular equal payments that cover interest and principal.
Balloon (bullet) payment: Large final payment in a partially amortised loan, equal to the PV of the remaining scheduled payments.
Annuity mortgage: Mortgage with constant total payments; the interest share falls and the repayment share rises over time.
Linear mortgage: Mortgage with constant repayments; total payments fall over time as interest decreases.
Bond: A (mostly tradable) certificate showing that a borrower owes a specified sum and will pay coupons and principal on set dates; a tradable loan.
Face value (par value): The principal amount repaid at maturity; assume 1,000 if nothing is stated.
Coupon: The stated interest payment on a bond.
Coupon rate: Annual coupon divided by face value.
Maturity: The date on which the face value is repaid.
Yield to maturity (YTM): The discount rate that equates the PV of a bond's promised cash flows with its market price; usually quoted in simple annual terms.
Current yield: Annual coupon divided by the bond's price; ignores built-in gains or losses until maturity.
Zero coupon (pure discount) bond: Bond that pays no coupons, only the face value at maturity; sold at a deep discount.
Level coupon (plain vanilla) bond: Bond that pays a fixed coupon each period and the face value at maturity.
Consol: A bond that pays coupons forever and never repays principal; valued as a perpetuity.
Floating-rate bond (floater): Bond whose coupon is adjusted to an interest rate index, often with a floor and cap.
Premium bond: Bond selling above face value; coupon rate above market rate.
Discount bond: Bond selling below face value; coupon rate below market rate.
Par bond: Bond selling at face value; coupon rate equals market rate.
Interest rate risk: Risk of a change in a bond's value due to changes in market interest rates; larger for longer maturities and lower coupons.
Duration: Weighted average time until a bond's cash flows are received; summarises its interest rate risk.
Indenture: Written agreement between the issuing firm and bondholders that sets out the terms of the bond.
Sinking fund: Account managed by the bond trustee to retire part of a bond issue before maturity.
Call provision: Right of the issuer to repurchase bonds at a stated price before maturity.
Protective covenant: Part of the indenture that limits (negative) or requires (positive) certain actions of the borrower to protect lenders.
Seniority: Order of priority among creditors in default; subordinated debt is paid after senior debt.
Nominal interest rate: Rate not adjusted for inflation; percentage change in the amount of money.
Real interest rate: Rate adjusted for inflation; percentage change in buying power.
Fisher equation: (1 + nominal) = (1 + real)(1 + inflation); approximately real = nominal - inflation.
Term structure of interest rates: Relationship between nominal rates on default-free pure discount bonds and time to maturity.
Inflation premium: Part of a nominal rate that compensates for expected future inflation.
Interest rate risk premium: Compensation investors demand for bearing interest rate risk.
Yield curve: Plot of yields on government coupon bonds against maturity.
Default risk premium: Part of a bond yield that compensates for the possibility of default.
Liquidity premium: Part of a bond yield that compensates for a lack of liquidity.
Taxability premium: Part of a bond yield that compensates for unfavourable tax treatment.
Bond rating: Assessment by Moody's, S&P or Fitch of the issuer's creditworthiness (default risk).
Investment grade: Bonds rated at least BBB (S&P, Fitch) or Baa (Moody's).
Junk (high-yield) bond: Bond rated below investment grade; offers a higher promised yield.
Dividend yield: Dividend divided by the share price at the start of the period (D1/P0).
Capital gain yield: Price change divided by the initial price; in the constant growth model equal to g.
Dividend growth model: P0 = D1/(R - g): share value as a growing perpetuity of dividends.
Differential growth: Dividends grow at a high rate for some years and at a lower constant rate afterwards.
Preference shares: Equity with priority over ordinary shares for dividends and in liquidation, usually with a fixed dividend and often without votes.
Cumulative dividends: Unpaid preference dividends are carried forward and must be paid before ordinary dividends.
Dealer: Agent who buys and sells securities from its own inventory, earning the bid-ask spread.
Broker: Agent who matches buyers and sellers without holding inventory.
Net present value (NPV): The difference between the present value of an investment's future cash flows and its cost; accept if NPV is zero or positive.
Discounted cash flow (DCF) valuation: Valuing an investment by discounting its expected future cash flows.
Payback period: Time required for an investment's cash flows to recover its initial cost.
Discounted payback period: Time required for an investment's discounted cash flows to equal its initial cost.
Cut-off period (benchmark): Maximum acceptable (discounted) payback period, chosen arbitrarily by the firm.
Average accounting return (AAR): Average net income divided by average book value of an investment.
Reducing balance depreciation: Depreciation as a fixed percentage of the remaining book value each year.
Straight-line depreciation: Depreciation of an equal amount each year over the asset's life.
Profitability index (PI): PV of future cash flows divided by the initial investment (benefit-cost ratio); accept if at least 1.
Internal rate of return (IRR): Discount rate that makes the NPV of an investment zero; accept if it exceeds the required return (for conventional cash flows).
NPV profile: Graph of a project's NPV against the discount rate; it crosses zero at the IRR.
Investing-type cash flows: An initial outflow followed by inflows; accept if IRR exceeds the required return.
Financing-type cash flows: An initial inflow followed by outflows; the IRR is a rate paid, so accept if IRR is below the required return.
Multiple rates of return: More than one IRR, possible when cash flows change sign more than once.
Mutually exclusive projects: Projects of which at most one can be accepted.
Independent projects: Projects whose acceptance or rejection does not affect other projects.
Crossover rate: Discount rate at which the NPVs of two projects are equal; the IRR of the difference in their cash flows.
Modified IRR (MIRR): IRR computed on cash flows adjusted at the required return, so that only one rate results.
Incremental cash flows: Differences between a firm's future cash flows with and without a project.
Stand-alone principle: Evaluating a project on its own incremental cash flows as if it were a mini-firm.
Sunk cost: A cash flow that has already occurred and cannot be recovered; ignore it.
Opportunity cost: The most valuable alternative given up (lost revenue) by making the investment; include it.
Erosion: Negative side effect: a new product reduces cash flows of existing products (cannibalisation).
Synergy: Positive side effect: a new project increases cash flows of existing projects.
Free cash flow (FCF): OCF minus capital expenditure minus change in NWC; cash available to investors.
Operating cash flow (OCF): Cash generated by the day-to-day operations of a project or firm.
Capital expenditure (CapEx): Cash spent on acquiring or upgrading long-term assets; maintenance or growth CapEx.
Change in net working capital: Increase (cash tied up) or decrease (cash released) in current assets minus current liabilities.
Depreciation tax shield: Tax saving from depreciation: depreciation x tax rate.
After-tax salvage value: Salvage value adjusted for tax on the difference between salvage value and book value.
Fixed costs: Costs that do not change with the quantity of output in a given period.
Variable costs: Costs that change with the quantity of output.
Contribution margin: Price minus variable cost per unit (P - v); the amount each unit contributes to covering fixed costs.
Cash break-even: Sales level at which OCF is zero: Q = F/(P - v).
Accounting break-even: Sales level at which net income is zero: Q = (F + D)/(P - v).
Financial break-even: Sales level at which NPV is zero: Q = (F + OCF*)/(P - v).
Operating leverage: The degree to which a firm or project relies on fixed costs.
Degree of operating leverage (DOL): Percentage change in OCF relative to the percentage change in quantity sold; DOL = 1 + F/OCF.
Forecasting risk: Risk of a wrong decision because of errors in projected cash flows; magnified by high operating leverage.
Cost of capital: The minimum return a firm must earn on its investments to satisfy its investors; equal to the required return on investments of similar risk.
Cost of equity (RE): The return equity investors require on their investment in the firm.
Dividend growth model approach: Estimating the cost of equity as RE = D1/P0 + g.
Security market line (SML) approach: Estimating the cost of equity as RE = Rf + beta x (RM - Rf).
Market risk premium: The expected return on the market minus the risk-free rate.
Beta: Measure of an asset's systematic risk relative to the market; the slope of a regression of its returns on market returns.
Cost of debt (RD): The return lenders require on the firm's debt, measured by the yield to maturity on its (or similar) bonds.
After-tax cost of debt: RD x (1 - TC), because interest is tax deductible.
Cost of preference shares (RP): The fixed dividend divided by the price of the preference share, RP = D/P0.
Capital structure weights: Market value proportions of equity (E/V) and debt (D/V) in total firm value V = E + D.
Weighted average cost of capital (WACC): (E/V)RE + (D/V)RD(1 - TC): the overall required return on the firm's assets.
Pure play approach: Using a WACC or beta based on firms that operate only in the same line of business as the project.
Subjective approach: Placing projects in risk classes and adjusting the firm's WACC up or down per class.
Flotation costs: Costs of issuing new securities, such as underwriting, legal and registration fees.
Weighted average flotation cost (fA): (E/V)fE + (D/V)fD; used to gross up the amount that must be raised.
Private equity: Equity financing for non-public companies whose shares are not traded.
Venture capital (VC): Financing for new, often high-risk start-ups, by individuals or funds that pool money from institutions.
Business angel: Individual venture capitalist who invests his or her own money in start-ups.
Seed money: First, small amount of financing to prove a concept or develop a product.
Prospectus: Legal document with all relevant financial and business information about a public offering.
General cash offer: Public issue of securities offered to the general public.
Rights issue (rights offer): Issue of new shares offered first to existing shareholders, who receive one right per share.
Underwriter: Investment bank that helps issue securities, advises on price and sells the issue.
Firm commitment underwriting: The underwriter buys the entire issue and bears the risk of unsold securities.
Best efforts underwriting: The underwriter sells as much as possible as an agent, without guaranteeing the proceeds.
Dutch auction underwriting: Offer price set by competitive bids; all successful bidders pay the same (uniform) price.
Green shoe option: Option for underwriters to buy up to 15% extra shares from the issuer at the offer price; also called overallotment option.
Lock-up agreement: Clause that prevents insiders from selling shares for a period (usually 180 days) after an IPO.
Quiet period: Period around an IPO in which communication with the public is limited to factual matters.
Underpricing: Setting the IPO price below the market value, visible as a first-day closing price above the offer price.
Gross spread (underwriting discount): Difference between the offer price and the price the issuer receives.
Abnormal return (SEO): The drop in the share price around the announcement of a new equity issue; an indirect issue cost.
Dilution: Loss in existing shareholders' value in terms of ownership, market value, book value or EPS.
Subscription price: The price at which existing shareholders can buy new shares in a rights issue.
Subscription right (SR): Right received per old share that, together with others and the subscription price, allows buying a new share.
Theoretical ex-rights price (TERP): Share price after the rights issue: (N x P0 + S)/(N + 1).
Standby underwriting: Arrangement in which the underwriter guarantees to buy the shares not taken up in a rights issue, for a standby fee.
Oversubscription privilege: Right of existing shareholders to buy shares not subscribed by others in a rights issue.
Expected return: Probability-weighted average of the possible returns of an asset in the future.
Variance (expected returns): Probability-weighted average of squared deviations of possible returns from the expected return.
Standard deviation: Square root of the variance; the usual measure of volatility (total risk).
Portfolio: A group of assets such as equities and bonds held by an investor.
Portfolio weight: Percentage of a portfolio's total value invested in a particular asset.
Surprise (unexpected return): The part of a return that was not anticipated, U in R = E(R) + U.
Systematic risk: Risk that influences a large number of assets; also called market or non-diversifiable risk.
Unsystematic risk: Risk that affects at most a small number of assets; also called unique, idiosyncratic, asset-specific or diversifiable risk.
Diversification: Spreading investments over many assets, which eliminates unsystematic risk but not systematic risk.
Systematic risk principle: The expected return on a risky asset depends only on its systematic risk.
Beta coefficient: Amount of systematic risk of an asset relative to the market; covariance with the market divided by the market variance.
Portfolio beta: Weighted average of the betas of the assets in a portfolio.
Reward-to-risk ratio: (E(Ri) - Rf)/beta_i: the risk premium per unit of systematic risk.
Security market line (SML): Line of expected return against beta; its slope is the market risk premium.
Capital market line (CML): Line of expected return against standard deviation for efficient portfolios of the risk-free asset and the market portfolio.
Capital asset pricing model (CAPM): E(Ri) = Rf + beta_i(E(RM) - Rf): expected return depends on the time value of money, the reward for systematic risk and the amount of systematic risk.
Underpriced security: Security plotting above the SML: expected return too high, price too low; buy.
Overpriced security: Security plotting below the SML: expected return too low, price too high; sell or short.
Capital gains yield: Price change divided by the price at the start of the period.
Arithmetic average return: The return earned in an average year over a multiyear period.
Geometric average return: The average compound return earned per year over a multiyear period.
Siegel's paradox: Losses and gains are not symmetric: a loss of L requires a gain of L/(1 - L) to recover.
Blume's formula: Forecast that weights the geometric and arithmetic averages according to the horizon T and the data length N.
Historical variance: Sum of squared deviations from the average return divided by n - 1.
Normal distribution: Symmetric bell-shaped distribution: about 68%, 95% and 99% of outcomes within 1, 2 and 3 standard deviations.
Fat tails: Extreme outcomes occur more often than the normal distribution predicts.
Black swan: An extreme, very unlikely event with large impact, such as Black Monday 1987.
Risk premium: Return on a risky asset minus the risk-free return (T-bills).
Efficient capital market: Market in which asset prices fully reflect available information.
Efficient markets hypothesis (EMH): Hypothesis that actual capital markets are efficient.
Weak-form efficiency: Prices reflect all past price information; technical analysis is useless.
Semi-strong-form efficiency: Prices reflect all publicly available information.
Strong-form efficiency: Prices reflect all information, public and private.
Arbitrage: Exploiting price differences for a riskless profit; arbitrageurs push prices back to fair values.
Behavioural finance: Study of how biases, framing and emotions cause systematic deviations from rational behaviour and market efficiency.
Loss aversion: The tendency to feel losses more strongly than equal gains.
Herding: Investors copying the behaviour of others, which can push prices away from fundamentals.
Volatility Index (VIX): Index of the expected volatility of the S&P 500 over the next 30 days; a barometer of investor fear.
Risk profile: Plot showing how the value of a firm is affected by changes in prices or rates.
Hedging (immunisation): Reducing a firm's exposure to price or rate fluctuations.
Derivative security: Financial asset that represents a claim to another financial asset (the underlying).
Underlying: The asset on which a derivative is written, such as a share, bond, currency or commodity.
Transactions exposure: Short-run financial risk from the need to buy or sell at uncertain prices or rates in the near future.
Economic exposure: Long-run financial risk from permanent changes in prices or economic fundamentals.
Forward contract: Agreement to buy or sell an asset at a future date at a price agreed today; both parties are obligated.
Payoff profile: Plot of the gains and losses on a contract resulting from unexpected price changes.
Settlement date: The future date on which a forward or futures contract is settled.
Counterparty (credit) risk: Risk that the losing party in a contract defaults on its obligation.
Futures contract: Standardised, exchange-traded forward contract whose gains and losses are settled daily.
Marking to market: Daily settlement of gains and losses on futures contracts.
Short hedge: Selling futures to protect against a fall in the price of an asset one owns or will produce.
Margin call: Demand by an exchange or broker for extra collateral when a position moves against the holder.
Swap: Agreement by two parties to exchange specified cash flows at specified intervals in the future.
Interest rate swap: Exchange of fixed-rate for floating-rate interest payments.
Currency swap: Exchange of fixed amounts of one currency for another at specified future dates.
Commodity swap: Exchange of a fixed amount for payments linked to a commodity price.
Swap dealer: Intermediary (usually a bank) that takes the other side of swaps and keeps a balanced book.
Option: Contract giving its owner the right, but not the obligation, to buy or sell an asset at a fixed price on or before a given date.
Strike (exercise) price: The fixed price at which the option holder may buy or sell the underlying.
Expiration date: The last day on which an option can be exercised.
American option: Option that can be exercised at any time up to the expiration date.
European option: Option that can be exercised only on the expiration date.
Option premium: The price paid by the buyer of an option for the right it gives.
Call option: Right to buy an asset at a fixed price; value at expiration max(S - K, 0).
Put option: Right to sell an asset at a fixed price; value at expiration max(K - S, 0).
In the money: An option that would have positive value if exercised now (call: S > K; put: S < K).
Out of the money: An option that would be worthless if exercised now.
Long position: Having bought a contract; for options, holding rights.
Short position: Having sold (written) a contract; for options, bearing obligations.
Interest rate cap: Call option on an interest rate that protects a floating-rate borrower against high rates.
Floor: Put option on an interest rate.
Collar: Combination of buying a cap and selling a floor, keeping the rate within a band.
Contract for difference (CFD): Derivative that pays the price change of an asset, allowing large leveraged gains and losses.
Survivorship bias: Drawing conclusions only from the successful survivors, ignoring those who failed.
Passive fund (index fund, ETF): Low-cost fund that tracks a market index instead of trying to beat it.
Active fund: Fund whose managers try to beat the market by selecting securities, usually at higher fees.