Absorbed
An issue is absorbed when it has been entirely sold to the public.
Absorption Point
During market trading, securities are absorbed when there are corresponding orders to buy and sell. When further absorption is impossible without an adjustment in price, the security has reached its absorption point.
Acceleration Clause
A clause frequently contained within an indenture agreement and other contracts. It stipulates that if certain default events should occur, the unpaid balance will become due and payable. Examples of the type of events are insolvency and failure to meet principal, interest or sinking fund payments.
Account
When a brokerage firm obtains a client, an account must be opened in the name of the client. The account will reflect activities of the client such as the buying and selling of securities.
Account Executive (AE)
An employee of a brokerage firm who must pass specified tests and must be registered with the Financial Industry Regulatory Authority (FINRA) before he or she may solicit or accept orders from clients.
An account executive working for a full service brokerage firm generally provide their clients with advice, placement of orders and has the legal powers of an agent. In a discount brokerage firm, an account executive generally provides the client with customer service and handles the purchase and sale of securities on an unsolicited basis. Because account executives at discount brokerage firms usually do not provide advice for their clients, the commissions charged for the purchase and sale of securities are customarily much lower.
Account Statement
A statement that includes all transactions, positions and open orders and indicates the status of a client's account with a brokerage firm. Statements are required to be issued at least quarterly for all accounts. However, statements for active accounts are often provided on a monthly basis.
Accounts Payable
The amount owed to creditors for goods and services. Analysts look at a company's relationship of accounts payable to purchases for indications of sound financial management.
Accounts Receivable
A component of a corporation's current assets that consists of money owed to the corporation for services or merchandise it sold to customers. It is a key factor in examining a corporation's "liquidity"--its capacity to meet current obligations without receiving additional revenues.
Accounts Receivable Financing
If a corporation is in need of short term financing, it may try to obtain accounts receivable financing. If obtained, the corporation's accounts receivable is used as collateral for working capital advances.
Accounts Receivable Turnover Ratio
A ratio that denotes how many times a corporation's receivable portfolio has been collected during an accounting period. The ratio is calculated by dividing total credit by accounts receivable.
Accredited Investor
To qualify as an accredited investor, an investor must either be: A) a financial institution; B) an affiliate of the issuer; or C) an individual with a net worth of at least $1 million or an annual income of at least $200,000, and the investment must not account for more than 20% of the investor's worth.
SEC Regulation D stipulates that a maximum of 35 non-accredited investors are allowed to invest money into a Private Placement. An issuer of a private placement will try to acquire accredited investors to raise a greater amount of capital than would be possible if only 35 investors of less affluence could contribute.
Accretion
A method of adjusting the tax cost basis of a bond bought at an original issue discount in equal amounts over the life of the bond. For tax purposes, the annual accretion is treated as interest.
Accrual Basis
An accounting method in which income and expense items are credited as they are incurred or earned, although they may not have been received or actually paid in cash. Cash Basis accounting is an alternative method.
Accrued Interest
When a bond or other fixed income security is sold, the buyer pays the seller the price of the bond plus accrued interest. To calculate the amount of accrued interest due to the seller, multiply the number of days that have elapsed since the last payment by the coupon rate.
The recipient of the accrued interest is taxed at ordinary income rates. The buyer's expenditure is only temporary. When the next interest payment on the bond is due, the purchaser will receive the entire amount. Part of the payment is for the current holder's status as a creditor and part restitution for the earlier payment to the former bondholder.
Accrued Market Discount
An increase in a discount bond's market value as it approaches its maturity date. The increase is not due to the decline of market interest rates.
Accumulated Dividend
A dividend due to stockholders of cumulative preferred stock that has not been paid to them. Until the dividend is paid, it is carried on the corporation's books as a liability.
Accumulation
With respect to mutual funds, accumulation is when a fixed dollar amount is invested regularly and any capital gains and dividends are reinvested back into the fund.
In regard to other types of investments, accumulation occurs when an organization (or individual) purchases a large number of shares in a controlled method. This is done in order to avoid driving up the price of the investment. It may take weeks or months to complete an organization's accumulation program.
Accumulation Area
The price range of a security that indicates buyers are willing to purchase the security at its current price. Technical analysts detect accumulation areas when a security does not fall below a specific price. Technicians advise buying securities that have attained their accumulation area because the securities are likely to draw more buying interest.
Acid Test Ratio
A ratio that tests a corporation's liquidity. It is a stricter test than if the current ratio is used. The ratio is calculated by dividing the sum of cash, cash equivalents, accounts receivable and notes receivable by the total current liabilities.
Acknowledgment
Authentication of a signature on a brokerage document to ensure it is valid and has been sanctioned by an authorized individual. Acknowledgment, for example, is needed when a client wishes to transfer an account from one broker to another.
Acquisition
The act of one corporation acquiring a controlling interest in another corporation. In an "unfriendly" takeover, the buying corporation may offer incentives to stockholders such as offering a price well above the current market value.
Across The Board
Movement, up or down, in the stock market that affects nearly all stocks in the same direction. That is, nearly all stocks are gainers (or losers).
Acting In Concert
More than one investor who work in concert to achieve an investment objective. A group of investors who wish to take over a company may act in concert to buy up the company's stock. This is legal as long as proper notification is made to the SEC. However, if the group is acting in concert to manipulate a stock's price for their own gain, it would be considered an illegal act.
Active Bond
Corporate debt instruments that trade frequently on the floor of the NYSE are classified as active and are assigned certain privileges. Included are substantial issues of established corporations and most convertible bonds.
Active Bond Crowd
New York Stock Exchange members who are responsible for the heaviest volume of bond trading. Investors who trade bonds in the active crowd usually tend to get better prices for their securities than in the inactive market. (The spreads between bid and asked prices are wider.)
A cabinet crowd, which deals in bonds that are infrequently traded, is the opposite of an active crowd.
Active Market
An active market occurs when a security, or the exchange as a whole, experiences heavy trading volume. The spread between the securities bid and asked price is usually narrower in an active market than in an inactive market.
Actuals
A physical commodity that, when traded, results in the delivery of the actual commodity to the buyer when the contract expires. When actuals are traded, most options and futures contracts are closed out before the contracts expire. Thus, these transactions tend not to end in the actual delivery of the commodity. Examples of actuals are commodities such as oil and gold.
ADB (Adjusted Debit Balance)
Under Regulation T of the Federal Reserve Board, it is the formula that is used to determine the status of a margin account. An account's ADB is useful for ascertaining whether withdrawals of cash or securities are acceptable based on Special Miscellaneous Account (SMA) entries. The ADB is calculated by netting the balance owed to the brokerage firm with any balance in the SMA plus unrealized profits on short accounts.
Additional Bonds Test
A test that is required when additional bonds being issued will be secured by revenues or assets already pledged to existing bonds. The primary requisite is that debt service coverage on the initial bonds and the new bonds need be at a satisfactory level. If the specific financial requirements are not met, the bonds cannot be issued.
Adjusted Basis
The base price that is used to assess capital gains and losses when a security is sold. When net proceeds are used for tax purposes, the commissions are deducted at the time of sale. If any stock splits have occurred since the original purchase, the stock's price needs to be adjusted to obtain a correct adjusted basis.
Adjustment Bond
When recapitalizing a corporation that faces bankruptcy, if the bondholders approve, adjustment bonds are issued in replacement of outstanding bonds. Bondholders usually will authorize the issuance of adjustment bonds as they are deemed a lesser evil than a corporate bankruptcy. An adjustment bond assures payment of interest only if earned by the corporation. This is one of the characteristics of an income bond.
Administrator
In regard to investments, an administrator is a court-appointed official empowered to supervise or conduct the court's decisions with respect to a decedent's estate until it is fully disbursed to all claimants. An administrator (or "administratix", if a woman) is appointed when anybody dies either without a will, without naming an executor, or if the named executor will not or cannot serve.
Administrator
Generic term used for a person or legal entity serving a function in the trust fund, such as executor, fiduciary or guardian. The administrator is also responsible for managing and allocating assets, as well as implementing the investment process.”
ADR (American Depository Receipt)
Receipt for shares of a foreign-based corporation held by a US banking institution. ADRs are created to facilitate transactions and transfers of ownership of foreign securities in the United States.
Affidavit Of Domicile
A document that states the residence of the decedent at the time of death. The form is executed by the legal representative of an estate and is required when transferring ownership of a security from a deceased person. The security's transfer agent requires the affidavit to be notarized and dated within 90 days.
Affiliated Person
Any persons who are officers, directors, or owns 10 % or greater of the voting shares, and in most cases, the aforementioned immediate family and confidants. These people are in a position to exercise control on the performance and conduct of a corporation. The terms "affiliated person" and "control person" or interchangeable.
Aftermarket
A term used to reference the trading of a new issue or, the secondary market.
Aftertax Basis
It is the basis for comparing the return of a tax-free bond to a corporate bond. The basis lets the investor know what tax-free yield is required in order to receive the equivalent or greater return of a corporate yield. In determining the after-tax basis, one needs to consider the investor's tax bracket.
Aftertax Real Rate Of Return
The amount of money that an investor can keep from an investment's income and capital gains after it has been adjusted for inflation.
Agency
1: A transaction in which the broker-dealer acts as an agent for the account. An agent (broker) acts as an intermediary between a buyer and a seller and charges a commission for this service.
2: Government securities issued by entities other than the US Treasury such as the Federal Home Loan Bank.
Agency Cross
A transaction whereby the same broker acts as agent for both sides (buy and sell) of the trade. As long as the broker first offers the securities publicly at a price higher than the bid, the practice is legal.
Agency Transaction
The brokerage firm's confirmation report to its clients that it executed an order in the capacity of a broker and charged a commission for the services rendered. The firm acted as an "agent" between the customer and the market maker. It is a requirement to show the commission charged separately on the confirmation report. The commission cannot be added into the execution price.
Aggregate demand
The sum of consumer spending, investments, government spending and exports in a particular economy.
Aggressive Growth Fund
A mutual fund that buys shares in small or speculative growth companies to achieve maximum capital appreciation.
Air Pocket Stock
A term used to exemplify a stock falling sharply as holders rush to sell and few buyers can be found, likened to an airplane hitting an air pocket.
All Or None (AON) Offering
All or none offerings give an issuer the right to cancel an entire issue if an underwriting is not completely subscribed. A corporation may select this type of offering because it may be uneconomical to complete the distribution unless the entire amount of capital needed can be financed. No purchases can be finalized until it is determined that the entire offering is sold.
All Or None (AON) Order
A type of order where the client wants the entire order executed or none of it. The purchase (or sale) order must be greater than one round lot (100 shares). An AON order can be either a "day" order or a "good til canceled" order.
StateTrust on-line rules require an AON order to be a minimum of 100 shares for securities and a minimum of 2 contracts for options orders.
Alligator Spread Order
An options spread order with very high commission costs. It is improbable that an investor will profit even if the market moves as anticipated.
Allotment
A specific amount of securities assigned to all underwriters in an investment banking syndicate. The syndicate is formed to distribute a new issue.
Alpha
A coefficient measuring a security's price volatility caused by factors other than the stock market in its entirety. Alpha calculates the amount of return expected from an investment's intrinsic value, such as the rate of growth in earnings per share. For instance, an alpha of 1.35 infers that a security is projected to increase 35% in price when the security's "beta" is zero. A security, whose price is low in relation to its alpha, is considered undervalued.
Alternative Minimum Tax (AMT)
A tax aimed at preventing affluent investors from using tax shelters to evade other types of taxes such as income tax. Computation of the AMT takes into consideration tax preference items.
AMA (Asset Management Account)
An account at a brokerage firm or a bank that combines checkwriting, debit cards (or credit cards) and brokerage services such as buying and selling securities. AMAs are convenient because all financial transactions are listed on one monthly statement. AMAs are also called central asset accounts and are known by proprietary names such as PC CASH (StateTrust) and Cash Management Account (Merrill Lynch).
American Depository Receipt (ADR)
Receipt for shares of a foreign-based corporation held by a US banking institution. ADRs are created to facilitate transactions and transfers of ownership of foreign securities in the United States.
American Stock Exchange (AMEX)
The second largest stock exchange in the US is located in the financial district of New York City at 86 Trinity Place. As a general rule, the securities traded on the AMEX are those of small to mid-size corporations. The AMEX also trades options of many NYSE securities and some OTC securities.
American Stock Exchange Market Value Index
The AMEX computes an index to measure the aggregate market value changes in all common shares, ADRs and warrants listed on the exchange.
The index is computed by totaling the securities' market values, dividing it by the market value at the close from the previous day, and then multiply that figure by the previous closing index. The index represents a relative change in the total value of all shares.
Amortization
1: An accounting procedure that gradually decreases the book value of an intangible asset through periodic charges to income. For fixed assets, the term used is depreciation, and for wasting assets, it is depletion. Both terms mean essentially the same thing as amortization. The purpose of amortization is to reflect resale or redemption value.
2: In a bond bought at a premium, it is a method of reducing a taxpayer's cost basis (vs. Accretion).
3: Amortization also applies to debt reduction through periodic payments of principal and interest sufficient to pay off a loan by maturity.
Amortization
Part of the payment applied to reduce the principal of a loan. It is the gradual decrease of a debt through periodic installments, which is sufficient to cover the interest due and payment of the loan on its due date. In Accounting, it refers to the systematic decrease of an account or asset over its estimated life span.
AMT (Alternative Minimum Tax)
A tax aimed at preventing affluent investors from using tax shelters to evade other types of taxes such as income tax. Computation of the AMT takes into consideration tax preference items.
Analyst
Individual in a brokerage firm, bank trust department, or mutual fund group who researches corporations, industry groups and the market to make buy and sell recommendations on specific securities. A majority of analysts specialize in a particular industry. However, some analyze corporations that interest them, regardless of its industry group.
Annual Report
A yearly statement of a corporation's financial condition that describes its operations and provides its balance sheet and income statement. In addition, other information that shareholders will be interested in will be furnished.
Annualized Discount
On a 360-day basis, it is the percentage of discount from par value that US Treasury Bills trade in the securities market at a particular moment in time.
Annuitant
An investor who is receiving annuity payments.
Annuitize
The series of payments from the capital that has built up in an annuity. The payments may be a fixed amount, or for a fixed period of time, or for the lifetimes of one or two annuitants.
Anti-money laundering legislation (aml)
Laws and regulations established to prevent money laundering and use of funds for illegal activities, including terrorism.
Appraisal
With respect to life insurance, this is the valuation a policy’s reserve. It is also the process of determining the value of a business or a property. A contingent beneficiary will receive the benefits of a policy if, when the owner dies, all of the primary beneficiaries named by the owner have died. A contingent beneficiary is named by the policy owner.
Appreciation
Appreciation is an asset's increase in value.
Approved List
A list of investments that a mutual fund or other financial institution is allowed to invest in. When fiduciary responsibility exists, the use of an approved list may be statutory.
Arbitrage
This is the practice of simultaneously buying and selling the same (or equivalent securities) to profit from the disparity in their prevailing prices in separate markets. This activity applies to equivalent securities trading in different markets, securities with convertible features, or securities involved in mergers, tender offers, recapitalizations, or corporate divestitures.
Arbitration
A method of settling disputes between brokers and their clients, brokerage firms and clearing corporations, employees and their firms, and two brokerage firms. Arbitration has been adopted by all exchanges and securities associations. A pre-dispute arbitration clause in a customer's brokerage account agreement is customary and assures that disputes will be arbitrated by objective third parties and preclude court cases.
Arrearage
Past due obligations such as interest on bonds or dividends on cumulative preferred stocks. If a cumulative preferred stock's dividends are in arrears, common dividends cannot be paid.
Articles Of Incorporation
Document filed with a US state by corporation founders. Once the state approves the articles, it will issue a certificate of incorporation. The articles and the certificate form the Corporate Charter and gives the corporation its legal existence. The charter provides such information as the corporation's name, purpose, amount of authorized shares, and the number and identity of directors.
Ascending Tops
A chart pattern that tracks a stock's price over a period of time. The pattern will show that each peak in the stock's price is higher than the preceding peak. This upward movement is considered bullish.
Asked Price
1: It is the lowest round lot price at which a dealer will sell a security or commodity on an exchange or in the over-the-counter market. In other words, it is the price that an investor can buy the security. Also called the "asking price", "ask", "offering price" or "offer".
2: The per-share price that mutual fund shares are offered to the potential investors. It is usually the "net asset value" per share plus any sales charges.
Assessed Valuation
A dollar value that is given to property by a municipality for the purpose of assessing taxes. Assessed valuation is important to both homeowners and investors in municipal bonds that are backed by property tax.
Asset
Anything of value owned or is owed to it by a business, institution, or individual. Assets may include cash, investments, accounts receivable, product inventory and other current assets. Patents and goodwill are called intangible assets.
Asset Allocation
The allotment of investment funds amongst various types of assets such as cash equivalents, stock, fixed-income investments, real estate, and precious metals. It also applies to sub-classifications such as industry groupings of common stocks and government, municipal, and corporate bonds. Asset allocation affects both risk and return.
Asset Coverage
Extent to which a corporation's net assets cover a specific class of preferred stock, debt obligation or equity position. Asset coverage is significant as a buffer against losses in the event of liquidation.
Asset Management Account (AMA)
An account at a brokerage firm or a bank that combines checkwriting, debit cards (or credit cards) and brokerage services such as buying and selling securities. AMAs are convenient because all financial transactions are listed on one monthly statement.
Asset Play
A security whose current price does not reflect the value of corporate assets. For instance, analysts may recommend a corporation because its real estate value is greater than is reflected in the stock's current price and not because the corporation is run well. Asset play securities are attractive targets for takeovers because they provide a low-cost way to buy assets.
Asset-Backed Securities
Securities underwritten by brokerage firms who sell them to investors. The securities (bonds or notes) are backed by loan paper or accounts receivable of the issuer.
Assets
Accounting/financial term given to anything with monetary value. It appears on a company’s balance sheet (cash, investment balance, inventory, equipment and facilities, etc.). It is a resource with financial value held and controlled by an individual, corporation or country, with the goal of obtaining a return in the future.
Assignment
1: When an option is exercised, the Options Clearing Corporation prepares an assignment notification to a broker/dealer that one of its clients has options written that were exercised. The firm then assigns the exercise to one of its clients. This is done in accordance with their internal procedures.
2: It is the signing of either a stock/bond certificate or a separate form known as a stock power/bond power to authorize transfer of ownership to a new owner.
Assimilation
After all shares have been sold by an issue's underwriters, a new issue is considered assimilated by investors.
Assumed Interest Rate
The growth rate built into an annuity table to calculate the payout on variable annuities.
At Par
The price of a security that is equal to the face or nominal value.
At The Close Order
An order to execute a buy or sell within the last 30 seconds of the trading day. There is no guarantee that the execution price will be the closing price or that the order will be executed at all.
At The Money
An option in which the underlying security is trading exactly at the strike (exercise price) of the option.
Premiums paid or received and commissions are not considered. Thus, "at the money" should not be confused with an investor's break-even point on the option.
At The Opening Order
An order to execute a buy or sell at the opening price. If the order can not be executed at the opening, it will be automatically canceled.
Auction Market
System by which securities are traded through brokers or agents on an exchange such as the New York Stock Exchange. Unlike conventional auctions with one auctioneer and many buyers, here there are many buyers and sellers. Brokers competitively bid for the most advantageous price. It is distinguished from the over-the-counter market, where trades are bought by dealers.
Autex System
When brokers want to trade large blocks of securities, they will utilize this electronic system to alert other brokers. The actual transaction takes place over-the-counter or on an exchange floor and not on the system.
Authorized Shares
Also called "authorized stock", it is the maximum number of shares of any class that a corporation may issue. This amount is set at the time of incorporation and is part of the Articles of Incorporation. A corporation provides for future increases in authorized stock by the votes of stockholders. The corporation does not have to issue all the authorized shares.
Automatic Withdrawal
A program offered by a mutual fund to its shareholders. It enables shareholders to withdraw a fixed amount of money on a monthly or quarterly basis. The payment consists of dividends, realized capital gains and income generated from securities held by the fund.
Average Down
A strategy used to reduce the average price paid for a security by buying additional shares of the security at lower prices.
Average Equity
In a trading account, it is the average daily balance. Although daily fluctuations in equity are normal, average equity is an effective guide in ensuring sufficient equity to meet margin requirements.
Average Life
The average length of time anticipated that a bond, with a mandatory sinking fund, will be outstanding.
Average Up
On a rising market, averaging up is the act of buying an equal number of shares of a security to lower its overall cost basis. For example, if an investor buys an equal number of shares at $20, $23, $25, and $28, the average cost basis will be $24.
Away From The Market
A phrase used when a "limit order's" asking price is higher or the bid is lower than the current market price for the security.
B
An abbreviation used in stock listings of newspapers to indicate a stock's annual rate of return plus dividend.
Baby Bond
Bonds with a denomination of less than a $1,000 par value. Baby bonds are a source of funds to corporations that lack access to large institutional markets and bring the bond market within reach of small investors.
Back Office
Those departments of a broker-dealer that are not directly involved in sales or trading. Some back office functions include cashiering, accounting, and the record keeping of clients' cash or margin accounts.
Back to back
An agreement whereby an irrevocable letter of credit serves as warranty for another irrevocable letter of credit. The bank issuing the first letter of credit becomes the issuing bank of the second letter. It is also known as a reciprocal letter of credit.
Back-End Load
A fee that an investor pays when redeeming (withdrawing) funds from an investment--also called "deferred sales charge." The fee is usually dependent on how long the investment is held--the longer the time period, the smaller the fee. Mutual funds and annuities are the most common investments with back-end loads.
Backing Away
The failure of a market maker to fulfill its obligation to buy or sell the minimum quantity of a particular security. Backing away is considered an unethical practice under the Financial Industry Regulatory Authority' Rules of Fair Practice.
Backup
Lingo used to indicate a sudden reversal of a market trend.
Bad Debt
Open balance or loan receivable that is considered uncollectible and is written off by a firm. (Reserves are usually maintained for uncollectible accounts.) The relationship of recoveries and write-offs to accounts receivable can indicate a firm's credit and charge-off policies.
Balance Sheet
A financial report that entails the status of a corporation's assets, liabilities, and owners' equity for a specific date, usually at month end. It only captures this information as of that date; it does not cover a period of time.
Balance Sheet Equation
Total liabilities plus stockholders' equity is equal to total company assets.
Balanced profile
Investors who choose a balanced profile have a portfolio composition of 40-60% fixed income instruments (bonds) and 0-60% variable income (stock). They have average risk and volatility.
BAN (Bond Anticipation Note)
A short-term debt instrument that is issued by a municipality or a state. At maturity, the debt is paid from the proceeds of a new bond issue.
BANs usually provide an investor with a tax-free yield that may be higher than other comparable tax-exempt debt instruments of the same maturity.
Bank Guarantee Letter
The document furnished by a bank certifying that a put writer has enough funds on deposit at the bank to equal the aggregate exercise price of the put.
Bankmail
An agreement between a bank and corporation involved in a takeover. The bank agrees not to finance another acquirer's bid.
Base Market Value
Group of securities average market price at a specified time. It is used in plotting dollar or percentage changes for purposes of market indexing.
Base Period
A period of time that is used as a measurement yardstick for economic data. A base period may be a month, year or average of years. For example, the US inflation rate is determined by measuring the current Consumer Price Index against those of its base year, 1967.
Bear
Investor who believes an individual security, an industry segment, or the overall market will decline.
Bear Hug
Takeover bid so attractive that the target company's directors, who might be adverse to it for other reasons, must approve it or risk shareholder protest.
Bear Market
A prolonged decline in stock prices that may occur for months or years. A bear market in bonds is usually caused by rising interest rates while a bear market in stocks is usually caused by investors who expect economic activity to decline.
Bear Market Strategies
Some common strategies are: Buying Contramarket Stock, Buying Put Options, Writing Call Options, Short Selling
Bear Spread
An option strategy wherein the investor profits when the underlying security's price declines. (Vs. Bull Spread).
Bearer Bond
A security, usually a bond, that does not have the owner's name registered on the books of the issuer or on the certificate. Interest and principal, when due, are payable to the person in possession of the bond. The holder sends in or presents a coupon for payment. Most securities issued today are in registered form.
Bellwether Security
A security that is perceived as an indicator of a market's direction. IBM, for example, is considered a bellwether stock. The 20-year US Treasury bond is considered a bellwether bond because it represents the direction in which all other bonds are likely to move.
Beneficiaries
The person(s) designated by the trustor as recipient(s) of benefits from the trust fund. Often, the initial beneficiary is the trustor himself. However, upon his death, children, family members and others designated by the trustor become the beneficiaries.
Benefit trust fund
A trust fund designed so specific beneficiaries receive income from the fiduciary estate.
Bid Form
A form used in a competitive municipal bond underwriting in which a firm can submit a bid to the issuer.
Blanket Recommendation
A recommendation made by a brokerage firm to buy or sell a particular stock or stocks in a specific industry. The advice is intended for investors without regard to their investment objectives or portfolio size.
Block
A large quantity of a security that is either held or traded. Generally, a block is considered to be 10,000 shares or more of stock and 200,000 or more bonds.
Block Trade
A large amount of a stock's shares sold as a single unit.
Blotter
A log in which daily activities are recorded. Such daily activities include orders placed and executed and, securities received or delivered.
Blowout
A hot issue--shares of a new securities offering that are sold very quickly. Investors usually do not obtain all the shares they want. During a blowout, a corporation is most likely to obtain a higher price for their securities.
Blue Chip
A publicly traded company known for the quality and wide acceptance of its products, services and management, and for its ability to profit and pay dividends to shareholders. Examples of blue chip stocks are IBM and General Electric. The term originates from blue poker chips--the most valuable chips.
Board Broker
Employees of the Chicago Board Options Exchange who handle orders that cannot be immediately executed. These types of orders are called "away from the market orders."
BOM (Branch Office Manager)
Individual who is in charge of a branch office of a brokerage firm or a bank. BOMs who supervise the activities of at least three brokers must pass supervisory tests given by the exchanges and the FINRA.
Bond
A certificate of indebtedness in which the issuer (borrower) promises to pay the bondholder (creditor) a specified amount of interest for a specified time period and to repay the debt at maturity. Obligations that are due in more than one year are classified as bonds whereas if the debt is for less than one year, it is called a "note." Bondholders are creditors of the issuer and they do not have ownership privileges. A bond may be registered either by issuing certificates in the bondholder's name, book-entry or in bearer certificates.
There are many different kinds of bonds and different methods of evidencing bond ownership. The most common types are:
Secured bonds are backed by collateral that may be sold if the issuer fails to pay interest and principal when they are due.
Unsecured bonds or debentures are only backed by the full faith and credit of the issuer. There is no specific collateral.
Convertible bonds give holders the right to exchange the bonds for other securities of the issuer at a future date, under prescribed conditions.
Bond Buyer’s Indexes
Municipal bond indexes that are published daily in "The Bond Buyer," a newspaper that reports on the fixed-income markets. The indexes are a standard by which municipal bond yields are measured. Investors use Bond Buyer Indexes to plot interest rate patterns.
Bond Counsel
A law firm or attorney who reviews a new municipal issue and then issues the legal opinion.
Bond Crowd
A section on the floor of an exchange in which members gather to transact bond orders. Because this area is separate from stock traders, it is called a "bond crowd."
Bond Fund
A mutual fund whose objective is to seek high income and preservation of capital by investing mainly in bonds. Some funds may aim to achieve a proper mix between short-term, intermediate-term and long-term maturities. The fund can be taxable or tax-free.
Bond Power
A form used in the transfer of registered bonds from one owner to another. A bond power replicates the assignment form on the back of the bond certificate, but it is separated from the certificate. Hence, a bond power is sometimes called an "assignment separate from certificate." Although both achieve the same goal, a bond power has a safety advantage in being separate.
Book Value
An accounting term that states the equity value of an outstanding share of stock. A stock's book value is determined by dividing the amount of stockholders' equity by the number of common shares outstanding. A company's book value may be of no relevance to its to market value.
Book-Entry Securities
Securities that are registered to an owner without the issuance of a physical certificate. Ownership is reflected by an entry in the issuer's books. This method of registering securities has grown in popularity because investors need not worry about the location of their certificates and it requires less paperwork for a brokerage firm.
Borrowing Power
Dollar amount that clients can buy securities on margin. The margin limit is dependent on the type of security--usually 50% of a stock's value, 30% of a bond's value and 100% of a cash equivalent's value (i.e., money market funds). Buying power can also refer to securities hypothecated (pledged) to a lender as loan collateral. The lender's policies and the type of security determine the collateral's loan value.
BOT (Bought)
An abbreviation for the word "bought." The abbreviation for "sold" is SL.
Bottom
A security's lowest market price or the market's lowest level as determined by any of the major indexes. The bottom can either be for a particular trading day, year or cycle.
Bottom Fisher
Person who looks for investments that have fallen to what they perceive to be the security's bottom prices before it starts to turn upward.
Bottom-Up Approach to Investing
An investment approach whereby an investor will search for individual stocks that are performing well. This approach assumes that individual corporations can do well even though its industry is not doing well.
Box
The physical location in a brokerage house where securities or other documents are held in safekeeping. These securities may qualify for stock loans or as bank loan collateral. The determination is dependent upon regulations concerned with the safety and segregation of clients' securities.
Box Spread
An option position composed of four different contracts--a long call/short put with identical exercise prices and expiration dates, combined with a short call/long put with identical exercise prices and expiration dates.
Breadth of the Market
Also called "advance/decline" indexes, it is a percentage of stocks participating in a market move. If 2/3 of the stocks listed on an exchange rise during a trading session, most analysts will consider the move to be a good breadth of the market.
Break
1: A discrepancy in a brokerage firm's accounts.
2: A sudden, steep drop in a security's price or in the overall market.
Break-Even Point
In securities and in options, it is the price where the investor has neither a gain nor a loss from the transaction. However, the break-even point is calculated differently depending on the option strategy. The break-even points are determined by: * Long calls and short uncovered calls--the strike price plus premium. * Long puts and short uncovered puts--the strike price minus premium. * Short covered calls--the purchase price minus premium. * Short put covered by short stock--the short sale price of underlying stock plus premium.
Breakout
Movement of a security's price that is above or below an established trading range. The movement may either be above a resistance level or below a support level. A breakout is considered to indicate a continuing move in the same direction.
Breakpoint
Dollar levels of investment purchases in a mutual fund that qualify an investor for reduced sales charges. The purchases may either be a lump sum or by accumulating shares.
Breakup Value
Total market value of a corporation if each of its divisions operate independently and has its own stock price. Also called private market value (PMV), analysts look for high PMV in relation to market values to identify bargains and potential target companies.
Broad Tape
Dow Jones news ticker tape used by brokerage firms. The service continuously reports major news developments and financial information. The phrase also refers to comparable information provided by Associated Press (AP), United Press International (UPI) or Reuters.
Broker
A person who handles investors' orders to buy and sell securities. For this service a commission is usually charged. Brokers specializing in stocks, bonds, options, or commodities act as an agent.
Broker Loan Rate
Interest rate charged to brokers when borrowing funds from banks to cover their clients' security positions. The rate is usually approximately a point above short-term interest rates such as the federal funds rate. Broker loans are callable on 24-hour notice. Hence, the broker loan rate is sometimes called the "call loan rate."
Broker’s Broker
A security firm that acts as an agent for another security firm.
Brokered CD
Certificate of Deposit (CD) that is issued by a bank and bought in bulk by brokerage firms who resell them to their customers. Brokered CD's may pay as much as 1% more than those sold directly by banks, carry federal deposit insurance up to $100,000, are liquid on a secondary market made by the broker, and investors are not charged a commission.
Brokers’ Loan
Money borrowed by brokerage firms from banks or other brokerage firms for financing inventories of stock, a firm's own investments, and customers' purchases of securities on margin.
Bulge
A momentary price rise in an individual security or in the entire stock or commodities market.
Bull
Investor who believes an individual security, an industry segment, or the overall market will rise.
Bull Market
An advancing trend in stock prices that usually occurs for a time period of months or years. Bull markets are generally characterized by high trading volume.
Bull Spread
An option strategy wherein the investor profits when the underlying security's price rises. (vs. Bear Spread). There are three types of bull spreads:
* Vertical Spread: Concurrently buying and writing (selling) the same options class and the same expiration date, but with different exercise prices.
* Calendar Spread: Simultaneously buying and writing the same options class and sale of options of the same price but at different expiration dates.
* Diagonal Spread: Simultaneously buying and writing the same options class at different exercise prices and different expiration dates. A diagonal spread combines a vertical and a calendar spread.
Bunching
1: A ticker tape pattern that occurs when a series of trades in the same security are displayed consecutively.
2: Round lot orders that are combined together to be executed at the same time. Bunching is also used with odd lot orders to save each client the odd lot differential that is sometimes charged for small orders.
Business Conduct Committee
A committee, organized under the FINRA in each of its 13 districts, that acts as a hearing tribunal for trade practice complaints made under the Code of Procedure--also called the "District Business Conduct Committee." The committee ascertains the facts and, when warranted, imposes discipline. Decisions may be appealed to the FINRA's Board of Governors.
Business Day
The securities industry considers a business day to be any day that the financial markets are open for trading. In determining settlement dates for regular way securities transactions--trade date plus 3 business days--weekends and legal holidays are not counted.
Bust-Up Takeover
Leveraged buyout whereby the target company's business activities or assets are sold by the buyer to repay the debt that financed the takeover.
Busted Convertible
A convertible security whose conversion feature is considered worthless because the price of the common stock to which they convert has dropped so low. Thus, the convertible trades like a fixed-income investment.
Butterfly Spread
Complex option strategy that involves writing (selling) two calls and buying two calls on the same or different markets and several expiration dates. One of the call options has a higher strike price and the other has a lower strike price than the other two call options. If the underlying stock price remains stable, the investor profits from the premium income collected on the options that are written.
Buy And Hold Strategy
Strategy whereby an investor acquires shares of a corporation over many years.
Buy And Write Strategy
An options strategy whereby investors write (sell to open) covered call options on securities that they already own. To be considered covered, the number of option contracts may not exceed the equivalent number of shares held (1 contract normally equals 100 shares). If an investor owns 1000 shares of XYZ, for example, he may write up to 10 option call contracts on XYZ for it to be considered covered.
The writer may receive both stock dividends from the underlying security and premium income from the call options. The inherent risk of this strategy is that the writer may have to sell their stock below the current market price if the call is exercised by the option buyer. For example, a writer sells a covered XYZ Nov 50 call and a buyer purchases XYZ Nov 50 calls. If the current market price is 53 when the buyer exercises the call options, the writer's stock is called away (sold) at 50--not 53.
Buy In
A procedure that occurs when a seller fails to deliver securities sold. The broker must purchase the security on the open market on behalf of the seller to complete the transaction.
Buy Minus
An order to purchase a security at a lower price than its current market price. Traders will try to execute this type of order when the security's price temporarily drops.
Buy On The Bad News
Investment strategy established from the belief that a security's price will plunge shortly after the corporation reports bad news. Investors who buy at this time deem that the security's price will rise when the news improves.
Buy Order
An order placed with a brokerage firm to purchase a specified quantity of a security at stipulated parameters, for example, price (limit or market) and duration.
Buy Stop Order
Buy order for a listed security that stipulates that it be held until the security's market price rises to the stop price. Once the stop price is reached, the order is considered to be a market order to buy at the best available price.
Buy The Book
An order placed with a brokerage firm to buy all available shares from the security's specialist and from other broker-dealers at the security's current offering price. Before the advent of computers, specialists used to keep track of buy and sell orders in a book. Thus, the name "buy the book." This type of order is most likely to be placed by institutional buyers and professional traders.
Buyback
Lingo that refers to the covering of a short sale by purchasing the same security.
Buying Climax
A security's quick rise in price that draws many buyers, leaving them with no one to sell to at higher prices resulting in a subsequent fall in the security's price. Technical chartists ascertain a buying climax when they see a sharp price rise along with increased trading volume in the security.
Buying On Margin
Buying securities on credit in an established margin account at a brokerage firm.
Buying Power
The dollar amount available to purchase securities on margin. The amount is calculated by adding the cash held in the brokerage accounts and the amount that could be spent if securities were fully margined to their limit. If an investor uses their buying power, they are purchasing securities on credit.
Buyout
A party that purchases a controlling percentage of a corporation's stock, through negotiation or a tender offer, to take over the corporation's assets and operations.
Bylaws
Written rules established at the time a company is incorporating or a not-for-profit organization is forming. The rules govern the internal management of the company or organization and detail such items as the election of directors and the duties of officers. In contrast, a corporate charter is concerned with broad issues such as the number of authorized shares.
Bypass Trust
A written agreement established by parents that allows them to pass their assets to their children in the event of their death.
C
Abbreviation used in newspaper listings of stocks to indicate liquidating dividends.
Cabinet Crowd
Any member of the NYSE that trades in bonds that are not traded frequently--also known as an "inactive bond crowd" or "book crowd." The term arose because limit orders are kept in racks called cabinets that are located next to the bond trading floor.
Cabinet Security
An infrequently traded bond or stock that is listed on an exchange. There are many inactively traded bonds and just a few of such stocks--primarily those trading in ten share units.
Cage
A back office area of a brokerage firm in which funds are received and disbursed.
Calendar
A schedule of securities that will be offered for sale in the near future. An individual calendar is issued for new stock offerings, municipal bonds, corporate bonds and government securities.
Calendar Spread
An options trading strategy wherein options are bought and sold on the same underlying security, with the options having identical strike prices but different expiration dates--also called a "Horizontal" or "Time" spread. Investors hope to profit from a narrowing or widening of the spread between the options.
Call
1: An option in which the holder has the right to buy a specific number of shares of the underlying security at a specified price within a specified time period.
2: An issuer's right to redeem a bond issue (in full or part) before its maturity date.
Call Features Of A Bond
Part of an agreement, called an indenture, that states the schedule and price at which an issuer may make redemptions before the bond's maturity date. Municipal and corporate bonds usually have call protection periods of 10 years.
Call Loan
A brokerage firm that borrows money that is collateralized, has no maturity date, may be terminated at any time, and has interest rates that change daily. If the loan is not called, it is automatically renewed for another day. Otherwise, it is payable on demand the day after it is contracted.
Call Loan Rate
The rate of interest a bank charges a brokerage firm on collateralized loans for its margin account clients.
Call Option
A contract that gives the holder the right to buy a specified number of shares of a particular stock, stock index, or dollar face value of bonds at a predetermined price--called the "strike price"--on or before the option's expiration date. For this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the stock's price rises. If the holder decides to exercise the option (as opposed to selling it), the writer must give up ownership of the security.
Call Premium
1: In call options, it is the dollar amount that a buyer has to pay the writer (seller) for the right to buy a particular stock or stock index at a specific price by a specific date.
2: In bonds, preferred securities, and convertible securities, it is the dollar amount over par that the issuer pays to a holder for redeeming the security before its maturity.
Call Price
The price at which an issuer may redeem a bond prior to its maturity, or a preferred stock that has a call provision--also known as "redemption price." The issuer reimburses holders for their loss of income and ownership by paying a call premium--the call price is usually higher than the security's par value, the difference being the call premium.
Call Protection
Time during which a security, with a call provision, cannot be redeemed by the issuer. Corporate and municipal issuers typically have a call protection period of 10 years. Before buying a bond, an investor should be sure to check that it has a call protection. Otherwise, the bond can be called away at any time as designated in its indenture.
Call Risk
A bondholder's risk that the bond may be redeemed prior to maturity.
Callable
Under pre-stipulated conditions, a bond issue that may be redeemed by the issuer before its maturity date. If the issuer does call the issue, in full or part, the bondholder may receive a premium price. Issuers might call a bond when interest rates fall so drastically that it is worth the expense of issuing new bonds at the lower rates. U.S. government securities are not usually callable. However, 30-year Treasury bonds are an exception. They become callable after 25 years.
The term also pertains to preferred shares that may be redeemed by the issuing corporation.
Called Away
Lingo used to indicate that a particular bond issue was redeemed before its maturity date. This mainly occurs when an issuer exercises a right to retire the bond before its maturity.
Cancel Order
A client's instructions to cancel a buy or sell order that was previously placed but not yet executed.
Capital Asset
Regarding individuals, any kind of investment. In relation to corporations, besides security investments, it includes fixed assets such as land, buildings, equipment and furniture. Generally, a capital asset can be any item that is not bought or sold in the normal course of business.
Capital earnings
Benefits obtained by selling a financial asset at a higher price than its cost or estimated value.
Capital Gain
The positive difference between an asset's purchase price and the selling price.
Capital Gains Distribution
A distribution of profits derived from the assets within a mutual fund. Mutual funds usually distribute these gains on a quarterly basis to their shareholders.
Capital Loss
A negative difference between an asset's purchase price and its selling price.
Capital markets
Made up of financial institutions that channel the offering and demand of financial lending — banks, stock exchanges and other financial institutions. Through capital markets, businesses obtain the financial resources they need to conduct their business operations and individual savings can be put to work through production activities.
Capital Stock
All shares representing ownership in a corporation as authorized by its charter. A corporation's balance sheet normally includes the number and value of the issued shares in the figures for authorized shares.
Cash Account
A brokerage account in which the client pays in full for any purchases. In contrast, in a margin account the broker extends the client credit. Many brokerage clients have both cash and margin accounts. Custodial accounts may not have a margin account.
Cash Dividend
A cash payment that is made to shareholders of corporate stock. The dividends are distributed from current earnings or accumulated profits.
Cash Equivalent
A very liquid and safe investment or instrument that makes it, in effect, as good as cash.
Cash Sale
On the day that a trade is executed, the securities are required to be delivered.
Collateral
Tangible assets provided as guarantee in a loan.
Combination
An option position that is effected by either a purchase of two long positions or two short positions. The investor purchases a call and a put (or sells a call and a put) with different expiration dates and/or different strike prices.
Commercial deficit
The negative balance of the difference between the value of the goods a country sells and the goods it buys.
Commercial Paper
Debt instruments that are issued by established corporations to meet short term financing needs. Such instruments are unsecured and have maturities ranging from 2 to 270 days. Commercial paper is rated by Standard & Poor's and Moody's.
Commission
A fee paid to a broker for executing security trades. The commission is usually based on the dollar amount of the trade or the number of shares traded.
Commodity
It refers to raw materials. In general, it is defined as material, tangible goods that may be sold or purchased based solely on their price, instead of their qualities or characteristics. Some examples are oil, grains, metals, and cotton. These goods are traded as futures contracts in the world’s stock exchanges.
Common Stock
Securities which represent an ownership interest in a public corporation. Owners are entitled to vote on the selection of directors and other important matters as well as to receive dividends when they are declared. If a corporation is liquidated, the claims of secured and unsecured creditors, bondholders and owners of preferred stock have priority over the claims of common stockholders.
Common Stock Equivalent
Bond or preferred stock that is convertible into common stock. A warrant (or a right) to purchase common stock at a specified price, usually at a discount from market price, is also common stock equivalents. If common stock equivalents are converted, the equity of existing shareholders may become diluted. Thus, their conversion or exercise is factored in when calculating fully diluted earnings per share.
Common Stock Fund
A mutual fund that invests almost entirely in common stocks, although their objectives may vary greatly.
Community Property
A special ownership for married couples under laws of community property. Not all states have community property laws. Each has equal rights to any appreciation or income derived from those assets.
Comparative advantage
This concept refers to the various conditions that may favor a country’s specialized production based on the intensive use of production factors that are abundant in said country, such as raw materials, fertile soil or qualified labor, in addition to accumulated physical capital and research speed.
Competitive Bid
Price and terms submitted in a sealed bid to an issuer by an underwriter. The issuer will award the contract to the underwriting syndicate who bids the best price or most advantageous terms. The competitive bid process is mostly used by municipalities, utilities, and railroads.
Complex trust fund
Provides great flexibility while the trustor is alive and upon his death. This makes a big difference vs. simple trust funds, which do not allow meeting the needs of individuals with disabilities or the elderly, and do not establish special conditions to dictate allocation of the estate.
Confirmation
Written notification, from a broker to a client, that summarizes the details of a securities transaction. Some details include the security's name, number of shares, price and whether the broker acted as principal or agent.
Consumer Price Index (CPI)
A measure of price changes in consumer goods--also known as the "cost of living index." The index is calculated monthly by the US Bureau of Labor Statistics. Some CPI components are food, housing costs and transportation.
Contingent Order
The placement of two orders in which one of the orders cannot be executed unless other one is executed. A customer, for example, places a buy order at the market and a sell limit order in which the buy cannot be executed unless the sell limit is executed. Contingent orders are discouraged by brokers because the order that cannot be executed immediately also usually cannot be placed until the other order is executed.
Contrarian
Investor who do the opposite of what most other investors are doing. In other words, if most investors are buying, the contrarian will sell and vice versa. The contrarian believes that when the market is going up, most people are already or nearly fully invested and have no additional funds to make more purchases. Thus, if the market has not already reached its peak, it will do so in the near future. Conversely, when other investors believe the market will or is declining, they have already sold their investments. Thus, there are little or no sellers left and the market can only go up.
Control Person
Any officer, director, or 10% stockholder (and their immediate family) of a corporation.
Control Relationship
An association between a broker-dealer and an issuer such that the broker-dealer has influence in the issuance of bonds by the issuer.
Control Stock
Stock owned by a control person.
Convertibility
When a currency can be converted into another currency without restrictions.
Convertible Bond
A bond that may be exchanged for the common stock of the same company. If the bondholder wishes to convert the bond, it must be done according to the terms of the indenture.
Convertible Debenture
A debenture that may be exchanged into common shares at the owner's option as long as it is in accordance with the issue's terms.
Convertible Preferred Stock
A preferred stock that may be exchanged into common shares at the owner's option as long as it is in accordance with the issue's terms.
Convertible Securities
Corporate securities (usually preferred stock or bonds) that are exchangeable into a fixed number of shares of common stock at a stipulated price. Convertibles may also be exchanged into other forms of the security, but it is unusual. Convertible securities are usually bought by investors who want higher income than what can be received from common stock combined with a greater potential for appreciation than what can be received from regular bonds. A corporation will issue convertibles to enhance the marketability of their securities.
Conveyance of an estate
The process of distributing the property of an estate either during the estate owner’s life or after his/her death.
Cornering The Market
The practice of purchasing a security or commodity in volume such that the purchaser has complete supply and demand control of a security.
Corporate Bond
Debt instrument issued by a corporation. In contrast to most municipal and government bonds, which are not traded on major exchanges and are tax-free, corporate bonds are traded on major exchanges and the interest paid to the investor is taxable.
Corporate Charter
A document that is prepared during the formation of a corporation. It states the corporation's goals and objectives as well as what the corporation can do and cannot do to fulfill its goals.
Corporate Resolution
A document in which a corporation's board of directors states who is authorized to act on behalf of the corporation.
Corporation
A legal entity chartered by a state or the federal government and is separate and distinct from the persons who own it. A corporation is considered an artificial person--it may own property, incur debts, sue or be sued. Some distinguishing features of corporations are: * Ownership is held by stockholders who have limited liability--that is, they can only lose what they invest. * Transfer of ownership is accomplished through the sale of stock shares. * Perpetual existence (unless ended through bankruptcy, a merger, tender or takeover).
Correction
Reverse movement, usually downward, in an individual security's price. If the overall market has been rising and then has a sharp fall, this is said to be a "correction within an upward trend." Technical analysts note that, in a bull market, corrections should be expected--no market, or security, moves straight up or down.
Correspondent bank
It is the intermediary bank between the bank issuing the payment and the bank receiving the funds. A bank establishes a banking relationship to satisfy the needs of its bank client with third-party clients.
Coupon
Paper that evidences an issuer's promise to pay interest when due. A coupon is usually attached to the debt security. When the due date arrives, the coupon is detached and submitted for payment.
Coupon Bond
A bond in a form that has interest coupons attached. The coupons are clipped as they come due (usually semiannually) and are submitted by the bondholder for payment of interest.
Coupon Rate
Interest rate on a debt security that the issuer promises to pay the holder until maturity. The rate is expressed as an annual percentage of face value. For example, a bond with a 9% coupon will pay $9 per $100 of the face amount per year. The annual payment is usually divided into semiannual installments.
Covered Call Option
You own the underlying stock but are willing to forgo price increases in excess of the option strike price in return for the premium. You should be prepared to deliver the necessary shares of the underlying stock (if assigned) at any time during the life of the option. Short call option position is when the investor owns the underlying security or a security convertible into the underlying security. For example, an investor owns 500 shares of XYZ and writes (sells) 5 XYZ call options. The 500 shares cover the call options sold—that is, if the writer is assigned (the option is exercised), the 500 shares will meet the obligation of the option contract. The writer does not have to go into the market to obtain the shares to deliver to the option exerciser.
Covered Put Option
Said of a short put option position in which the investor has a short position in the underlying security or a security convertible into the underlying security. For example, an investor is short 500 shares of XYZ (from selling short) and writes (sells) 5 XYZ put options. The short position covers the put options sold--that is, if the writer is assigned (the option is exercised), the short position will meet the obligation of the option contract. When the put writer is assigned, the XYZ is bought from the long put holder and the stock covers (closes) the investor's original short position in the underlying security. Put writers are also considered to be covered if they obtain a bank guarantee letter.
Covering Short
Buying securities to close a short position in which an investor previously sold short.
Crash
A precipitous drop in stock prices. Crashes usually occur after periods of inflated stock prices followed by a loss in investor confidence.
Credit Balance
1: In a client's cash account at a brokerage firm, the amount that the firm owes to the client. This equals money deposited and remaining after any purchases are paid, plus uninvested proceeds from securities sold and not sent to the client.
2: In a client's margin account at a brokerage firm a credit balance may mean either: * Proceeds from short sales that are held in escrow for the securities borrowed for these sales, plus the required margin for the trade.
* Any free credit balances, or net balances, which can be withdrawn at any time. A free credit balance occurs when all previously margined securities have been paid for in full. Special miscellaneous account (SMA) balances are not free credit balances. If money is withdrawn, a new or increased debit balance will be incurred. SMA is generated from the borrowing power of margin securities within the client's account
Credit Rating
Assessment of an individual's or corporation's credit history and ability to pay its obligations. There are several firms that investigate, analyze, and maintain records on the credit status of individuals and businesses--for example, Equifax for individuals, and Dun & Bradstreet for commercial firms. Standard & Poor's and Moody's assign ratings to bonds. In rating the bonds, credit worthiness is an important factor.
Credit Risk
The risk that the issuer of a security, such as a bond, may default on interest and/or principal payments or become bankrupt. If either event occurs, the investor stands to lose part or all of the investment.
Credit Spread
An option spread position whereby the premium of the option sold exceeds the premium of the option purchased--thus, creating a credit to the investor.
Crossed Market
A condition in which a broker submits a bid that is greater than the lowest offer of another broker, or vice versa.
Cum-Dividend
The literal translation is "with dividend"--that is, a stock whose buyer is eligible to receive a declared dividend. Stocks are cum-dividend when a buy trade is made on or before the third day preceding the record date. After the third day, trades are executed ex-dividend (without dividend).
Cum-Rights
The literal translation is "with rights"--that is, during a rights offering, the period in which the purchaser of stock will receive the rights. The rights entitle the purchaser to buy a fixed amount of shares of stock that has not yet been issued. The prospectus that accompanies a rights distribution states when the rights become ex-rights (without rights). On the ex-right date, a purchaser will not receive the rights.
Cumulative Preferred Stock
A preferred stock that has a provision stipulating if one or more dividends are omitted (arrearage) because of insufficient earnings or any other reason, the dividends will accumulate until they are paid to shareholders. Cumulative preferred stocks have seniority over common stocks--that is, a common stock dividend cannot be paid until all cumulative preferred dividends are current.
Cumulative Voting
A method of voting for corporate directors. In contrast to statutory voting, cumulative voting allows shareholders to multiply the number of shares owned by the number of directorships being voted. The votes may be cast in any manner that the holder chooses--all for one director or any combination thereof. If a corporation, for example, has 6 openings to the Board of Directors, in statutory voting, a stockholder who owns 100 shares may cast 100 votes for each opening, thus having 600 votes. In cumulative voting, the stockholder may vote in the same manner as statutory voting or cast 600 votes for only one nominee, 300 for two, 200 for three, or any other combination.
Cumulative voting allows small shareholders to have a better chance of naming representatives on the board of directors. Cumulative voting is required under the corporate laws of some states, and is at the discretion of the corporation in most others.
Current Assets
Corporate assets that are expected to be converted to cash within twelve months. These assets include cash, accounts receivable, marketable securities and inventories.
Current Coupon Bond
A municipal, corporate or government bond that has a coupon within half a percentage point of current market rates. Because these bonds have an interest rate that is competitive with current market instruments, they are less volatile than comparably rated bonds with lower coupons.
Current Liabilities
Debt or other obligations that are due within twelve months.
Current Market Value (CMV)
The worth of all positions in a client's brokerage account. To determine the portfolio's current market value, stocks and bonds are valued at their closing prices. For over-the-counter securities, the bid is used.
Current Ratio
A test of a corporation's liquidity--that is, a corporation's ability to pay its current obligations from current assets. The ratio is calculated by dividing current assets by current liabilities.
Cushion Theory
A theory which asserts that if many investors have short positions in a stock, the stock's price must inevitably rise because the short positions must eventually be covered by purchases of the stock. If the number of short positions in a stock is twice as high as the stock daily trading volume, most technical analysts will be bullish on the stock--that is, any price rise will force short sellers to cover their short positions, making the stock's price rise even more.
Custodial Account
An account opened on the behalf of a minor by an adult who acts as custodian. The custodian is usually one of the child's parents--both parents cannot be custodian. This type of account is opened because minors cannot enter into contracts. Thus, they cannot make securities transactions for themselves. Any assets placed into a custodial account are irrevocable. Once the minor is of majority (usually 18, but some states are 21), they may do what they please with the assets.
Custodian
A financial institution, such as a brokerage firm, or a bank that holds stock certificates and other assets on the behalf of a mutual fund, corporation or individual. An individual may also act as a custodian in the case of an account for an minor.
Custodian Bank
Bank assigned by a mutual fund to act as its custodian. The bank performs clerical functions and holds the fund's cash and securities.
Customer’s Net Debit Balance
The total amount of credit extended by New York Stock Exchange member firms to finance customers' security purchases.
Cyclical Stock
Stock that is strongly affected by changes in economic activity. The stock's price will rise when the economy turns up, and will fall when the economy turns down. Examples are automobiles and paper stocks. Non-cyclical stocks, such as stocks within the food and hospital industries, are not directly affected by economic changes.
DA
1: Deposit Account
2: Documents against Acceptance
Daily Bond Buyer
A daily municipal industry newspaper that contains news and announcements. The paper basically concentrates on new issues and publishes a variety of municipal industry statistics. These statistics include: Eleven Bond Index, Revenue Bond Index, Twenty Bond Index and Visible Supply.
Daily Trading Limit
The daily maximum amount that many options and commodities markets are allowed to rise or fall. When a market reaches the upper limit and remains there all day, it is said to be having an up-limit day. Conversely, when a market reaches the lower limit and remains there all day, it is said to be having a down-limit day.
Daisy Chain
Brokerage lingo used to describe a pattern of fictitious trading by a group of persons buying and selling to create the appearance of active volume to entice legitimate investors. The unsuspicious investor drawn into the daisy chain bails out the market manipulators--that is, when these traders drive the price up, they sell their holdings and leave innocent investors without buyers.
Dated Date
The date from which interest begins accruing on new municipal bonds and other debt instruments. The buyer makes a payment to the issuer for the interest accrued from the dated date to the issue's settlement date. On the bond's first interest payment the buyer is reimbursed.
Day Order
Security buy or sell orders that expire at the end of the trading day on which they were entered unless already executed or canceled during the day.
Day Trade
The purchase and sale of a position in an account during the same trading day. A day trade may also be a short sale followed by a short cover (buy).
Deal Stock
A company's stock that rises or falls due to takeover rumors.
Dealer
An individual or firm in the securities business who acts as a principal rather than as an agent in a specific transaction. Principles buy and sell securities for their own account and risk.
A dealer's profit or loss is derived from the difference between the price he/she pays for the security and the price he/she receives when selling the security to a customer.
Because most individuals and firms act as both brokers and dealers, the term broker-dealer is commonly used.
Debenture
An unsecured (without collateral) bond backed only by the integrity of the issuer (borrower). The parameters of the bond are set forth in an agreement called an indenture.
Debenture Stock
A stock issued under an agreement that provides for fixed payments at scheduled intervals. A debenture stock is more similar to a preferred stock than a debenture. In the case of a company's liquidation, it is treated as an equity. Investors will not receive payment until all debt is paid.
Debit Balance
Money owed to a broker from the purchase of stock or bonds in a customer's margin account. This money is a loan extended by the broker to the margin customer and the customer pays interest on the debit balance in the account.
Debit Spread
An option spread in which the premium of the bought option is greater than the premium of the one sold.
Debt
1: Common name for bonds and other forms of paper evidencing the amount owed and whether it is payable on a specific date or on demand.
2: One party's legal obligation to pay another party in accordance with an expressed or implied agreement. The debt may or may not be secured.
Debt Instrument
A written agreement denoting that the issuer promises to reimburse a debt. Examples are Treasury Bills, Notes and Bonds, Banker's Acceptances, Commercial Paper and Certificate of Deposits.
Debt Limit
The maximum amount of debt that a municipality is permitted to incur--also known as "debt ceiling."
Debt Retirement
The repayment of specific debt. There are two methods used to retire debt--sinking fund and serial. Sinking fund and serial bonds are not types of bonds, just methods of retiring them. The sinking fund method, in which money is set aside each year to retire debt, is most commonly used for corporate debt. Conversely, the serial method is more commonly used in the debt retirement of municipal bonds. When bonds are issued in serial form, parts of the issue, known as a "series," are retired in various time schedules, usually semiannually or annually.
Debt Security
Securities, such as Treasury Bills and Commercial Paper, that represent money borrowed by the issuer. This money must be repaid by the maturity date at a specified interest rate unless it was an original issue discount purchase.
Debt Service
The yearly amount needed to make interest and current maturities of principal payments on a bond issue.
Debt-to-Equity Ratio
1: The ratio of a company's securities with fixed charges to the company's common stock equity. To calculate, divide the total amount of preferred stock and bonds by the amount of common stock equity.
2: In the case of liquidation, the ratio indicates the extent owner's equity can cover creditors' claims. It is calculated by dividing total liabilities by total shareholders' equity.
3: A ratio that is used to measure leverage. Leverage is the use of borrowed money to increase the return on owners' equity. To calculate, divide the total amount of long term debt by the total amount of shareholders' equity.
Debtor
A business or individual that borrowed money that needs to be reimbursed to the creditor.
Declaration Date
A specified date that the board of directors of a corporation declares and authorizes a dividend payment. At this time, the dividend becomes a corporate obligation.
Deduction
An expense that can be subtracted from an individual's adjusted gross income to obtain their taxable income. The type of expense deductions allowed is determined by the Internal Revenue Service (IRS). Examples include state and local taxes, charitable contributions and mortgage interest paid.
Deep Discount Bond
A bond that trades substantially below its face value--usually more than 20% from its face value. The term is usually used in reference to zero coupon bonds. Although original issue discount bonds and deep discount bonds are similar, deep discount bonds are issued at a par value of $1,000. The value of a deep discount bond generally increases faster as interest rates fall and declines faster as rates rise.
Deep In The Money
A call option whose exercise (strike) price is considerably below the underlying security's current market price--that is, the strike price is 5 or more points below the underlying security's current market price.
In regard to a put option, the exercise price is well above the underlying security's current market price--that is, the strike price is 5 or more points above the underlying security's current market price.
When buying a deep-in-the-money call option, the premium is high because the holder has the right to purchase the stock at an exercise price that is substantially below the underlying security's current market price.
Default
The failure of a debtor to make timely payments of principal and/or interest. If the debtor defaults, the bondholders may make claims against the issuer's assets to get back their principal.
Defeasance Bonds
A process whereby a corporation gets rid of old, low-rate debt without paying it back before maturity--another term for "advance refunded bonds."
The corporation uses newly purchased bonds that have a lower face value and pay higher interest or have a higher market value. In doing this, the corporation's balance sheet becomes more debt free and earnings will increase by the amount that the old debt's face value exceeds the cost of the new debt.
Another type of defeasance occurs when a corporation solicits a brokerage firm to buy the outstanding bonds of the old corporate debt issue. The brokerage firm will then exchange the old debt issue for a new corporate stock issue equal to the market value of the old debt. The broker will then sell the stock at a profit.
Defensive Securities
Securities that are steadier than the average stock or bond and provide the investor a safe return on their money. Because of the corporation's business (e.g. utility and food industries), its securities are relatively resistant to general economic changes. Thus, when the stock market is weak, defensive securities are apt to decline less than the overall market.
Deferral of Taxes
The deferment of making tax payments from this year to a later year. For example, money in an Individual Retirement Account (IRA) grows tax deferred until the money is withdrawn from the account.
Deferred Account
An account, such as an Individual Retirement Account or Profit Sharing Plan, that delays taxes until a later date.
Deferred Annuity
An annuity in which its contract provides that payments to the annuitant are delayed until certain thresholds have been attained (e.g., when the annuitant attains a certain age)--also called a "deferred payment annuity."
Deferred compensation
An agreement through which current salary or future increases in salary are not taken immediately, but are postponed until a future date, which may be the date of retirement. Life insurance can be utilized to finance the plan, which pays retirement benefits to the employee or death benefits to the employee’s beneficiaries.
Deferred Interest Bond
A bond, such as a zero coupon bond, that pays interest and repays principal in one lump sum at maturity.
Deferred taxes
When all or some taxes are paid at a future date, instead of in the year during which the income was generated. Investments with deferred taxes are particularly applicable to retirement accounts, which allow the deferral of taxes on contributions, returns, or both. Taxes are not paid until the funds are withdrawn during retirement.
Deficiency Letter
A written notice sent by the Securities and Exchange Commission (SEC) to the issuer of an anticipated new issue. The notice states that there are omissions of material fact in the registration statement and/or that the preliminary prospectus needs revision. If immediate action is not taken by the issuer, the registration period may need to be extended.
Deficit
The amount by which expenditures exceed the amount budgeted or the amount by which liabilities exceed income and assets. Deficits can be corrected by borrowing money or by selling assets.
Deficit Financing
The borrowing of money by government agencies to procure revenue shortages. Deficit financing may stimulate the economy for a while, but usually ends up being an economic hindrance by pushing up interest rates.
Deficit Net Worth
The amount that liabilities exceed assets and capital stock--also referred to as "negative net worth."
Deficit Spending
A shortage that is financed by government borrowing. This shortage occurs when the amount of government expenditures exceeds government revenues.
Defined Benefit Pension Plan
A retirement plan that stipulates that each participant will receive a set payment after a predetermined number of years of service. It does not pay taxes on investments within the plan. Contributions to the plan may be by employer only, employee only or both.
Deflation
A persistent price decline of goods and services--the inverse to inflation. Deflation usually occurs during a recession and is characterized by supply exceeding demand, and while there is increased buying power, the amount of currency in circulation is greatly reduced. Marked deflation generally affects production and employment negatively. Deflation should not be confused with disinflation, which is a result of a slow down in the rate that prices increase.
Deflator
Statistical factor used to adjust the difference between real value and inflation affected value.
Delayed Delivery
Delivery of securities later than the settlement date of the sell transaction. Delayed delivery is acceptable only when there is an agreed upon contract by both parties to the trade--known as a "seller's option."
Delayed Opening
The postponement of the start of trading in a stock beyond the normal opening of a day's trading because exchange officials judge that market conditions justify such a delay. Such market conditions may be caused by a great influx (or an extreme imbalance) in buy and sell orders, or pending corporate news that requires time for dissemination.
Delisted Security
Elimination of a corporation's security from an exchange because the security no longer meets specific financial ratios, sales levels, or other qualifications.
Delivery
The physical exchange of money and securities on the brokerage transaction's settlement date. Industry standards stipulate what is an acceptable condition for the securities being delivered--otherwise known as being in "good deliverable form."
Delivery Date
Currently, it is the fifth business day following a "regular way" transaction on the New York Stock Exchange in which money and securities need to be exchanged. However, on June 1, 1995, new industry regulations will be in effect. The regulation change stipulates that the delivery date for regular way transactions--for most securities--will occur on the third business day following the transaction.
Moreover, in regard to other types of securities, the term regular way delivery does not necessarily mean three business days following the transaction. Government securities, for instance, have a regular way delivery on the next business day following the transaction.
Delivery Notice
Notification from the seller to the buyer of the date when the actual commodity in a futures contract will be delivered.
Delivery Versus Payment (DVP)
Securities industry procedure whereby the sold securities are delivered to the buyer's bank in exchange for payment. From the seller's perspective, it is called "receive versus payment." Institutional customers customarily use delivery versus payment to make settlement on transactions. It is also referred to as COD (cash on delivery) transactions.
Delta
A statistical measure of the relationship between an option contract's price movement to the price movement of the underlying futures contract or stock price. To illustrate, if the option's underlying stock increased by 2 points and the call option increased by 1 point, the call option would have a delta of .5. As an in-the-money option near expiration, it advances to a delta of 1.
Demand Deposit
A type of bank account whereby the account balance can be withdrawn by the depositor without prior notice to the bank (e.g. checking accounts). The balance can be withdrawn via check, automatic teller machine or by transfers to other accounts using a PC or telephone. The Federal Reserve uses demand deposits as a primary indicator as to when to implement monetary policy because they are the largest component of the money supply.
Demand-Pull Inflation
Price increases as a result of supply not meeting demand.
DeMinimus Exception
A provision within Regulation T of the Federal Reserve that allows margin deficiencies of $1000 or less. Brokers may not have to liquidate securities to correct the situation. However, a broker does have to obtain the funds within a reasonable period. This rule is in effect for cases in which the client may be unavailable because of vacations or some other extraordinary event.
Denomination
Face value of securities, currency and coins.
Depletion Accounting
An accounting practice that allows for charges against earnings based on the amount of assets taken out of reserves to reductions in taxable income. This practice is only available to companies that extract natural resources such as oil and gas.
Deposit
1: Securities put into a customer's account at a financial institution (e.g., brokerage firm).
2: Cash, checks, or drafts credited to a customer's account at a financial institution (e.g., bank checking and saving accounts).
3: Money put down as an indication of good faith in contracts and vendors, such as utility and telephone companies, to protect the other party against nonpayment, property damage and contract defaults.
Depository Trust Company (DTC)
A central securities certificate repository that is a member of the Federal Reserve System and is industry-owned. The New York Stock Exchange is the majority owner. DTC members deliver securities to each other via computerized debit and credit entries. This reduces the need to actually move paper certificates.
Depreciation
A decrease in the value of an asset in terms of real factors, such as wear and tear. Fixed assets depreciate in accounts by periodically decreasing their value on the ledger book or balance sheet.
Devaluation
The decrease in value of a country’s currency against another currency/currencies or the price of gold. Devaluation is applied based on the legal/official decrease of the exchange rate or parity price of a currency with respect to another currency.
Diagonal Spread
An investment strategy that entails buying or selling of two different option positions of the same class (two call positions or two put positions in the same stock). Both the strike prices and the expiration dates of the options are different. For instance, a three month ABC call sold with a strike price of 30 and a two month call sold with a strike price of 25. Investors gain or lose as the difference in price narrows or widens.
Digits Deleted
Specification on the exchange tape indicating that some digits are not being displayed because the tape is delayed. For example, 15 1/4...15 3/8...26 1/8 becomes 5 1/4... 5 3/8... 5 1/8.
Dilution
The effect on book value per share and earnings per share if all stock options or warrants are exercised or all convertible securities are converted.
Dip
After a security's prolonged up-trend, a small drop in its price. Analysts frequently advise investors to buy on dips because it is seen as only a temporary price weakness.
Direct Participation Program (DPP)
A business venture, usually organized as a limited partnership, that is structured to pass-through income and "tax losses" of the underlying investments to investors. However, its use as a tax shelter has been severely reduced by tax legislation.
Direct Placement
Securities directly sold to one or more professional investors.
Direct tax
Tax imposed on income from individuals and corporations, also known as taxpayers.
Director
An individual elected by corporate shareholders to serve on that corporation's Board of Directors. The Board of Directors decide when dividends will be paid, appoint the corporation's president, vice president and all other officers.
Discharge of Bankruptcy
Order ending bankruptcy proceedings. It usually releases the debtor of any legal liability for specific obligations.
Discharge of Lien
Order removing a lien on property after the claimant has been paid or the debt is otherwise satisfied.
Disclosure Document
A pamphlet published by the Options Clearing Corporation (OCC) that outlines the risks and uses of options trading.
Discount
1: A bond that trades in the market at a price below its face or redemption value. A bond selling below par is said to be "selling at a discount."
2: Securities, such as treasury bills, that are issued for less than their face value and mature at face value. At maturity, the difference between the purchase price and the face value is the interest.
3: To evaluate a security's current price, all applicable news and information about the corporation are used.
4: Relationship between two countries' currencies. For example, the French Franc may sell at a discount to the German Mark.
Discount Bond
Bond trading for less than its redemption value.
Discount Broker
A brokerage firm that executes buy and sell orders at lower commission rates than those charged by a full service broker.
Discount Rate
The rate of interest charged by a Federal Reserve Bank on a loan to a member bank, using government securities or eligible paper as collateral.
Discount Window
Federal Reserve location where banks can borrow money at the discount rate.
Discount Yield
Yield on a security sold at a discount--most notably T-bills. To calculate the annual yield, divide the discount by the face amount and multiply that number by the approximate number of days in the year divided by the number of days to maturity.
Discounted Cash Flow
Future value of anticipated cash receipts and expenditures on a specified date. It is computed using net present value (NPV) or internal rate of return (IRR) and is a consideration in analyses of capital and securities investments. The NPV method uses a discounted rate of interest based on the marginal cost of capital to future cash flows to bring them into to the present. The IRR formula finds an investment's average return for the life of the investment. It identifies the discount rate that matches the present value of future cash flows to the investment's cost.
Discounting the News
The act of bidding a stock's price up or down in the anticipation of news about the stock's corporate financial outlook. This process may occur regardless of whether the news is good or bad.
Discretionary Account
A type of brokerage account whereby clients authorize their broker to buy and sell securities or commodities when the broker deems it is appropriate. The broker will decide when and which securities, the amount of shares, and price to be paid or received without the client's prior knowledge or consent. Some clients may set guidelines for the broker, such as limiting the type of securities in which to invest.
Discretionary Trust
Mutual fund or unit trust where the management decides on the best way to invest the assets. The fund is not limited to a specific kind of security.
Discretionary trust fund
Vests trustees with special discretionary power with regard to management and allocation of the estate to beneficiaries.
Disinflation
A process that commonly occurs during a recession whereby price increases slow down--as sales decrease, retailers may not be able to pass on higher prices to customers.
Disintermediation
The withdrawal of money from low yielding financial accounts, such as saving accounts, and the reinvestment into higher yielding securities such as Treasury bills. Banks, in an effort to keep the money, may pay depositors higher rates. In order to afford the higher rate, banks will then charge their borrowers higher interest rates. This can possibly lead to tight money and reduced economic activity.
Disinvestment
Capital investment shrinkage caused by a firm's failure to maintain or replace capital assets being used up or by the firm's sale of capital goods such as equipment.
Disposable Income
Income that remains after tax payments. This money may be spent on essentials (e.g., food and shelter), nonessentials (e.g., dining in a restaurant) or it can be saved.
Disproportionate
An arrangement in an oil and gas direct participation program (DPP) whereby the general partner carries a portion of the program's cost in return for a larger percentage of the income.
Distributing Syndicate
Group of brokerage firms or investment bankers that work together to expedite the distribution of securities in an offering.
Distribution Area
Price range in which a security trades for an extended time period. Distribution areas are a factor in a technical analysts' prediction of when a security may decline from that price range. To avoid pushing a security's price below its range, a seller will want to be mindful not to sell below it. Accumulation of shares in the range aids in the stability of the security's price.
Distributions
1: The payment, to investors, of realized capital gains on securities within the portfolio of a mutual fund or closed-end investment company.
2: Sale of a large block of securities over a period to avoid a decline in their prices. Technical analysts consider distribution patterns to predict when the security's price will fall.
District Business Conduct Committee (DBCC)
Financial Industry Regulatory Authority (FINRA) committee that has jurisdiction in handling complaints against, or violations by FINRA members within its district.
Diversification
Spreading risk by placing assets in different types of investments (i.e., mutual funds, stocks, bonds, etc.) and various companies in different industry groups (i.e., pharmaceutical, utility, airline, etc.).
Diversified Investment Company
Term used for either closed or open-ended mutual funds or unit trusts that invest in many different kinds of securities and companies. Under the Investment Company Act of 1940, an investment company, with respect to 75% of its portfolio, may not have more than 5% of its assets invested in the securities of any one issuer and may not own more than 10% of the voting shares of any one issuer.
Divestiture
Disposal of an investment by sale, liquidation or other means. This legal term is also used to describe a corporation's systematic distribution of large blocks of another company's stock which were being held as an investment.
Divided Account
A type of a new issue syndicate--also known as a "Western Account"--where all members are liable for selling a percentage of the issue commensurate to their participation. The member's liability ends once it has sold its percentage of the issue.
Dividend
Distribution of a company's earnings to its shareholders, usually in the form of a quarterly check. The company's board of directors authorize and determine the amount of the dividend. Dividends are taxed as income in the year they are received by the shareholder. A mutual fund dividend is paid out of income and the shareholder's tax is dependent on whether the distributions originated from interest income, capital gains, or dividends received by the fund
Dividend Capture
Investment strategy whereby the investor buys the stock roughly two weeks before it goes ex-dividend and then sells it about two weeks after it has gone ex-dividend in order to collect the dividend and make a small profit on the trade. On the stock's ex-dividend date, its price will drop by the amount of the dividend. The theory is that the stock's price will work its way back up to the price it was at before the ex-dividend date. This allows the investor to sell slightly above the purchase price. Thus, the investor is able to collect the dividend and realize a small capital gain in about four weeks. Also referred to as a "dividend rollover plan."
Dividend Discount Model
Mathematical model used to identify undervalued stocks. It determines the price that a stock should be selling at based on the discounted value of projected future dividend payments.
Dividend In Arrears
Cumulative preferred stock dividends that are due but have not been paid.
Dividend Payout Ratio
Percentage of earnings paid in cash to shareholders. It is calculated by dividing the dividends paid on common stock by the earnings per share. In general, a corporation with a higher payout ratio will be more mature. A company in a growth phase usually reinvests all earnings and pays little or no dividends.
Dividend Reinvestment Plan (DRIP)
A program in which a dividend paying company (especially mutual funds) will automatically reinvest an investor's dividend to purchase additional shares of the company's stock. The dividend is still taxable by the IRS. In participating in a DRIP, investors use dollar cost averaging to increase their amount of capital in the stock.
Dividend Requirement
The amount of annual earnings needed to pay a preferred stock's contracted dividend.
Dividend Yield
The annual percentage of return that the dividend provides to the investor on either common or preferred stock-often referred to as just "yield." The yield is calculated by dividing the annual cash dividend per share by the stock's market price at the time of purchase.
Dividends Payable
Dollar amount of dividends that are obligated to be paid once a dividend is declared by the board of directors. The dollar amount is listed as a liability in the annual and quarterly reports.
DJIA (Dow Jones Industrial Average)
Average of the prices of 30 well-known, predominantly blue-chip, industrial stocks. The following 30 stocks make up the DJIA as of February 1995: Allied Signal; Alcoa; American Express; A T & T; Bethlehem Steel; Boeing; Caterpillar; Chevron; Coca Cola; Disney; Dupont; Exxon; General Electric; General Motors; Goodyear; IBM; International Paper; Kodak; McDonalds; Merck; 3M; JP Morgan; Philip Morris; Proctor Gamble; Sears; Texaco; Union Carbide; United Tech; Westinghouse and Woolworth.
DJTA (Dow Jones Transportation Average)
Average of the prices of 20 representative transportation companies.
DJUA (Dow Jones Utility Average)
Average of the prices of 15 geographically representative gas and electric utility companies.
DNR (Do Not Reduce)
A designation used on an order (specifically--buy limit, sell stop and sell stop-limit orders) to specify that an order's limit price should not be reduced by the amount of the dividend. When the stock goes ex-dividend, its price is reduced by the amount of the cash dividend. DNRs only apply to cash dividends.
Dollar Bond
1: Municipal revenue bonds that are quoted and traded at a dollar price rather than at a yield to maturity.
2: Bonds that are issued in the United States by foreign companies and denominated in US dollars.
3: Bonds that are issued outside the United States and denominated in US dollars.
Dollar Cost Averaging
An investment method that involves consistently buying at regular intervals equal dollar amounts of a security, rather than a certain number of shares, regardless of the price. As a result, more shares are bought when prices are low than at high prices. Thus, the average cost is less than the average of the prices paid. However, the method does not guarantee a profit. The investor only profits if the sale price exceeds the average cost per share.
Dollar Price
A bond's price stated as a percentage of face value. For example, a dollar price of 95 represents 95% of face value or $950 per $1,000 face value.
Double Bottom
Used in technical analysis, it is chart pattern of a stock's prices showing a drop in price, then a rebound, then another drop to the same low price. The pattern usually means the stock has support at that low price and should not decline further. However, if the stock's price does drop through that same low price, the security is expected to reach a new low.
Double Taxation
Corporate earnings taxed at both the corporate level and again as a stockholder dividend.
Double Top
Used in technical analysis, it is chart pattern of a stock's prices showing a rise to a high price, then a drop, then rebound to the same high price. The pattern usually means the stock is resisting a move to go higher. However, if the stock's price does move through that same high price, the security is expected to achieve a new high.
Double-Barreled Bond
A municipal revenue bond that has two separate entities making a financial commitment. The project's revenues provide the initial security and the secondary guarantee is provided by the general obligation taxing powers of the issuer. To illustrate, a revenue bond would be double-barreled if a highway authority issues a bond that is secured by toll revenues and if the state also secures the bonds. Thus, if highway usage is low and toll revenues are insufficient to cover principal and interest payments, investors are safeguarded against default because of the state's guarantee.
Dow jones
An index showing stock performance of the top 30 corporations from various industries in the United States, during a trading session in the New York Stock Exchange.
Dow Jones Composite
Combination of the Dow Jones Industrial Average (DJIA), Dow Jones Transportation Average (DJTA) and the Dow Jones Utility Average (DJUA).
Dow Theory
Market theory whereby a major stock market trend must be corroborated by a similar movement in the Dow Jones Industrial Average and the Dow Jones Transportation Average. A trend is confirmed only when both Dow Jones indexes obtain new highs or lows. If they do not, the market will return to its previous trading range. Believers of the Dow Theory frequently disagree on when a true trend is taking place.
Downside Risk
An assessment as to the extent that a security could decline in value--considering all possible factors that could affect the security's market price.
Downtick
Also called "minus tick," the sale of a listed stock at a price that is less than the previous sale price. For example, if a stock traded at $12 a share, the next trade would be a downtick if it is at 11 7/8.
Downturn
A decline in a stock market or economic cycle.
DPP (Direct Participation Program)
A business venture, usually organized as a limited partnership, that is structured to pass-through income and "tax losses" of the underlying investments to investors. However, its use as a tax shelter has been severely reduced by tax legislation.
Draining Reserves
Actions that are taken by the Federal Reserve to reduce the money supply in order to cut the funds available to banks for lending purposes. The Fed accomplishes this by:
* Raising reserve requirements--banks will need to keep more money on deposit with Federal Reserve banks;
* Escalating the rate that banks borrow to maintain reserves--making it unattractive to drain reserves by making loans; and
* Selling bonds at such attractive rates that dealers will reduce their bank balances to buy them.
DTC (Depository Trust Company)
A central securities certificate repository that is a member of the Federal Reserve System and is industry-owned. The New York Stock Exchange is the majority owner. DTC members deliver securities to each other via computerized debit and credit entries. This reduces the need to actually move paper certificates.
Dual Listing
A security that is listed on more than one exchange--either the New York Stock Exchange and a regional exchange or the American Stock Exchange and a regional exchange. However, a security may not be listed on both the New York and American stock exchanges. Being dual listed increases the liquidity of a security.
Dual Purpose Investment Company
An exchange listed closed-end investment company that issues two classes of shares--income and capital. The income (preferred) shareholders receive all the income (dividends and interest) from the portfolio, and the capital (common) shareholders receive all the capital gains. As dual purpose funds are not highly traded, many analysts do not follow them closely.
Due Bill
A written notification that either dividends, interest, or other distributions are owed by the seller to the buyer or vice versa. For example, a security is purchased prior to its ex-dividend date and the seller does not deliver the security until after the dividend's record date. The security is delivered with a due bill attached because the seller will receive the dividend in which he is not entitled. The seller's name was on the company books even though he no longer owned the security. The due-bill is a notification that the purchaser is entitled to receive the dividend. Conversely, if a security is purchased ex-dividend (without dividend) and the security is delivered before the record date, the buyer's name will be on the company books on the record date. The buyer will receive a dividend in which he is not entitled. The buyer signs a due bill stating that the dividend he receives is payable to the seller.
Due diligence
Rules and procedures required by law to verify information provided by customers who wish to establish a business relationship with any financial institution. These rules and procedures seek to monitor, report and/or avoid any suspicious activities that may involve money laundering or diversion of funds for illegal activities, including terrorism.
Dumping
Event that occurs when a seller offers a large amount of stock for sale with no concern as to how it will affect the stock's price or the market.
Dutch Auction Preferred Stock
Type of adjustable rate preferred stock whereby the dividend to be paid is determined in a Dutch Auction process that occurs every seven weeks. Shares are bought and sold at face values that range from $100,000 to $500,000 per share.
DVP(Delivery versus payment)
Securities industry procedure whereby the sold securities are delivered to the buyer's bank in exchange for payment. From the seller's perspective, it is called "receive versus payment." Institutional customers customarily use delivery versus payment to make settlement on transactions. It is also referred to as COD (cash on delivery) transactions.
E
An abbreviation used in stock listings of newspapers to indicate that items, such as dividends, were declared or occurred in the preceding 12 months.
Each Way
Commissions made by a broker who was involved in both the buy and the sell side of a transaction.
Early Withdrawal Penalty
An assessment charged to an investor when they withdraw their money from a fixed-term investment before its maturity. For example, if investors who have a one year certificate of deposit withdraw their money after eight months, the banking institution would assess a penalty.
Earned Before Taxes
A corporation's earnings after bond interest has been paid but before it pays taxes.
Earned Income
Income generated from employment, pensions or annuities--for example, wages, salary, commissions, bonuses, IRAs, etc.
Earnings
The amount of profit a corporation receives after expenses and taxes are paid.
Earnings Before Interest and Taxes (EBIT)
A corporation's earnings before it pays bond interest and taxes.
Earnings Momentum
A corporation's earnings per share that continuously increases from one period to another. The usual effect is that a stock's price will rise. A corporation has earnings momentum, for instance, when its earnings per share are 24% this year, with the previous year being 16%. Its stock should see a rise in its price.
Earnings Per Share (EPS)
Amount of a corporation's earnings that are apportioned to each outstanding share of common stock. It is calculated by dividing net income minus preferred dividends and bond interest by the number of outstanding common shares. If all common stock equivalents--such as convertible bonds, preferred stock, rights and warrants--have been exchanged into common stock, earnings per share is considered to be "fully diluted."
Earnings Price Ratio (EPR)
A corporation's earnings per share related to its current stock price. It is used to compare the attractiveness of stocks, bonds, and money market instruments--also called "earnings yield."
Earnings Report
A corporation's profit and loss statement that displays its earnings or losses for a specific time period--also called an income statement. The report provides details on revenues, expenses, and the net result.
Eastern Account
An underwriting account for a new issue of municipal securities whereby the underwriting group, as a whole, assumes financial responsibility for successful distribution of the issue--also called an "undivided account." A member's profits are contingent upon their percentage of participation in the account regardless of how much they sell. Member A, for example, has a 15% participation and sells 20% of the bonds. If the group sells only 90% of the bonds, member A is still responsible to sell unsold bonds equal to the same percentage of his original participation--that is 15%.
EBIT
A corporation's earnings before it pays bond interest and taxes.
Econometrics
Mathematical computerized models used to illustrate the relationship between key economic conditions such as employment rates, interest rates, and government policies. It is then used to conduct analyses on various economic situations. An econometric model, for example, might be used to show the relationship between consumer spending and unemployment rates.
Economic Growth Rate
Annual percentage change in the gross national product (GNP). If the rate rises in two consecutive quarters, it is considered to indicate an expanding economy. If the rate drops in two consecutive quarters, it is considered to mean a recession. A "real economic growth rate" is obtained when the rate is adjusted for inflation.
Economic Indicators
Key statistics indicating the direction (expanding or contracting) of the economy. Some indicators are the unemployment rate, inflation rate and balance of trade.
Economies of scale
The process through which production unit costs decrease by increasing the number of units produced.
Endorse
The transfer of an asset's ownership by signing the back of a negotiable instrument. For instance, an individual signs the back of a stock or bond certificate to transfer ownership.
Energy Mutual Fund
Mutual fund that aims to profit from stock investments in companies whose business is energy related. For example, oil, gas, solar energy, and coal companies.
Engineering Report
An analysis and a report completed by an engineering firm as part of the feasibility study for a proposed municipal revenue issue.
Entrepreneur
Individual who starts a new business. Venture capital is often used to finance the startup costs in return for an equity share. Once the business is established, an entrepreneur may choose to raise additional capital by selling equity shares to the public through an initial public offering.
Environmental Fund
Mutual fund that aims to profit from stock investments in companies that have a role in improving the environment, or are considered environmentally sound.
EPR (Earnings Price Ratio)
Amount of a corporation's earnings that is apportioned to each outstanding share of common stock. It is calculated by dividing net income minus preferred dividends and bond interest by the number of outstanding common shares. If all common stock equivalents--such as convertible bonds, preferred stock, rights and warrants--have been exchanged into common stock, earnings per share is considered to be "fully diluted."
EPS/T-Bill Yield Ratio
Monthly ratio of the Standard & Poor's (S & P) 500 earnings per share yield to the 3 month Treasury bill yield. It is calculated by dividing the latest 12 month earnings per share of the S&P 500 Index by the index's monthly average price for the current month. This will determine "earnings yield." Once the earnings yield is obtained, it is divided by the average 3 month T-bill yield for the same time period. If the ratio is 1.2 or greater, it is considered a good time to buy stocks. If the ratio is .9 or lower, it is considered a good time to sell stocks.
Equalizing Dividend
Dividend paid to investors to make up for lost income because the quarterly dividend payment schedule was changed.
Equilibrium Price
Price at which the supply of goods equals demand.
Equipment Trust Bond
A type of bond that is commonly issued by transportation companies to pay for new equipment. Title to the equipment, such as a rail car, is held by a trustee, usually a bank, until the bond is repaid. An equipment trust certificate gives the bondholder first claim on the equipment in the event that interest and principal payments are in default.
Equity
1: Ownership interest in a business endeavor; net worth.
2: Ownership interest in a corporation through the purchase of shares of stock.
3: A customers ownership in an account at a brokerage firm. The customer's equity is the account's market value of long positions (commonly just referred to as "long market value") minus the account's debit balance, or the credit balance minus market value of short positions ("short market value").
Equity Financing
A corporation's issuance of shares of common or preferred stock to raise money. Equity financing is commonly done when its per share prices are high--the most money that can be raised for the smallest number of shares.
Equity Funding
An investment that combines a life insurance policy with a mutual fund. The fund shares are used as collateral for a loan to pay the insurance premiums. Equity funding gives the investor the insurance protection benefits along with potential investment appreciation.
Equity REIT
An investment trust in which it has ownership in the property bought within the trust. REIT is an abbreviation for "real estate investment trust." Shareholders invested in equity REITs receive dividends on a building's rental income and earn appreciation on properties sold at profit.
Equivalent Taxable Yield
Comparison between a corporate bond's taxable yield and a municipal bond's tax-free yield. Depending on the investor's tax bracket, the after-tax return may be greater with a municipal bond than with a corporate bond that has a higher interest rate. The equivalent taxable yield is equal to the municipal yield divided by 100% minus the tax bracket. For an investor who is in a 28% tax bracket, for example, a 9% municipal bond would have an equivalent taxable yield of 12.5% (9%/72%).
ERISA (Employee Retirement Income Security Act of 1974)
Federal law passed in 1974 that regulates the establishment, management, operation, and funding of most non-government pension and benefit plans.
ERISA (Employee Retirement Income Security Act of 1974)
Federal law passed in 1974 that regulates the establishment, management, operation, and funding of most non-government pension and benefit plans.
Erroneous Report Rule
A New York Stock Exchange rule dictating that a client must accept a valid execution, regardless of any reporting mistakes.
Escheat
Abandoned property (e.g., bank account balances) that is turned over to the state. This will also occur when a person dies without a will. If the owner or heirs later appear, the property can be claimed from the state.
Escrow
Money, securities or other property that is held by a third party until a contract's conditions are met.
Escrow Receipt
A certificate issued by a bank guaranteeing that the options writer has the option's underlying securities on deposit at the bank and that they will be delivered to the broker if the option is exercised.
ESOP (Employee Stock Ownership Plan)
A plan that encourages employees to purchase stock of their employer. By participating in the plan, employees are able to partake in the company's management.
Estate
Real property of a company or individual, defined as the sum of all assets less the sum of all liabilities. The estate is everything an individual or corporation possesses before it is distributed to the beneficiaries. It is the sum of assets less the sum of all liabilities: debts, pending liabilities, tax liabilities.
Estate distribution agreement
The process of distributing the estate of a deceased owner. First all debts and taxes are paid, then property is transferred to the heirs.
Estate planning
A process directed toward orderly handling of the administration and distribution of an estate when the owner dies. Depending on the size of the estate and the customer’s goals, estate planning should include preservation and growth of the estate for the enjoyment of the heirs, and should also establish all the means for avoiding a reduction in the size of that estate.
Estate Tax
Tax imposed by a state or the federal government on assets left to heirs in a will. There currently (as of February 1995) is not an estate tax on property transfers between spouses and assets up to $600,000 are excluded.
Estate Tax Anticipation Bonds
Specified US Treasury bond issues that are accepted at par value for estate tax payments if the bonds were owned by the decedent at the time of death. Also called "flower bonds," the last of these bond issues will mature in 1998.
Estimated Tax
The anticipated amount of tax for the coming tax year that is based on the higher of regular or alternative minimum tax (AMT) minus any tax credits. Persons or entities, for whom an employer does not withhold a fixed percentage of income, need to calculate estimated tax and make quarterly payments. Total withholdings and estimated taxes paid must equal the prior year's actual tax or 90% of the estimated year's tax.
ETF
ETF (Exchange Traded Funds) are investment funds traded in capital markets. These funds are made up of assets such as bonds and stocks, traded throughout the day through a stockbroker. Most ETFs are indexed funds.
Eurobond
Bond that is denominated in a specific country's currency and sold to investors outside the country whose currency is used. The bonds are usually issued by large underwriting groups from many countries. The entity issuing the bonds does not have to be from the country whose currency is being used. Eurobonds provide an important capital source for multinational companies and foreign governments.
Eurocurrency
Money--also called "Euromoney"--deposited by corporations and governments in banks not located in their home countries. These banks are called "Eurobanks." The currencies or the banks are not necessarily European. For example, dollars deposited in a Japanese bank are considered to be Eurocurrency.
Eurodollar
US currency held in banks outside the US, primarily in Europe.
Eurodollar Bond
Bond paying interest and principal in Eurodollars--US dollars held in banks outside the US. Eurodollar bonds do not have to register with the Securities and Exchange Commission.
European Style Exercise
A stipulation that only allows holders to exercise some US listed and almost all European options on the last day (or the day before) they expire.
Evaluator
An independent expert who assesses a property's value for which there is limited trading--such as antiques or rarely traded stocks. For the evaluator's services, either a flat fee may be charged or a percentage of the item's appraised value.
Event Risk
In the case of an associated takeover development, such as additional debt issuance, risk that a bond's credit quality will decline and a lower rating will be justified. Corporate bonds that include protective covenants, such as poison puts, are given event risk covenant rankings by Standard & Poor's. Ratings range from E-1 (highest) to E-5 (lowest). Covenant rankings are supplemental to basic bond ratings.
Ex-All
A purchase of a stock while it is trading without dividends, rights, warrants, or any other privileges connected with that stock.
Ex-Dividend
A synonym for "without dividend," it is the time period between a dividend announcement and payment during which an investor who buys the stock's shares is not entitled to receive the dividend. For example, a dividend may be declared as payable to holders of record on the company's books on a given Friday (the record date). The New York Stock Exchange would declare the stock "ex-dividend" as of the opening of the market on the preceding Wednesday (two business days prior to the record date). Therefore, an investor who buys the stock on or after that Wednesday is not be entitled to that dividend.
It is common for a stock's price to increase by the dividend amount as the ex-dividend date gets closer. It then usually drops by the dividend amount after the ex-dividend date. A stock that is ex-dividend is marked with an "x" in the stock table listings in newspapers.
Ex-Legal
Situation in which a municipal bond does not have a legal opinion printed on it. Buyers of these bonds must be forewarned that there is not a legal opinion.
Ex-Rights
Brokerage lingo meaning "without rights." During a rights offering, if the common stock is purchased on or after the ex-rights date (four business days prior to the record date), the investor does not receive rights that enable an investor to buy the company's common stock at a discount from the prevailing market price. As a rule, after the ex-rights date, the rights will trade separately from the common stock.
Ex-Warrants
Brokerage lingo meaning "without warrants." An investor who buys a stock that is ex-warrants are not entitled to the stock's warrants. An investor, for example, who buys a stock on April 25 that has gone ex-warrants on April 23, will not be entitled to receive those warrants. The warrants belong to the shareholder of record on April 23. Warrants permit the holder to buy stock at a specified price at a future date.
Exact Interest
A financial institution's interest payments in which the interest is calculated on a 365 day basis as opposed to a 360 day basis. The difference--the ratio is 1.0139--is substantial when calculating daily interest on large amounts of money.
Excess Margin
Equity in a customer's margin account at a brokerage firm that is above the Regulation T minimum or the New York Stock Exchange maintenance requirement. With a Regulation T margin requirement of $50,000 and an exchange maintenance requirement of $25,000, for example, the customer whose equity is $100,000 would have excess margin of 50,000 and 75,000, respectively.
Excess Profits Tax
Additional federal taxes levied on business earnings. The purpose of the tax is to increase national revenues during a time of national emergencies.
Exchange Distribution
Block trade completed on an exchange floor. An investor who wishes to sell a large block of stock in one transaction will request a broker to solicit and group orders. The seller sells the securities to the buyers all at the same time, and the trade is announced on the broad tape as an exchange distribution. The seller pays a special commission to the executing broker.
Exchange for Physical Program (EFP)
A trading technique involving index futures and the stocks composing the index. Complex computer programs show deviations in the spread between the futures and the stocks. The trader attempts to profit through arbitrage--buying the index future and selling the stocks short, or vice versa. As the spread returns to its norm, the positions are closed out at a profit.
Exchange Privilege
A mutual fund feature that allows a shareholder to convert from one fund to another fund within the same mutual fund family. For example, in a bull market an investor placed their money in an aggressive growth fund. If they expected the market to take a downturn, an exchange privilege would allow them to move the money to a conservative fund such as a money market. Mutual funds do not usually charge when an investor takes advantage of an exchange privilege. However, some funds do have specific parameters as to when or how many times an investor may use the exchange privileges.
Exchange Rate
Price at which the currency of a particular country can be converted into another country's currency. Exchange rates usually vary slightly each day and are influenced by a wide range of economic factors.
Execution
Securities term to used to indicate that a buy or sell order has been completed.
Executor
Any individual(s) appointed in a will, and confirmed by the court to administrate and distribute assets within the decedent's estate.
Exempt Transaction
A security transaction that is excluded from registration requirements.
Exercise
In options trading, the holder of a long contract has the right to buy (call option) or sell (put option) the underlying shares at the exercise price by notifying the option seller (writer). In making notification to the seller, the holder is exercising the option contract.
Exercise Limit
Maximum number of option contracts of the same class that can be exercised within five consecutive business days. Stock options usually have an exercise limit of 2000 contracts.
Exercise Notice
Notification by a broker that a client who holds a long option wants to exercise a right to buy (if call) or sell (if put) the underlying stock in an option contract. The notice is sent to the Options Clearing Corporation (OCC) which in return notifies the option seller (writer) to make sure that the stock is delivered.
Exercise Price
Dollar value per share at which the underlying security in a long option contract can be exercised over the specified period. If it is a call option, when exercising, the underlying security is bought, and if it is a put option, it is sold. The holder of 1 ABC January 65 put, for example, can exercise the contract before January's expiration date. Thus, when exercising the contract, the holder sells 100 shares of ABC at the exercise or strike price of $65.
EXIM (Export-Import Bank)
A bank that facilitates US trade with foreign countries by providing financing for exports and imports. It borrows money from the US Treasury and is backed by the full faith and credit of the US Government.
Exit Fee
Mutual fund lingo used when a penalty (in cents per share) is charged to investors who redeem their investment within the fund's first few years of operation. Not to be confused with a back-end load.
Expiration
The last day on which an option can be exercised. If it is not, the option is said to have "expired worthless."
Expiration Cycle
Cycles used to designate expiration dates in options trading. Corporations and indexes that have options trading are assigned a specific cycle to follow. There are three cycles: 1: January, April, July, October; 2: February, May, August, November; 3: March June September, December. Only three of the four months in a set are traded at one time. For example, when February options expire, trading in November options will begin.
Expiration Date
The date on which an option expires. In most cases, an options expiration date is on the Saturday immediately following the third Friday of the expiration month. However, the last day the option can be traded is the third Friday of the expiration month.
Export-Import Bank (EXIM)
A bank that facilitates US trade with foreign countries by providing financing for exports and imports. It borrows money from the US Treasury and is backed by the full faith and credit of the US Government.
External Funds
Outside funds infused into a corporation to supplement the firm's cash flow. They are used for expansion and working capital needs. The external funds can originate from a bank loan, a bond offering, or from venture capitalists.
Extra Dividend
A stock or cash dividend paid to shareholders. It is in addition to the company's regular dividend. An extra dividend may be paid by a company after an especially profitable year to reward its shareholders.
Extraordinary Item
An irregular event, such as a division write-off or acquisition of another company, that needs to be explained to shareholders in an annual or quarterly report. Earnings will normally be calculated and reported before the effect and after the effect of extraordinary items.
Face Amount Certificate
A debt instrument issued by a face amount certificate company, which is a type of investment company. Face amount certificates offer a predetermined rate of interest and may be purchased in lump-sums, or more commonly, in periodic installments. Certificate holders are entitled to redeem their certificates at maturity for the face amount, or they may redeem them prior to maturity for their surrender value.
Face Amount Certificate Company
One of three basic types of investment companies defined by the Investment Company Act of 1940. This kind of investment company issues debt certificates, called face amount certificates, at a predetermined rate of interest to investors. They may be purchased in lump-sums, or more commonly, in periodic installments. Certificate holders are entitled to redeem their certificates at maturity for the face amount, or they may redeem them prior to maturity for their surrender value.
Face Value
The value of a bond (or other debt instrument) that appears on the front, or face, of the certificate. Although a bond's price may change due to market conditions, the face value does not change. At maturity, the issuer redeems the bond at the face value amount. If the bonds are retired before maturity, the bondholder usually receives a slight premium over the face value. The face value is also the amount used to compute interest payments. For instance, a 10% bond with a face value of $1,000 pays $100 interest annually. Corporate bonds usually are issued with $1,000 face values, municipals with $5,000 face values, and federal government bonds with $10,000 face values. Other terms for face value include par value, nominal value and principal amount.
Fail Position
A position that is the result of a broker-dealer's failure to settle a transaction with another broker. Generally a broker has a fail when his client fails to either make payment or deliver securities in time to meet the settlement date of a trade. A fail position may be either a fail to deliver or a fail to receive.
Fail to Deliver
A situation that occurs when the broker-dealer on the sell side of a transaction does not deliver securities to the broker-dealer on the buy side by the settlement date of the transaction. Usually this occurs because the selling broker-dealer has not received the certificates from the selling customer. The buying broker-dealer will not pay for the securities until the fail to deliver is eliminated by delivery of the certificates.
Fail to Receive
A situation that occurs when the broker-dealer on the buy side of a transaction has not received securities from the broker-dealer on the sell side by the settlement date of the transaction. The buying broker-dealer will not pay for the securities until the fail to receive is eliminated by delivery of the certificates.
Fair Market Value
The price of an asset or service as determined by the buyer and seller of the asset or service, where both parties have sufficient information to make a rational decision.
Fallen Angel
A bond that was rated investment grade (AAA to BBB) at issuance, but has fallen below investment grade (BB or lower). Bonds rated below investment grade are called junk bonds.
Family of Funds
A group of mutual funds in which each fund has a different objective, yet all are managed by the same investment company. Usually shareholders of one fund can switch their money into one of the family's other funds, sometimes without incurring a charge. This makes it easier for investors to move their assets in response to changes in the market or in their needs. There may be tax consequences when money is transferred from one fund to another.
Farther Out; Farther In
Terms used to describe the length of option contracts relative to the present. For example, in February, an option expiring in May would be farther in than an option expiring in August. The August option, on the other hand, would be farther out.
Federal Agency Security
A debt instrument issued by an agency of the federal government such as the Federal National Mortgage Association. Although these securities generally have high credit ratings due to the fact that they are sponsored by the federal government, they are not backed by the full faith and credit of the U.S. government, unlike Treasury securities.
Federal National Mortgage Association (FNMA)
A government-sponsored corporation that purchases mortgages from lenders, repackages them and sells them. The agency, which is known as Fannie Mae, deals in both government-backed and conventional mortgage.
Federal Reserve Board (FRB)
The governing body of the Federal Reserve System. The Board is comprised of seven members appointed by the President and subject to confirmation by the Senate. In order to ensure members' independence from political influence, each member serves a 14-year term. The Board is responsible for setting monetary policy for the U.S. and has the authority to determine bank reserve requirements, set the discount rate, regulate the availability of credit, and control the purchase of securities on margin.
Federal Reserve System
A system established by the Federal Reserve Act of 1913 to manage the monetary and banking system within the U.S. The Federal Reserve System, also known as the Fed, is broken up into 12 regions and is governed by the Federal Reserve Board. National banks are stockholders of the Federal Reserve Bank in their region.
The Fed is responsible for regulating the national money supply, setting bank reserve requirements, controlling the printing of currency and acting as a clearinghouse for the transfer of funds throughout the banking system. The Fed also establishes and enforces bank regulations.
Fictitious Credit
The credit balance in a margin account is known as a fictitious credit because it cannot be withdrawn by the customer since it is held as collateral to secure the broker's loan of funds and securities to the customer. A fictitious credit is comprised of the proceeds from short sales and the margin requirement, which is established by Regulation T of the Federal Reserve Board. A free credit balance, on the other hand, may be withdrawn at any time.
Fiduciary
Person, company, or association entrusted with the control of assets for the benefit of another, known as the beneficiary. Most states have laws governing the conduct of fiduciaries. Some states maintain a list of securities, known as the legal list, which are permissible investments for fiduciaries acting on behalf of their beneficiaries. Other states simply use the prudent man rule which requires that fiduciaries act as a prudent man or woman would with regard to how they invest on behalf of their beneficiary. In addition, the document appointing the fiduciary will establish parameters and guidelines for their activities with respect to the beneficiary's assets. Some examples of fiduciaries are executors of wills, administrators of estates, receivers in bankruptcy, trustees, and custodians for minors.
FIFO (First In, First Out)
Method of accounting for the purchase and sale of securities for tax purposes whereby the first security purchased is assumed to be the first security sold. For instance, under FIFO, or first in, first out accounting, an investor who purchased 100 shares of XYZ in January and another 100 shares of XYZ in March, and then sold 100 shares of XYZ in November, would have sold the first 100 shares bought in January. In contrast, the LIFO method, or last in, first out would allocate the shares bought in March as the shares sold.
Fill
The execution of a client's order to buy or sell a security. An order is considered filled when the total number of shares is completely bought or sold. If less than the order's full amount is executed, it is known as a "partial fill."
Fill or Kill (FOK) Order
A limit order to buy or sell a security in which the client instructs the broker to execute the order immediately in its entirety. If the order cannot be executed, it is canceled. FOK orders are usually used when a client wants to transact a large quantity of a security--one that would cause a significant price change if a market order to buy or sell were entered.
Financial Pyramid
An investment strategy which apportions an investor's assets based on four categories of risk. The largest portion of assets are invested in safe, liquid investments. The second largest portion of assets is allotted to low-risk investments with the objectives of income and long-term growth. Third are assets categorized as medium-risk, and fourth, the smallest portion of assets, is comprised of high-risk investments.
Financial Supermarke
A company that offers a large variety of financial services. For instance, some financial supermarkets may offer banking services, securities brokerage, real estate brokerage, and insurance products--all under the same roof.
FINRA (Financial Industry Regulatory Authority)
The Financial Industry Regulatory Authority, known as FINRA, is the largest non-governmental regulator for all securities firms doing business with the United States public—more than 5,000 firms employing more than 660,000 registered representatives. FINRA was created in 2007 through the consolidation of NASD and NYSE Member Regulation.
Firm Commitment
A type of underwriting whereby the underwriter agrees to purchase the entire issue from the issuer, regardless of his ability to sell the securities to the public. Any unsold shares cannot be returned to the issuer. Also called a "Firm Commitment Underwriting."
Firm Commitment Underwriting
A type of underwriting whereby the underwriter agrees to purchase the entire issue from the issuer, regardless of his ability to sell the securities to the public. Any unsold shares cannot be returned to the issuer.
Firm Order
1: An order to buy or sell for the proprietary account of the broker-dealer, or firm.
2: An order to buy or sell which is not conditional.
Firm Quote
A quote by a market maker for a security which requires the market maker to purchase or sell a round lot of the security at the quoted bid or offer. This is in contrast to a nominal or subject quote which may require further negotiation or review and must be identified as such.
First Call Date
First date on which part or all of a bond may be redeemed, or called, by the issuer, at a prespecified price. The first call date is specified in the bond's indenture. Bond brokers generally will quote callable bonds by giving both the yield to maturity and the yield to call.
First Preferred Stock
A class of preferred stock that has preferential claim over other classes of preferred stock and common stock with regard to claims on dividends and assets.
Fiscal deficit
The negative balance of the difference between a government’s income and expenses.
Fitch’s Rating Service
A rating agency for municipal and corporate bonds, preferred stock, commercial paper, and other debt instruments.
Fixed Annuity
An investment contract sold by an insurance company which makes fixed payments to the annuitant for a prespecified period of time, usually for life. In contrast, a variable annuity makes payments which are directly related to the performance of the vehicles in which the annuity has invested.
Fixed assets
Fixed assets are the properties, goods or rights that represent a capital investment, and thus, they depreciate or amortize over time. Examples include machinery and equipment, buildings, land, furniture, licenses, rights and stock from affiliated companies.
Flat
A bond term that means it is trading without accrued interest. Bonds which are in default of interest or principal are traded flat. This means that accrued interest will be received by the buyer if and when it is paid, but no accrued interest will be paid to the seller.
Flat Market
A market distinguished by horizontal price movement that is usually the result of low activity.
Flight to Quality
The movement of capital by investors to the safest possible investment. Flights to quality usually occur when the market is declining or a specific situation occurs within the marketplace that unsettles investors. Money market investors, for example, may only buy government securities if a major bank fails.
Float
The number of shares of a security currently outstanding and available for trading by the public.
Floor
The area of an exchange where securities are bought and sold.
Floor Broker
A member of an exchange who may or may not be employed by a member firm and executes orders on the floor of the exchange. The floor broker executes orders for customers and is therefore acting as agent. In contrast, the floor trader is buying and selling for his own account and is acting as principal.
Flower Bond
A US Treasury bond that is accepted at face value to pay estate tax if the bonds were owned by the decedent at the time of death. Flower bonds are no longer issued and the last of them will mature in 1998. The bonds trade at a discount since they have a relatively low interest rate (3% to 4%).
Form BD
Document that broker-dealers must file and keep current with the SEC. It provides details about the firm's principals and officers, net capital compliance, and financial statements.
Forward contract
A term or forward contract allows customers to buy or sell currencies with a fixed rate, a specific value and a future delivery date, based on the terms agreed upon with StateTrust Bank.
Fourth Market
Direct trading of large blocks of securities between institutional investors to avoid brokerage commissions. Quotes can be obtained through a service called Instinet, an acronym for Institutional Networks Corporation.
Fractional Share
Less than one full share of stock. An investor may have a fractional share as the result of a dividend reinvestment program. If the amount of the dividend is not sufficient to purchase a full share of stock, the investor will be credited with a fractional share until enough dividends are received to purchase a full share. For instance, if XYZ stock issues a $1.00 dividend and the stock is trading at $10.00, a customer with dividend reinvestment will be credited a fractional share of 1/10.
FRB (Federal Reserve Board)
Acronym for the Federal Reserve Board, the governing body of the Federal Reserve System. The Federal Reserve Board is comprised of seven members appointed by the President and subject to confirmation by the Senate. In order to ensure members' independence from political influence, each member serves a 14-year term. The FRB is responsible for setting monetary policy for the U.S. and has the authority to determine bank reserve requirements, set the discount rate, regulate the availability of credit, and control the purchase of securities on margin.
Free trade zone
Geographical areas within a country with special legal designation in the customs, currency exchange, capital investment and international trade arenas.
Freeriding
1: A situation that occurs when a member of an underwriting syndicate withholds a portion of a public offering of a new securities issue with the intent to sell it at a price higher than the initial offering price. This is a violation of securities regulations because the underwriter is not making a legitimate offering to the public.
2: A situation that occurs when a customer purchases a security, then sells the same security and uses the proceeds to pay for the purchase. This practice is prohibited by Federal Regulation T which requires that customers pay for securities within prespecified time frames. Firms are required to freeze or restrict customer accounts that engage in this practice for 90 days.
Front Office
Term used to identify brokerage industry personnel who deal directly with the public, such as sales and trading personnel.
Front Running
A situation that occurs when a securities or commodities trader takes a position in a security in order to take advantage of a large upcoming transaction of which he is aware.
Front-End Load
A sales charge in connection with the purchase of an investment, which is applied at the time of purchase. Generally this term is associated with mutual funds, but may also apply to life insurance policies and limited partnerships.
Frozen Account
A brokerage account in which the customer may only purchase securities up to the amount of cash in the account and only sell securities if the certificates are held in the account. Generally, an account is frozen for freeriding, which is a violation of Federal Regulation T. Frozen accounts may also be called restricted accounts.
Full Disclosure
Term which refers to the requirements established by the Securities and Exchange Commission regarding public divulgence of material facts by corporations.
Full Faith and Credit
Term used to describe a security for which a government entity pledges its full taxing and borrowing power, plus revenue other than taxes to support the payment of interest and repayment of principal. For instance, Treasury securities are backed by the full faith and credit of the U.S. government.
Full Service Broker
A broker that provides a variety of brokerage and financial services to clients, including offering advice on investment decisions. Generally full service brokers charge higher commissions than discount brokers who execute trades but do not give any investment advice.
Fully Valued
Price at which a corporation's fundamental earnings power is fully reflected in the security's market price. If the stock goes up from that price, it is considered to be overvalued. If the stock goes down, it is undervalued.
Fundamental Analysis
Research and examination of a corporation's financial statements and balance sheets to predict the future price movements of their securities. Among other indicators, fundamental analysts study past records of assets, earnings, sales, products, management and markets to predict future trends. By assessing a firm's prospects, fundamentalists can evaluate whether a security is overvalued or undervalued. In contrast to fundamental analysis, technical analysis does not consider a corporation's financial data. Technical analysts rely on price and volume movements of stocks.
Fundamentalist
A person who thinks that a corporation's security prices are determined by its future earnings and dividend abilities. Besides studying a corporation's financial data, they will also examine its industry and how the economy will affect the company's core business.
Futures Contract
A contract to buy or sell a prespecified amount of a commodity or financial instrument at a particular price on an agreed upon date in the future. Futures differ from options in that the holder of an option has a choice whether or not to exercise the option, but the parties involved in a futures contract are obligated to complete the transaction.
Futures Market
A commodity exchange where futures contracts are traded.
Futures market
A market where contracts can be established to supply goods or financial assets on a predetermined date in the future.
GAAP (Generally Accepted Accounting Principles)
Detailed rules and procedures as defined by accepted accounting practices. Although the principles were established by the Accounting Principles Board, the board has since been superseded by the Financial Accounting Standards Board (FASB), a self-regulatory organization.
Gamma Stocks
Class of stocks traded on the London Stock Exchange that are less regulated and only require two market makers quoting indicative prices. Gamma stocks rank third behind Alpha and Beta stocks in terms of capitalization and activity.
Gap
1: Securities industry term used to depict a security's price movement when its one day's trading range does not overlap the next day's, causing a range (gap) in which no trade has occurred. This usually occurs because of extraordinary positive or negative news about a corporation or a commodity.
2: Financial term representing the dollar amount needed for which provisions have yet to be made. For example, XYZ corporation needs $2.5 million to purchase a new facility. It obtains a loan of $1.25 million and new equity of $750,000. That leaves a gap of $500,000 in which it needs gap financing.
Garbatrage
Traders' lingo--a combination of the words garbage and arbitrage--that represents stocks that rise because of a major takover. These stocks do not have any significant involvement in the target corporation or in its industry. Hence, they have no real reason to rise.
Gather in the Stops
Trading strategy that entails selling enough shares of a stock to drive its price down to a point where stop orders are believed to be. The stop orders are then activated and become market orders that create movement that activates other stop orders in a process called snowballing. Because this can cause major trading swings, exchange floor officials, if they deem it prudent, have the authority to suspend stop orders in individual securities.
General Account
Federal Reserve Board term for customer's margin account subject to Regulation T (rules governing credit extensions to brokerage customers for the purchase and short sale of securities). The Fed requires that all margin transactions be made in this account.
General Ledger
Formal ledger that includes all the financial statement accounts of a business. It contains offsetting debit and credit accounts.
General Lien
Lien against an individual that gives the right to seize personal property to pay off a debt. The property seized does not have to be the property that causes the debt. The lien does not give the right to seize real property such as land.
General Loan and Collateral Agreement
Also called a "broker's loan," it is an on-going agreement in which broker-dealers borrow money from a bank to buy securities, finance new issue underwriting, carry inventory, or carry customer margin accounts.
General Mortgage
A mortgage that covers all (blanket) the eligible properties of a borrower and not one particular property. If a liquidation should occur, a blanket mortgage may have a lower priority claim than a mortgage on specific properties.
General Mortgage Bond
A bond that is secured by a blanket mortgage on a corporation's property, but which may be outranked by another mortgage.
General Obligation Bond
Commonly abbreviated as "GO" bond, it is a municipal bond secured by the "full faith and credit" (taxing and borrowing power of the issuer) of the municipality. In comparison to revenue bonds that are repaid from a specific facility (i.e., a sewer system) built with the borrowed funds, a GO bond is repaid with general revenue and borrowings.
General Partner
The partner in a limited or general partnership who is responsible for the management and operation of the partnership. The partner also has a fiduciary responsibility to act for the benefit of the limited partners and, ultimately, any debts taken on by the partnership.
Generally Accepted Accounting Principles (GAAP)
Detailed rules and procedures as defined by accepted accounting practices. Although the principles were established by the Accounting Principles Board, the board has since been superseded by the Financial Accounting Standards Board (FASB), a self-regulatory organization.
Gift Tax
A graduated tax assessed to a donor by the federal government and most state governments when assets are gifted from one person to another. As the gift's value increases, so does the tax rate. The Economic Recovery Tax Act of 1981 permits a donor to give $10,000 a year per recipient free of the federal gift tax ($20,000 to a married couple). The gift tax is calculated on the dollar value of the asset being transferred above the $10,000 exemption level.
Gilt Edged Security
A corporate security that has been established over a period of years so that it earns sufficient profits to pay its bondholders their interest without interruptions. The term can also be used for a stock that pays a reliable dividend. However, the term blue chip is more commonly used when referring to stocks.
Glamor Stock
Stocks that achieve a wide following by consistently producing rising sales and earnings over a long time period. In a bull market, glamor stocks usually rise faster than the overall market. A glamor stock may also be categorized as a blue chip stock. However, it is often distinguished by a higher earnings growth rate.
Global Mutual Fund
A mutual fund that invests anywhere in the world, including within the United States.
GNMA (Government National Mortgage Association)
Nicknamed Ginnie Mae, a government-owned corporation that is an agency of the Department of Housing and Urban Development. Ginnie Maes are pools of residential mortgages. GNMA guarantees, with the full faith and credit of the US Government, that investors will receive full and timely principal and interest payments even if mortgages in the pool are not paid on a timely basis.
GNP (Gross National Product)
The total value of goods and services produced by the economy in a given period. It is a primary indicator of an economy's status. "Real GNP" measures economic production that is adjusted for inflation. Real GNP and GNP figures are stated on an annual basis and are updated every quarter.
Go-Go Fund
A mutual fund that invests in highly risky but potentially lucrative stocks. The investments are highly speculative.
Going Away
Bonds bought by dealers for immediate sale to investors, as opposed to being held in inventory for resale at future date. The importance of the difference is that bonds bought going away will not cause adverse pressure on prices.
Going Concern Value
A corporation's value as an operating business as opposed to the value of its assets or its liquidating value. In accounting, going-concern value in excess of asset value is considered an intangible asset and is called goodwill. Goodwill represents the value of a corporation's name, customer service, employee morale, and other such factors that are anticipated to translate into higher earning power. However, as an intangible asset, it does not have a liquidation value and accounting principles require that it is written off over a specific time period.
Going Long
A purchase of a security that creates a "long position." The opposite of going long is "going short," when investors sell a security they do not own and hence, a short position is created.
Going Private
Going from public to private ownership of a corporation's shares. It is usually accomplished by either the company's repurchase of shares or a private investor purchasing the public shares. A corporation will usually go private when its shares are priced considerably below their book value and thus the assets can be bought cheaply. Another reason a company's management may decide to go private is to ensure their own existence by removing the company as a takeover prospect.
Going Public
Industry lingo used to describe the initial sale of shares of a privately held corporation to the public. To fund corporate expansion, a company may go public to raise the needed money. In exchange, the corporation's management gives up some decision-making control to public shareholders. The stock being sold to the public is called an "initial public offering" (IPO).
Going Short
Selling a security that is not owned and hence, a short position is created. An investor who goes short borrows the security from their broker and hopes to buy other shares of the security at a lower price. The investor replaces the borrowed security with the lower priced security. The difference is the investor's profit.
Gold Bond
A debt obligation that is issued by gold-mining companies. The interest payments are determined by gold prices. These bonds are bought by investors who believe gold prices are going to rise. Similarly, silver mining companies issue silver-backed bonds.
Gold Fix
The daily price setting of gold by selected gold specialist and bank officials in London. The price is fixed at 10:30 am and 3:30 p.m. London time every business day, and is determined by the forces of supply and demand. The gold fix price is used to set the prices of gold bullion, gold-related contracts and products.
Gold Mutual Fund
Mutual fund that invests in gold mining firms. Some funds only invest in US and Canadian firms while others invest in North American and South African firms. Funds investing in South African mines usually pay high dividends because they typically pay out almost all of their earnings as dividends. Gold funds typically perform best during periods of rising inflation. They offer the investor an inflationary hedge, without the risks incurred by investing directly in gold commodities, bullion, or individual gold stocks.
Gold Standard
A monetary system in which currency is convertible into fixed amounts of gold. The US used to be on the gold standard but was taken off in 1971.
Goldbug
An analyst that is smitten with gold as an investment and recommends it as a hedge. Goldbugs are usually anxious about either the world economy, depression or hyperinflation.
Golden Parachute
Lucrative contract that is given to top executives in the event that the company is taken over by another corporation and results in job loss. The contract usually includes a large amount of severance pay, stock options, and a bonus. Golden Parachutes are usually a part of an anti-takeover strategy.
Good Delivery Of Securities
Industry lingo meaning that a certificate is endorsed properly, has a signature guarantee and has met other qualifications. The certificates must be in good form to conform with the sale contract so that ownership can be transferred to the buyer. Certificates not in good form are said to be a "bad delivery."
Good Through
Customer order to buy or sell securities at a limit or stop price for specific time period, unless canceled, executed, or changed. It is a type of limit order and may be specified GTW (good-this-week), GTM (good-this-month order), GTC (good-til-canceled), GTC-90 (good-til-canceled for a 90 day period), or for shorter or longer periods.
Good-Til-Canceled Order (GTC)
Customer order to buy or sell securities at a limit or stop price that will remain in effect until it is either executed or canceled. If it is not executed, the order can be canceled or changed at any time. Also called an "open order."
Goodwill
An intangible asset that represents the value of a corporation's name, customer service, employee morale, and other such factors that are anticipated to translate into higher earning power. However, as an intangible asset, it does not have a liquidation value and accounting principles require that it is written off over a specific time period.
Government Agency Securities
Also called "agency securities," they are securities issued by US government agencies--for example, the Federal National Mortgage Association. Although agency securities have high credit ratings, they are not government obligations. Hence, they are not directly backed by the full faith and credit of the US government.
Government Bond
Debt obligation of the US Government that are regarded as the highest grade of securities issues.
Graduated Securities
A corporation's security listing that has been upgraded by moving from one exchange to a more notable exchange--for instance, a security's move from a regional exchange to a national exchange. A graduated security usually sees an expansion of its trading volume.
Grantee
The person to whom property is transferred.
Grantor
In investments, an options trader who sells a call or a put option and receives premium income for doing so. In the case of a call, the grantor sells the right to buy a security at a specified price. In the case of a put, the grantor sells the right to sell a security at a specified price.
Graveyard Market
Termed a graveyard market because investors who are in the market cannot get out and those who are out have no desire to get in the market. This can happen in a bear market when investors who wish to sell will be faced with large losses and when potential investors prefer to stay liquid until the market improves.
Greater Fool Theory
Believers of this theory feel that even though a stock or the overall market is fully valued, speculation is warranted because there are enough fools (greater fools) to push prices further upward.
Green Shoe
An underwriting agreement provision stipulating that, in the case of huge public demand, additional shares will be authorized by the issuer for distribution by the syndicate.
Greenmail
An act of buying a corporation's stock, threatening to take control, and then demanding that those shares be purchased back by the corporation--usually at a price higher than can be obtained on the open market. In exchange, the acquirer agrees not to proceed with the takeover bid.
Gross estate
The accumulated wealth and property of an individual at the time of his/her death.
Gross National Product (GNP)
The total value of goods and services produced by the economy in a given period. It is a primary indicator of an economy's status. "Real GNP" measures economic production that is adjusted for inflation. Real GNP and GNP figures are stated on an annual basis and are updated every quarter.
Gross Per Broker
Gross commission revenues generated by a registered representative during a given time period.
Gross Profits
Also called "gross margin," it is profits earned from the service or manufacturing operation--before the deduction of selling costs and other expenses and before taxes are paid.
Gross Spread
The difference (spread) between a security's public offering price and the price paid to the issuer by an underwriter. The spread consists of the syndicate manager's fee, the underwriter's discount, and the selling concession--the discount offered to a selling group.
Group Sales
Term used in securities underwriting that refers to block sales made by the syndicate manager to institutional investors. The securities come from the syndicate "pot." Credit for the sale is pro-rated amongst syndicate members in proportion to their original allotments.
Growth and Income Fund
A mutual fund whose objective is to seek long-term capital appreciation along with income.
Growth Fund
A mutual fund that seeks long-term capital appreciation by selecting corporations to invest in that should grow more quickly than the general economy. Growth funds are more volatile than conservative funds such as income or money markets. However, they usually rise more quickly than conservative funds in bull markets and fall more sharply in bear markets.
Growth profile
Investors who choose a growth profile have a portfolio composition of 80-100% variable income instruments (stock) and 0-25% fixed income (bonds).They have above average risk and volatility.
Growth Stock
Stock of a company with earnings' growth at a fairly rapid rate that is anticipated to continue to grow at high levels. Growth stocks are riskier investments than average stocks, however, because they generally have higher price/earnings ratios and make little or no dividend payments to shareholders.
Growth Stock Theory
Theory that corporate stocks should be selected for investment purposes based on the fact that the corporation's earnings and dividends are continuously increasing at a faster rate than the growth of the general economy.
GTC (Good-Til-Canceled)
Customer order to buy or sell securities at a limit or stop price that will remain in effect until it is either executed or canceled. If it is not executed, the order can be canceled or changed at any time. Also called an "open order."
Guarantee
This is the value that protects the individual or corporation issuing the loan against losses, in the event of incompliance in the repayment of a debt
Guarantee Letter
Letter issued by a bank guaranteeing aggregate payment if a put option is exercised and an assignment notice is presented to the option writer. A guarantee letter covers the put writer thereby making it a covered put.
Guaranteed Bond
Bond in which principal and interest are guaranteed by an entity other than the issuer. Guaranteed bonds are in effect debenture bonds (unsecured) of the guarantor. However, if the guarantor has stronger credit than the issuer whose bonds are being guaranteed, the bonds have greater value. An example of a guaranteed bond would be in the case of corporate parent-subsidiary relationships where the bonds are issued by the subsidiary with the parent's guarantee.
Guaranteed Stock
Stock in which its dividends are guaranteed by an entity other than the issuer. Guaranteed stock becomes, in effect, debenture (unsecured) bonds of the guarantor.
Guarantor
An individual or corporation who agrees to pay a debt if the debtor failed to comply with an obligation acquired.
Gun Jumping
1: The act of soliciting buy orders in an underwriting before an SEC registration is effective.
2: Trading securities based on inside information.
Haircut
Industry term for the valuation of securities used to calculate a broker/dealer's net capital. The haircut will change depending on the class of a security, its market risk, and the time to maturity. The haircut may fluctuate from 0% to 30% (common for equity securities) to 100% for fail positions (securities with past due delivery) that have prospect of settlement.
Half Life
Point in time when the principal on a mortgage backed security (issued or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Association) has been repaid. It is presumed that the security has a half life of 12 years. However, depending on interest rate trends, specific mortgage pools can have longer or shorter half lives. If interest rates rise, homeowners will hold onto their mortgages longer than predicted, and half lives will rise. If interest rates fall, more homeowners will refinance their mortgages. Thus, principal will be paid off more quickly, and half lives will drop.
Half Stock
A common or preferred stock that has a $50 par value. The usual standard is a $100 par value.
Hammering The Market
Intense selling by investors who believe stock prices are inflated. Also, speculators anticipating a market drop will sell short, and are said to be hammering the market.
Hard Dollars
Customers' payments for services rendered by a brokerage firm. For example, a customer's payment to a broker for a financial plan produced for them. Conversely, with soft dollars, a broker is compensated by commissions received if he places any of the trades specified in that financial plan.
Heavy Market
A market that has falling prices due to a larger supply of offers to sell than bids to buy.
Hedge Clause
A disclaimer used in market letters, research reports, or other printed materials relating to the evaluation of investments. Its intent is to exonerate the writer from responsibility for the information's accuracy.
Hedge Fund
Securities term that describes funds that use hedging techniques. For example, an option fund may use futures contracts on stock market indexes and short sales with stock options to limit risks.
Hedging
The use of almost opposite direction securities, instruments, or futures contracts as a method of attempting to reduce market risk. A perfect hedge is one that eliminates the prospects of any future gains or losses. Investors frequently try to hedge against inflation by purchasing assets (e.g, gold) that will rise in value faster than inflation.
Hedging
The use of almost opposite direction securities, instruments, or futures contracts as a method of attempting to reduce market risk. A perfect hedge is one that eliminates the prospects of any future gains or losses. Investors frequently try to hedge against inflation by purchasing assets (e.g, gold) that will rise in value faster than inflation.
Heir
Any person with the right to receive all or part of a deceased owner’s estate.
High Flyer
Very speculative and high priced stock that moves up and down sharply over a short time span.
High Grade Bond
Bond rated "AAA" or "AA" by Moody's or Standard & Poor's rating services.
High Premium Convertible Debenture
A long term bond that has a high premium common stock conversion feature and offers a competitive interest rate. Premium refers to the difference between the convertible bond's market value and the value at which it is convertible into common stock. The "Kicker" (convertibility to stock) is designed as an inflation hedge.
High Yield Bond
Bond that has ratings of BB or lower and pays higher yields to offset its greater risk.
High-Tech Stock
Companies whose business is in high technology fields such as biotechnology, computers and robotics. High-tech companies that are successful may have above average earnings growth and volatile stock prices.
Highs
In daily trading, stocks that have reached new high prices for the current 52 week time period. To identify stock market trends, technical analysts observe the ratio between new highs and new lows.
Historical Trading Range
Price range that a security has traded since going public. Technical analysts perceive the top of a historical range as the resistance level and the bottom as the support level. It is deemed as significant if a security breaks above the resistance level or below the support level. Analysts usually interpret this to mean that the security will reach new highs or lows and thus, its historical trading range expands.
Historical Yield
Yield provided by a mutual fund, typically a money market fund, over a specific time period.
Hit the Bid
Seller's acceptance of the highest price offered for a stock. For example, if a stock's ask price is $24 1/4 and the current bid price is $24, sellers will hit the bid if they accept $24 a share.
Holder
The owner of a security.
Holder of Record
Owner of a company's securities that is recorded on the books of the issuing company or its transfer agent as of a specific date--called the "record date." For example, dividend and stock splits always specify whether they are payable to holders as of the record date.
Holding Period
Length of time an asset is held by its owner. It determines whether a gain or loss is considered short term or long term.
Home Run
Large gains obtained by an investor in a short time period. For example, an investor who aims to hit a home run may look for possible takeover candidates as most takeover bids result in sudden price rises. Such investing strategies are intrinsically more risky than the strategy of holding for the long term.
Horizontal Price Movement
A security's price movement within a narrow range over extended time periods--also called "sideways price movement."
Horizontal Spread
Options strategy--also known as a "calendar spread"--that includes buying and selling the same number of options contracts with the same exercise price, but with maturity dates that are different. The investor hopes to profit by price moves in the underlying security.
Hot Issue
A new security issue that trades at an immediate premium above its fixed public offering price. In other words, the secondary market price on the initial sale date is above the new issue's offering price. It is caused by great public demand for more shares than are available.
Hot Money
Investment funds seeking high yields that are short term. Borrowers enticing hot money should be ready to lose it when another borrower offers a higher rate.
Hot Stock
1: Newly issued stock that rapidly rises in price.
2: Stock that has been stolen.
House
1: Firm or individual, as a broker-dealer, engaged in the securities business and/or investment banking and related services.
2: Nickname for the London Stock Exchange.
House Account
Account that is managed by a brokerage firm's main office or by an executive of the firm and not one that is normally handled by a salesperson in the territory. Normally, salespeople do not receive commissions from house accounts, even though the accounts may be in their region.
House Call
Brokerage firm notification that a client's margin account equity is below the firm's maintenance level. Once the equity declines below that point, the client must deposit additional funds or securities. If the client fails to deliver the required margin, securities in the account will be liquidated to cover the call. Normally, house call limits are higher than the limits set by the Financial Industry Regulatory Authority (FINRA) and the exchanges with jurisdiction over these rules.
House Maintenance Requirement
Brokerage house rules that are internally set in regard to a client's margin account. The required equity level should be maintained by client. Normally, house call requirements are higher than those set by the Financial Industry Regulatory Authority (FINRA) and the exchanges with jurisdiction over these rules.
House Rules
Securities industry term for an individual brokerage firm's internal rules, policies and procedures regarding the opening and management of clients' accounts and the clients' activities in such accounts.
Hung Up
Term describes the position of an investor whose security's value has declined below the purchase price.
Hybrid Annuity
Annuity offered by an insurance company that permits investors to combine the benefits of both fixed and variable annuities--also called "combination annuity." The amount placed in the fixed portion will provide a specified rate of return while the variable portion offers a chance for higher returns (and risks) through the investment in securities.
Hypothecation
Pledging of securities to a brokerage firm as collateral for margin loans made to purchase securities or to cover short sales.
lliquid
Said of investments such as a stock, bond or commodity that cannot be readily converted into cash. A security becomes illiquid when a lack of trading activity in the security makes it hard to sell without taking a large loss. Other assets such as real estate can also be considered to be illiquid because there is not a ready market and they may take time to sell.
Imbalance Of Orders
Too many buy orders without matching sell orders or vice versa. An imbalance of orders can occur because of extraordinary corporate events such as a takeover, loss of a lawsuit that was expected to be won, or the death of a key executive. If the imbalance occurs before the market opens, the stock may have a delayed opening. However, if it occurs during the trading day, trading may be suspended until the specialist can make an orderly market.
Immediate Family
As defined in the NASD Rules Of Fair Practice, an immediate family member includes parents, brothers, sisters, children, father-in-law, mother-in-law, sister-in-law, brother-in-law, and any other relatives who are financially supported. The Rules of Fair Practice use this definition when dealing with practices such as freeriding and withholding. The rules prohibit the sale of hot issues to members of a broker-dealer's immediate family or to persons trading for institutional accounts and their families.
Immediate Payment Annuity
Annuity contract purchased with a single payment and a pay-out plan that starts immediately. Payments, usually on a monthly basis, are either for a specified time or until the annuitant passes away.
Immediate-Or-Cancel Order (IOC)
A limit order to buy or sell a security that requires all or part of the order to be executed immediately. Any part of the order that is not executed, is automatically canceled. An IOC order is usually for a significant share quantity.
Impaired Capital
Total capital that is less than the par value of the corporation's capital stock.
Imputed Interest
Interest that is considered to have been paid although no actual payment was made. A zero coupon bond, for instance, has imputed annual interest that the IRS requires the bondholder to report.
In Play
A security whose price fluctuates because of takeover rumors or activities.
In-And-Out Trader
Person who buys and sells the same security in the same day in hopes of profiting from steep price moves.
Inactive Asset
Assets that are not continuously productive, such as a computer used only when the main system is not working.
Inactive Post
New York Stock Exchange trading post where inactive stocks are traded in 10-share lots instead of the regular 100 share round lots.
Inactive Stock/Bond
Security that trades infrequently and has such a low volume that it makes the security illiquid.
Incentive Stock Option
Plan created by the Economic Recovery Tax Act of 1981 (ERTA) whereby qualifying options are free of taxes when granted and when exercised. Profits on exercised shares sold are taxed as ordinary income--until 1987, it was subject to capital gains tax if the shares were held at least one year.
Income Bond
A bond that only pays interest if the corporation has sufficient earnings. These bonds are usually traded flat (without accrued interest) and are an alternative to bankruptcy.
Income Limited Partnership
A limited partnership, such as real estate, whose objective is to generate high taxable income. These types of partnerships are usually designed for tax sheltered accounts such as IRAs and pension plans.
Income Mutual Fund
A mutual fund that invests in income producing securities such as bonds, preferred stocks, high dividend yielding common stock, or covered call stock options.
Income Property
Real estate bought specifically to generate income. The property may be bought by individuals, corporations or income limited partnership. When selling the property, the owners also hope to sell at a profit.
Income Shares
A class of capital stock that is issued by a split investment company or a dual purpose mutual fund. Owners receive dividends and interest generated from the income shares and from capital shares, another class of capital stock. Owners of capital shares receive capital gain generated from both classes.
Income Statement
A quarterly or annual financial statement that shows a corporation's business results. It specifically shows all revenues, earnings, expenses, costs and taxes.
Income Stock
A stock that pays a relatively high dividend.
Incorporation
The process by which a company receives a state's permission to function as a corporation. After incorporation, the company will show that it is incorporated by adding the word "incorporated" into its name. "Inc." or other acceptable abbreviations may be used.
Incremental Cash Flow
Net of cash inflows and outflows that arise from a corporate investment project.
Indemnify
An agreement by one party to compensate another party for losses or damages that are incurred if specific actions or events occur.
Indenture
A written contract, also known as a "Deed of Trust", under which bonds and debentures are issued, setting forth maturity date, interest rate, redemption rights, call privileges and other terms. Under the rules of the Trust Indenture Act of 1939, the contract is executed by the issuer and a trustee who acts on behalf of the bondholders.
Independent Broker
NYSE member who executes orders for other floor brokers who currently have more business than they can manage themselves, or for firms whose floor brokers are not on the floor. Previously known as "Two-Dollar Brokers", these brokers used to receive $2 per hundred shares for executing such orders. These fees, paid by the commission brokers, were once fixed but are now negotiable.
Index
1: A statistical yardstick that measures the economy. It is usually expressed as a percentage change from a base year or from the previous month. An example of an economy index is the Consumer Price Index . Using 1967 as its base year, the index consists of key consumer goods and services that measures price movements to changes in inflation rates.
2: Statistical measurement of groups of securities, industries or markets that reflect market prices and the number of shares outstanding for the companies in the index. Indexes may either be broad-based (a wide range of firms in many industries aiming to mirror the overall market) or narrow-based (consisting of securities from a specific industry). Stock indexes are used as a base for trading index options.
Index Arbitrage
A trading technique in which baskets of stocks and stock futures contracts are bought and/or sold according to their conformity and deviation from a stock index. To keep the position fully hedged, the stocks are bought and the futures are usually sold and vice versa. In doing this, the arbitrageur is locking in a profit (or loss).
Index Fund
A mutual fund that buys securities to match that of a broad-based index such as the Standard & Poor's Index. The fund aims to achieve the same return as the general market.
Index Option
Call and put option contracts traded on an underlying index, such as the S & P 100, and not a specific security. Investors who trade index options invest in a particular market or industry group without having to buy all the underlying securities. A narrow-based index allows an investor to trade in a particular industry while a broad-based index will scope many industries.
Indexed composite of term deposits
An investment that generates a fixed interest payment, plus the appreciation or depreciation of the value added by the currencies in the composite. This allows for risk diversification and maintaining a competitive rate of return.
Indexing
An investor who buys individual securities or index funds to mirror a broad-based index such as the S & P 500. The investor aims to match the index's performance.
Indicated Yield
The dividend or coupon rate stated as a percentage of the security's present market price. The type of security determines how the indicated yield is calculated. The indicated yield for common stock is calculated by dividing its annual dividend by its market price . For preferred stocks, the contractual dividend is divided by the market price. And, for fixed rate bonds, the indicated yield is the same as the current yield.
Indication
Estimation of what a security's bid and offer prices will be when trading resumes after a delayed opening or trading halt--also called "indicated market".
Indication of Interest
Underwriting term meaning a non-binding indication of a client's interest in purchasing securities that are in registration (awaiting effectiveness by the Securities and Exchange Commission). The broker is required to provide the client with a preliminary prospectus on the securities. The indication of interest is non-binding because it is illegal to sell a security that is in the registration process.
Indicators
1: Measures of economic activity utilized by economists to forecast the general direction of the economy.
2: Measurement utilized by technical analysts to make forecasts regarding the direction of the overall market or the movement of a particular stock.
Indirect tax
Tax imposed on certain transactions.
Individual Retirement Account (IRA)
A personal savings plan that offers tax advantages to save and invest for retirement. Contributions are often tax deductible in whole or in part, depending on individual circumstances, including compensation levels and participation in an employer sponsored qualified retirement plan. Income derived from investments in a traditional deductible or nondeductible IRA is tax deferred until withdrawn. Under certain circumstances, withdrawals from a Roth IRA are tax-free. Tax penalties may apply to IRA distributions taken before age 59 ½.
Industrial
Stock market lingo that is a catch-all category that includes all firms that have businesses that are not classified as utility, transportation, or financial companies.
Industrial Development Bond (IDB)
A bond issued by a municipality to finance fixed assets that are secured by a lease agreement with a corporation whose payments amortize the debt. IDBs used to be tax-exempt to holders. However, under current tax laws, they are no longer tax-exempt.
Industrial Production
A key economic indicator that is a released monthly by the Federal Reserve Board. The indicater relates the total output of all US factories and mines.
Inefficiency In The Market
An investor's failure to ascertain that a security may be having difficulties or has good prospects. Some analysts believe that investors who identify a security first can profit by exploiting that information--with corporate stocks that have substantial growth opportunities reflecting most clearly the market's inefficiency. However, followers of the Efficient Market Theory believe current prices already reflect all knowledge about a security.
Inflation
The persistent and appreciable rise in the prices of goods and services. Moderate inflation is normally associated with periods of expansion and high employment--increasing dollars chasing a dwindling supply of goods. Hyperinflation, when prices rise 100% or more a year, causes people to lose confidence in the currency. During inflationary times, people often divert their investments into real estate and gold because they usually retain their value.
Inflation Rate
Rate of price changes usually calculated on a monthly or annual basis. The Consumer Price Index and the Producer Price Index are two principle US indicators of inflation rates. They track changes in prices paid by consumers and producers.
Initial Margin Requirement
Initial dollar amount or marginable securities that a brokerage client is required to deposit with a broker before placing margin transactions--one in which the broker extends credit to the client in a margin account. The initial margin requirement, according to the Federal Reserve Board's Regulation T, is presently 50% of the purchase price (or $2000--whichever is higher) when buying marginable securities or 50% of the proceeds of a short sale.
Initial Public Offering (IPO)
The first public issuance of stock from a company that has not been publicly traded before.
Inside Information
Material corporate information that has not yet been made public in a widely used medium. Use of this information would influence the purchase or sale of a company's security. An example of inside information is a company who has a large quarterly loss and this fact has not yet been made public. If this information was used to trade the security, under SEC rules, it may be deemed as illegal.
Inside Market
Bid and asked quotes at which one dealer will buy from or sell to another--also called "wholesale" or "interdealer market". In contrast, retail market quotes are the prices that customers pay to dealers to buy or sell a security.
Inside Quote
The highest bid to buy and the lowest offer to sell a security at a given time. If one asks for a "quote" on a stock, you will receive something like "15 1/4 to 15 1/2." This means that $15.25 is the highest price any buyer willing to pay and that $15.50 is the lowest price any seller will accept.
Insider
Anyone who is either an officer, director or key employee of a corporation, a person owning 10% of the company's stock (and their families), or anyone with inside (non-public) information.
Insolvency
The inability of an individual or entity to pay its debts when they are due.
Installment Sale
A transaction that has a set contract price and is usually paid in monthly installments over a specified period.
Institutional Broker
Broker who trades securities for institutional clients such as banks, mutual funds, pension funds and insurance companies.
Institutional Broker’s Estimate System (IBES)
A service provided by Lynch, Jones and Ryan. The brokerage firm gathers analysts' future earnings estimates on publicly traded companies and determines which companies' estimates have changed substantially.
Institutional Investor
A mutual fund, bank, pension fund, insurance company, university or other institution. Institutional investors usually invest large volumes in the securities markets.
Instrument
A legal document that states a contractual relationship or that specific rights are granted such as notes, agreements or contracts.
Instrumentality
Obligations of government agencies that are backed by the full faith and credit of the government. However, these obligations are not direct obligations of the government. Examples of such instumentalities are the Student Loan Marketing Association, Federal Intermediate Credit and Federal Land Banks.
Insured Bonds
Municipal bonds covered by an insurance policy. The policy guarantees that should the issuer default in making payments, the insurance company will pay all interest and prinicipal due. Insured bonds usually are rated very high as the risk to the investor is minimal.
Intangible Assets
Assets of a corporation that are not physical. They are considered to enhance the company's position in the marketplace. Such assets include goodwill, trademarks, patents, copyrights, franchises, leases, licenses, and permits.
Intercommodity Spread
A spread that includes a long position and a short position in related commodities--for instance, a long position in silver futures and a short position in gold futures. The investor aims to profit from the changing price relationship between the commodities.
Interdelivery Spread
Technique used in trading options or futures. Contracts expiring in one month are bought and the same contracts expiring in a different month are sold--for example, buying a May cotton contract and simultaneously selling an August cotton contract. The investor aims to profit when the price between the two contracts narrows or widens.
Interest
Dollar cost that a borrower pays a lender for the use of the lender's money.
Interest Rate Options
Option contracts that are based upon underlying debt instruments.
Interest Sensitive Stock
A corporation's stock whose earnings change when interest rates change. Upon news of rate increases or decreases, the stock will go up or down in price. Examples of interest-sensitive stocks include bank and utility companies.
Interim Dividend
A dividend that is declared and paid before annual earnings are determined. Most companies plan quarterly dividends they know they can afford.
Interim Statement
A report that presents a corporation's income statement for the period and, sometimes the balance sheet. A corporation usually issues three interim reports (quarterly) and one annual report.
Interlocking Directorate
An individual who is on the board of directors for more than one corporation.
Intermarket Trading System (ITS)
An electronic communications network that links the posts of specialists who are market makers for the same securities at the floors of seven registered exchanges to foster competition among them. Quotes are displayed and are firm (good) for at least one round lot (100 shares). Through ITS, a broker at one exchange may direct an order to another exchange where the quote is better.
Intermediary
Individual or entity that is sanctioned to make investment decisions for others--also called "financial intermediary". An intermediary is used because they are investment specialists that usually can obtain higher returns than the average investor. Moreover, because they deal in large dollar volumes, they can easily diversify the assets. Examples of some intermediaries are brokerage firms, mutual funds, banks, and insurance companies.
Intermediate Term
Time between short and long term with the length dependent on the context. A bond analyst, for instance, usually considers an intermediate term to be between 3 to 10 years. A stock analyst would consider it to mean 6 to 12 months.
Intermediation
Money deposited with financial intermediaries--such as brokerage firms, banks, insurance companies--which invest in stock, bonds, money market securities, government obligations and/or mortgages to obtain a targeted return. In contrast, disintermediation is the withdrawal of money from an intermediary.
Internal Control
An organization's procedures that are designed to increase its efficiency, ensure its policies are implemented, and its assets are safeguarded.
Internal Expansion
Growth of an organization's assets through cash generated internally from either internal financing, appreciation or accretion.
Internal Financing
Funds generated through a corporation's normal business operations.
International Mutual Funds
A mutual fund that invests in nondomestic securities markets throughout the world. If investments are chosen carefully, this type of fund may be profitable when some markets are rising and others are declining. However, fund managers must watch foreign currencies as well as world markets--profitable investments in a rising market can lose money if the foreign currency rises against the dollar.
Intra-State Offering
A new securities' issue that will only be sold to investors in one state and who are residents of that state. An intra-state offering is exempt from filing provisions of the Securities Exchange Act of 1933 under Rule 147.
Intraday
Within the day. The term is often used when stating high and low prices of a security. When stating, for example, that a stock hit a new intraday low, it means that during the day the stock reached an all-time low price but rose back to a higher price by the end of the day.
Intrinsic Value
The amount whereby an underlying security's current market price is above the call option's strike (exercise) price or below the put option's strike price. If the strike price of a call option, for example, is $40 and the stock is $43, the option's intrinsic value is $3. An option that has intrinsic value is "in the money." If the option is at or out of the money, it does not have an intrinsic value.
Inventory Turnover
It is a company's cost of goods sold (from the income statement) divided by the year-end inventory (from the balance sheet). The number is used by fundamental analysts when examining a company's financial statement.
Inverted Scale
Serial bond issue in which earlier maturities have higher yields than later maturities.
Investment
The use of money through various vehicles, or an individual's time and effort, to make more income or increase capital, or both. The term "investment" infers that the safety of principal is important. On the other hand, speculation connotes that risking principal is acceptable.
Investment Advisor
Individual or organization who provides investment advice for a fee. In most cases, investment advisors with more than 15 clients must register with the SEC and abide by the Investment Advisors Act of 1940. Brokers, banks and general circulation periodicals are exempted from registration with SEC. Most states require an investment advisor to pass an examination.
Investment Advisors Act
Act passed by Congress in 1940 that requires investment advisers to register with the SEC. The intent of the Act is to protect investors from fraud or misrepresentation by investment advisors.
Investment Banker
A firm, acting as an underwriter or an agent, who serves as intermediary between an issuer of new securities and the investing public. The usual practice is for one or more investment bankers to form a syndicate to buy a corporation's new issue and then sell the issue to individuals and institutions--commonly called a "firm commitment underwriting". In a provisional arrangement--called "best effort"--the investment banker acts as an agent rather than principal and markets a new issue without underwriting it. Under another provisional arrangement--called "standby commitment"--the investment banker agrees to buy for resale any securities not taken by existing holders of rights.
If a client relationship exists, the investment banker's role starts with pre-underwriting counseling and continues after the distribution of securities is completed by offering ongoing advice and guidance. Some underwriting responsibilities include preparing the SEC registration statement, pricing the securities, forming and managing the syndicate, and pegging (stablizing) the price of the issue during the offering and distribution period.
Besides new securities offerings, investment bankers manage the distribution of secondary offerings, maintain markets for already distributed securities and act as finders for private placements. Most investment bankers also maintain broker-dealer operations that serve wholesale and retail clients in brokerage and advisory capacities.
Investment Certificate
Certificate that evidences investment in a savings and loan association and states the dollar amount invested. The certificates do not involve shareholder responsibility nor do they have voting rights.
Investment Company
A company or trust, such as unit investment trusts and management companies, engaged in the business of investing the pooled funds of small investors in securities appropriate for stated investment objectives. For a fee, it provides investors with more diversification, liquidity, and professional management service than would normally be available to them as individuals.
There are two types of management companies--closed-end and open-end mutual funds. Closed-end investment companies are traded in the open market and are bought and sold like any other stock. The capitalization of a closed-end fund usually remains constant and has a fixed number of outstanding shares. Open-end mutual funds sell their shares directly to investors, are ready to buy back their old shares at their current net asset value, and are not listed. The capitalization is open-end funds are not fixed--they issue more shares as investors want them.
Open-end management companies may either be "load" or "no-load" mutual funds. Load funds are sold by broker-dealers who receive a percentage that is added into the net asset value. The percentage is determined by the amount of the client's investment into the fund. Load funds often can be redeemed free of any charges from the fund. No-load funds are usually bought from the mutual fund and do not charge a loading fee. However, small redemption fees are not uncommon.
Every investment company states its specific investment objectives in its registration statement and prospectus. An investment company usually falls within one of the following categories:
* Diversified common stock funds; * Balanced funds that mix bonds and preferred and common stocks; * Bond and preferred stock funds that feature fixed income; * Specialized funds by industry, groups of industries, geography or size of company; * Income funds--income generated from high-yield securities; * Performance funds (growth stocks); * Dual-purpose funds--a closed-end investment company that offers a choice between dividend shares or capital gain shares and; * Money market funds (money market instruments).
Investment Counsel
Person whose principal business consists of acting as investment adviser and providing investment supervisory services.
Investment fund
A fund with mutual characteristics and a diversified portfolio, with proportionately distributed participation among investors based on their contributions.
Investment Grade
A bond that is rated within the top four categories by Moody's or Standard & Poor's.
Investment Income
Income, such as dividends, interest and capital gains amongst other sources, that is generated from securities and other investments. Under current tax regulations, an investor's interest charges from a margin account can be used to offset investment income.
Investment Letter
A letter that is an agreement between a seller and a buyer who is purchasing private placement securities (unregistered securities under Regulation D). The investor affirms that the purchase is a long-term investment and not for resale. The securities are also called "letter stock".
Investment profiles
The process of selecting and allocating financial instruments and indexes based on various risk tolerance levels.
Investment Strategy
Strategy used to allocate funds among such vehicles as stocks, bonds, cash equivalents and commodities. An investor's strategy should be based on their view of the direction of economic factors such as economic growth, interest rates and inflation. At the same time, the investor may also take into account their age, tolerance for risk, funds available for investment and future needs.
Investment Value Of A Convertible Security
The estimated price at which a convertible security would be valued if it did not have a stock conversion feature. A convertibles' investment value is determined by investment advisory services. Theoretically, it should not fall lower than the related stock's price. It is set by estimating the price at which a non-convertible bond or preferred stock of the same issuing company would sell.
Investor Relations Department
A department within a listed corporation that is responsible for investor relations. Some of the department's functions may include:
* Assuring that a company's activities and objectives are understood and are regarded favorably by the investment community.
* Ensuring full and timely disclosure of material information, and assisting the legal staff with compliance of SEC rules and industry regulations.
* Responding to requests from shareholders, institutional investors, brokers and the media for information and written material such as its quarterly and annual reports.
IOC (Immediante-or-cancel order)
A limit order to buy or sell a security that requires all or part of the order to be executed immediately. Any part of the order that is not executed, is automatically canceled. An IOC order is usually for a significant share quantity.
Irredeemable Bond
A bond that does not have a call feature or a redemption privilege. A call feature allows an issuer to redeem the bond before its maturity and a redemption privilege allows a bondholder to redeem the bond before its maturity.
Irrevocable trust
A trust that cannot be changed or cancelled by the grantor.
Issuance
Corporate securities with the same features, issued by a company. It also refers to the launch of a batch of securities in the market.
Issued And Outstanding
Corporate shares that have been authorized within the corporate charter and have already been issued. The share may represent all or only part of the number of shares authorized. Authorized shares not yet issued are called "unissued stock". Issued shares repurchased by the corporation are called "treasury stock". Treasury stock is held in the corporate treasury pending reissue or retirement. Although these shares are issued, when making calculations such as earnings per share and dividends, they are not considered to be outstanding. Authorized, issued and outstanding, and treasury shares are usually noted in a corporation's annual reports.
Issued Shares
Amount of common shares that a corporation has issued (sold).
Issuer
Entities, such as corporations, municipalities, governments and investment trusts, that may issue and distribute securities. Stock issuers are required to report corporate developments to its shareholders and, if declared, pay dividends. Bond issuers must make timely payments of interest and principal to its bondholders.
January Barometer
Market forecasting tool whose statistics show that the market rises in years when the Standard & Poor's 500 Index is up in January and will drop when the index is down for that month.
January Effect
Event that starts on the last day of December and ends on the fourth trading day of January--stock prices have historically tended to rise considerably. The January Effect is caused by year end selling for tax losses, recognizing capital gains, or effecting portfolio window dressing. Even though the sell off depresses the stocks, it has nothing to do with their basic worth. Bargain hunters may quickly buy in and thus, cause the January rally.
Joint Account
An account that is owned jointly by two or more clients. Joint accounts may be set up two ways.
Joint Account Agreement
Form used to establish a joint account at a brokerage firm or a bank. It must be signed by all account owners.
Joint and Survivor Annuity
Annuity that makes payments for the lifetime of two or more beneficiaries (frequently husband and wife). If one annuitant passes away, payments continue to the survivor as specified in the contract.
Joint Tenancy (JT)
An account or ownership of property where there are two or more owners. There are several types of joint tenancy. State laws and the relationship between the owners will determine the type of joint account one will want to establish.
Joint Tenants By Entirety
Ownership of assets by a married couple where the husband or wife automatically acquires the other's share upon death.
Joint Tenants In Common (JTIC)
Ownership of assets by two or more individuals. A specific ownership percentage is assigned to each individual. In the event of the death of one party, the deceased's interest passes to their estate and not to the surviving tenant(s).
Joint Tenants with Right of Survivorship (JTWROS)
Ownership of assets by two or more individuals where there is not specific fractional financial interest. In the event of the death of one party, the survivor(s) receives total ownership.
JT (Joint Tenancy)
An account or ownership of property where there are two or more owners.
Jumbo Certificate of Deposit
Certificate with a minimum denomination of $100,000.
Junior Issue
Debt or equity issue of a corporation that is subordinate in claim to another issue of the same corporation in regard to dividends, interest, principal, or security in the event of liquidation.
Junior Refunding
The refinancing of government debt maturing in one to five years by issuing new securities that mature in five or more years.
Junior Securities
Security that has a subordinate claim on assets to that of a "senior security". For instance, a preferred stock is junior to a debenture, but a debenture, being an unsecured bond, is junior to all corporate securities.
Junk Bond
Bonds that have little or no collateral or liquidation value and are typically very risky. For this risk, they offer a high rate of return. They are issued by corporations without sales and earnings track records, or by those with questionable credit. Moreover, in the 1980s, junk bonds were popular instruments for corporate mergers and acquisitions. The bonds usually have a credit rating of BB or lower. Because the term has an unfavorable connotation, issuers and holders prefer the bonds to be called "high yield bonds."
Justified Price
Fair market price an educated buyer will pay for an asset.
Kicker
Additional feature of a security that is intended to strengthen its marketability by offering the possibility of equity participation. For example, a bond may be convertible to stock if the shares reach a specified price. The kicker makes the bond more attractive to investors--the bondholder, in addition to interest payments, potentially gets ownership benefits of an equity security. Some other types of equity kickers are rights and warrants.
Know Your Customer
Securities industry ethics established by exchange rules, NASD Rules of Fair Practice and other authorities regulating broker-dealer practices. In order to satisfy the "know your customer" rules, when opening an account with a brokerage firm, the customer must provide information regarding his financial situation. Based upon the facts disclosed by the customer, the broker must have a reasonable belief that the recommendation they are making is suitable for the customer.
Lapsed Option
An option that has no value because it expired without being exercised.
Last Sale
The most recent transaction in a specific security. In contrast, the term "closing sale" is the final trade for a security in a trading day.
Last-In First-Out (LIFO)
A method used to determine the cost of goods sold. In making this evaluation, the method assumes that company's newest inventory (last in) is sold first (first out). When prices are rising, a company using the LIFO method will have lower gross profits and taxable income because the cost of goods sold will be higher (the newest inventory was costlier to produce).
Late Tape
A delay is displaying price changes of securities. This usually occurs on an especially heavy trading day. When the tape is greater than five minutes late, the security's price is shown without its first number. For example, a trade that occurred at 43 1/8 will be displayed as 3 1/8.
LBO (Leveraged Buyout)
A takeover of a corporation in which the acquirer uses borrowed funds. The target firm's assets are commonly used to secure the acquirer's loan. However, they may also use their own assets as collateral. A company's management might also use this technique to takeover their own company--that is, the management takes the company from being publicly owned to privately owned. In most LBOs, shareholders will receive a premium above the security's current market value.
Leader
1: Stock or group of stocks that are spearheading a rising or declining market. Institutions who want to demonstrate their own market leadership may trade heavily in leaders.
2: A company's whose product has a large market share.
Leading Indicators
Twelve components of an index that forecast ups and downs in a business cycle. The numbers, adjusted for inflation, are released monthly by the US Commerce Department's Bureau of Economic Analysis. Its full name is the "Composite Index of 12 Leading Indicators". Some of the components are unemployment, new orders for consumer goods and money supply (M-2).
Leg
1: One part of a spread option. A trader, for example, buys a call option and combines it with another call option on the same underlying security that has the same strike price and a different expiration date. Each of the two options is a leg of the spread. Selling one of the legs is termed "Legging Out".
2: A prolonged stock market trend. A bull or bear market may have multiple legs.
Legal Entity
Individuals or organizations that can enter into a contract and may be sued for not performing in accordance with the contract. A minor is not a legal entity and cannot sign a contract.
Legal guardian
Individual responsible for the personal care and assets of a minor or other person who does not have full capacity for self-care.
Legal Investment
An investment vehicle that a person with fiduciary responsibilities may purchase. Each state has legal investment guidelines that a fiduciary must follow. Investment grade bonds are an example of a legal investment.
Legal Transfer
Securities that require more documentation than just a stock or bond power to transfer the certificates from the seller to the buyer. Among others, these certificates may be registered in the name of trusts, decedents, corporations, partnerships, or investment clubs. A corporation who has sold a stock, for example, would need to submit a corporate resolution with a raised seal along with a stock power.
Legging Out
Closing one side of a hedge position that leaves the other side as a long or short position. A leg, according to Wall Street lingo, is one side of a hedge transaction. A trader, for example, has an option spread in which he bought an XYZ May 50 call and a sold an XYZ July 65 call. If the XYZ May 50 call (one side of the hedge) is closed (sold), the trader is legging out. The trader is left with a short leg.
Letter Of Intent (LOI)
1: A contract signed by a mutual fund shareholder that indicates that the shareholder intends to invest at least a certain amount of money, during a 13-month period, to qualify for a reduced percentage sales charge. A letter of intent may be backdated a maximum of 90 days. Any shares, bought before the letter of intent was signed and within the 90 days, will be adjusted to reflect the reduced sales charge.
2: A letter of intent may also refer to a preliminary contract between two parties negotiating a merger or an acquisition.
Level Debt Service
A stipulation in a municipal charter stating that each year's interest and principal payments on municipal debt must be relatively equal. This attempts to make it easier to project the amount of tax revenue needed to meet obligations
Level I Service Of NASDAQ
An electronic subscription service that provides the highest bid and lowest offer on NASDAQ traded securities. Brokerage firms use this service to give current quotes to its brokers and clients.
Level II Service Of NASDAQ
An electronic subscription service that identifies market makers and provides their bids and offers on NASDAQ trade securities. The service gives competitive information on NASDAQ traded securities. It is only accessible to traders of FINRA members and institutional investors.
Level III Service Of NASDAQ
An electronic subscription service that is accessible only to registered market makers. It allows them to enter their own bids and offers for securities in which they are registered. In effect, Level III is an electronic marketplace.
Leverage
The use of a financing component to increase the amount to be invested, thus achieving potential growth of the ROI.
Leveraged Buyout (LBO)
A takeover of a corporation in which the acquirer uses borrowed funds. The target firm's assets are commonly used to secure the acquirer's loan. However, they may also use their own assets as collateral. A company's management might also use this technique to takeover their own company--that is, the management takes the company from being publicly owned to privately owned. In most LBOs, shareholders will receive a premium above the security's current market value.
Leveraged Company
A company that has debt in its capital structure. A company whose capital structure consists of more than one third debt is commonly considered to be highly leveraged.
Leveraged Investment Company
1: An open-end investment company or mutual fund that is allowed to borrow capital from a lender. This provision must be stated in its charter.
2: A dual-purpose investment company that issues both income and capital shares. Holders of income shares receive dividends and interest on investments. Holders of capital shares receive all capital gains on investments. Essentially, each class of shareholder leverages the other.
Liability
The claims by creditors against a corporation or an individual. A corporation's liabilities include accounts payable, wages payable, dividends declared payable, accrued taxes payable, and long-term liabilities (bank loans and debentures).
LIFO
A method used to determine the cost of a good sold. In making this evaluation, the method assumes that company's newest inventory (last in) is sold first (first out). When prices are rising, a company using the LIFO method will have lower gross profits and taxable income because the cost of goods sold will be higher (the newest inventory was costlier to produce).
Lift
Investment lingo used to indicate a rise in securities prices as measured by the Dow Jones Industrial Average or other market averages. A lift is usually caused by good economic or business news.
Limit Order
An order that instructs a broker to buy or sell a specified amount of a security at a specified price or at a better price. In the case of a buy, it will never be executed above the limit price. Conversely, in a sell, the order will never be executed below the limit price.
If the limit price is not within the current market quote, it is said to be "away from the market". The order is entered on the specialist's book beneath any similar orders received earlier. These similar orders are said to be "shares ahead of you". Thus, the limit order may not be executed immediately or only partially, or not at all.
Limit Price
The price that is set in a limit order. The price stipulates to the broker to execute the order only at the limit price or better.
Limit Up, Limit Down
The maximum price that a commodity futures contract is permitted to move in one trading day. In extraordinary circumstances, a future may move limit up or limit down for several days in a row.
Limited Discretion
An agreement whereby a client allows their broker to make certain types of transactions without first notifying the client. For example, the broker will sell an option position that is about to expire when it is in-the-money.
Limited Liability
Condition in which an investor cannot lose more money than the amount that was invested.
Limited Partner
An investor in a limited partnership who does not participate in the management of the partnership and have limited liability.
Limited Partnership (LP)
Organization that consists of a general partner and limited partners. The general partner manages one or more projects for which the organization was formed. Limited partners invest money into the project; their risk is usually limited to the amount that they invested, and they do not have any day-to-day responsibilities of running the partnership. Limited partners typically receive income, capital gains, and tax benefits while the general partner collects fees and a percentage of capital gains and income. Common limited partnerships are in real estate, oil and gas, and equipment leasing, but there are other kinds of projects.
Limited Risk
When buying options contracts, the amount of the premium paid. For example, the buyer of a call option cannot lose more than the premium even if the underlying security does not rise during the option's life. A buyer of a put option also cannot lose more than the premium even if the underlying security does not drop. Naked (uncovered) put writers are limited to the strike price less the option premium received. Naked call writers have unlimited risk as the value of a security can infinitely increase.
Liquid Asset
Actual cash or an investment vehicle that is easily converitble into cash such as bank deposits and money market fund shares. A corporation's liquid assets, in reference to its financial statement, are cash, marketable securities, and accounts receivable.
Liquidate
The process of selling securities or assets to obtain cash.
Liquidation
1: Upon a brokerage client's failure to meet a margin call, the closing of positions within the account. If the position is long, the security is sold. If the position is short, the security is bought.
2: The dissolution of a company in which its assets are sold to pay its debts. Any remaining cash is distributed to its shareholders.
Liquidity
The ability of a stock to absorb a large amount of buying or selling without substantial price movement. Institutional investors are inclined to seek securities that have liquidity so that their trading activity will not have an effect on the stock's market price.
Liquidity Ratio
A gauge of a corporation's ability to meet short term obligations.
Listed Option
A call or put option that has been authorized for trading on, and by, a registered exchange. Its proper name is an "exchange-traded option".
Listed Security
A stock or bond that has been authorized for trading on, and by, a registered exchange. Each stock exchange has different criteria to determine a security's eligibility for listing.
Listing Requirements
Rules of eligibility that a corporation must meet before its stock can be listed for trading on an exchange. Each exchange has different requirements--the New York Stock Exchange (NYSE) being one of the stringent. Some of the NYSE's requirements are that a corporation must have:
* At least 1,100,000 shares publicly held with a minimum market value of $18 million;
* A minimum of 2,000 round lot shareholders or a total of 2,200 shareholders and;
* A minimum pretax annual net income of at least $2.5 million.
Load
Sales charge paid by investors when purchasing shares of a load mutual fund or units of an annuity--sometimes called "front-end load". This contrasts with a back-end load which charges a fee when the investor redeems their investment. A mutual fund that does not charge a fee is called a "no-load" fund.
Load Mutual Fund
Mutual fund that charges a fee when investors make purchases. This fee (or "load" as it is called) is used primarily to compensate salespeople selling the fund.
Load Spread Option
Process used to allocate a contractual mutual fund's annual sales charge. In a contractual plan, fund shares are accumulated through periodic fixed payments. The maximum sales charge is limited to 9% for the life of the contract. However, up to 20% of any year's investment can be credited against the sales charge as long as the total charge for the first four years does not exceed 64% of one year's investment.
Loan
Transaction whereby an owner of property (lender) grants another party (borrower) to use the property for a specified length of time. The borrower promises to return the property and to pay a fee (interest) for its use. When the property is cash, the borrower signs a promissory note. A loan may be secured with collateral or unsecured.
Loan Consent Agreement
An agreement that is signed by a brokerage client as part of a their margin account documentation. By signing the agreement, the client agrees the broker-dealer may lend the securities.
Loan Value
The maximum amount of credit that a lender may lend against collateral. For example, at 50% of appraised value, a piece of property worth $500,000 has a loan value of $250,000.
With respect to the brokerage industry, Regulation T of the Federal Reserve Board stipulates the maximum percentage of eligible securities that a brokerage firm may lend to a margin account client.
Lock Box
1: Process whereby a firm's customers mail payments to a post office box. The bank collects the checks from the lock box and deposits them into the firm's account. The company is then notified of the deposits either by telephone or electronically.
2: Service provided by a bank in which they hold a customer's securities and deposit any income or dividends received.
Locked In
1: Lingo used to indicate that a rate of return on an investment has been guaranteed for a specific length of time. Examples of such investments are certificate of deposits (CDs) and fixed rate bonds.
2: Said of a security whose profits or yields have been secured through use of a hedge.
3: Said about an investor who does not sell a profitable security because the profit would immediately be subject to capital gains tax.
Locked Market
A situation that occurs in a highly competitive market in which a security's bid and ask prices are the same. Once more buyers and sellers submit their orders, the market will unlock.
LOI (Letter Of Intent)
1: A contract signed by a mutual fund shareholder that indicates that the shareholder intends to invest at least a certain amount of money, during a 13-month period, to qualify for a reduced percentage sales charge. A letter of intent may be backdated a maximum of 90 days. Any shares, bought before the letter of intent was signed and within the 90 days, will be adjusted to reflect the reduced sales charge.
2: A letter of intent may also refer to a preliminary contract between two parties negotiating a merger or an acquisition.
Long
Brokerage lingo signifying that an investor has ownership of a security. Ownership rights entitle the investor to receive any income and dividends paid by the security and, once sold, to profit or to lose money. The owner also may transfer ownership of the security by sale or by gift.
Long Bond
A bond maturing in 10 or more years. Because an investor's money is tied up for a long time, the bonds are riskier than shorter term bonds of the same quality. Thus, they usually pay a higher yield.
Long Coupon
The first interest payment on a bond that represents interest for more than six months. A long coupon occurs when a bond's issuance date is more than six months before the first scheduled payment. A short coupon is interest covering less than six months.
Long Hedge
An option or futures contract that is bought to protect against an investment risk. For example, if interest rates are expected to decline, a call option will be bought to lock in a fixed income security's present yield.
Long Leg
The long part of an option spread (the buying and selling of options within the same class at the same time). In other words, the part of the spread that is bought as opposed to written (sold). For example, if a spread is composed of a long call option and a short call option, the long call is the long leg.
Long Market Value
The dollar value of the long positions within an investor's brokerage account.
Long Position
Securities owned by an investor that are held in a brokerage account.
Long Term
1: Referring to bonds--a bond with a maturity of ten years or longer.
2: Referring to stocks--a stock which is held for a year or more by an investor.
Long Term Debt
Liabilities that are due to be repaid after more than one year. This is inclusive of bonds and long-term loans.
Low
The lowest price per share for a security during a period of time. When talking about a security's low, it may be in regards to the "day's low", the "annual low" or the "historical low". The day's low is the lowest price that a security reached during the current day's trading session. An annual low is the security's lowest price over the past 52 weeks. The historical low represents the security's lowest price since the security came into existence.
Lump-Sum Distribution
A single payment of all funds to an owner of such accounts like an IRA, a pension plan or a profit sharing plan.
M1
Basic money supply figure that includes currency in circulation, demand deposits (checking accounts), credit union share drafts, and non-bank travelers' checks. NOW accounts and Super-NOW accounts are included in demand deposits.
M2
A wider definition of money supply than M1, it includes M1 plus savings accounts, time deposits under $100,000, money market mutual funds shares, overnight repurchase agreements and overnight Eurodollars.
Macroeconomics
Analysis of the overall economy using information such as unemployment, inflation, production and price levels.
Maintenance Call
A call for more money or securities to be deposited into brokerage client's margin account. A call will be made when the account's margin equity falls below exchange requirements or the brokerage firm's house requirements. Currently, NYSE maintenance requirements are 25% in a long account (client has long positions) and 30% in a short account (client has short positions generated from selling short). The brokerage firm's house requirements are usually more stringent than the exchanges. If the account is not brought up to maintenance levels, some of the client's securities may be sold to eliminate the deficiency.
Maintenance Fee
Yearly charge to maintain certain types of brokerage or bank accounts such as an IRA or an asset management account.
Majority Shareholder
A shareholder who controls more than half of the outstanding shares of a corporation--commonly considered 51% of the outstanding shares. However, if ownership is widely distributed such that there are no majority shareholders, control may be gained with far less than 51% of the outstanding shares.
Make A Market
The process of maintaining firm bid and asked prices in a given security by standing ready to buy or sell round lots at publicly quoted prices. In the over-the-counter market, the dealer is called a "market maker", and on the exchanges, a "specialist".
Maloney Act Of 1938
An amendment to the Securities Exchange Act of 1934 that allows self-regulation by securities firms dealing in the over-the-counter market. As a result, the Financial Industry Regulatory Authority was created.
Management Fee
An expense paid by an investment company to the investment advisor for managing a portfolio. As disclosed in the prospectus, this fee is past onto the investor and is a fixed percentage of the fund's asset value.
Margin
"On Margin"--a process whereby a brokerage client uses credit to finance securities transactions.
Margin Account
An account with a brokerage firm that allows its clients to buy securities with money borrowed from the broker. Depending on the security, an investor can sometimes borrow up to 50% or more of the market value. Margin accounts are governed by Regulation T of the Federal Reserve Board, by the NYSE, and by the brokerage firm's house rules. Margin requirements can be met with cash, eligible securities, or any combination thereof.
Margin Agreement
Document that must be signed by a brokerage client who wished to trade on margin--also called a "hypothecation agreement". The document details the rules governing a margin account, including the hypothecation of securities, how much equity the customer must keep in the account, and the interest rate on margin loans.
Margin Call
A demand for a client to deposit money or eligible securities with the broker to bring a margin account up to the initial margin or minimum maintenance requirements. A Regulation T margin call is sent when a purchase is made and a maintenance margin call is sent when the margin account's equity falls below specific levels. If the client does not respond to the call, securities in the account may be liquidated.
Margin financing
Financing backed by capital market assets.
Margin Requirement
According to Regulation T of the Federal Reserve Board, it is the minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. This amount must be deposited in the client's margin account in the form of cash or eligible securities.
Margin Security
A security that may be bought or sold in a margin account. Regulation T of the Federal Reserve Board determines which securities are eligible.
Mark To Market
The comparison and adjustment of a position to reflect current market values. Mark to market is conducted on stocks that were sold short, uncovered calls and puts and when-issued securities. The adjustment may cause a margin call to be issued.
Market
1: The overall security markets, also called "marketplace", or the New York Stock Exchange in particular.
2: Short for "market value"--the value of an asset based on the price it would command on the open market. It is usually set by the market price at which comparable assets have recently been bought or sold.
Market Analysis
Research used to assist in predicting the direction of the markets based on technical data relating to price movements of the market, or on fundamental data such as corporate earnings.
Market Breadth
The scope of change in stock prices as measured by analyzing the number of stocks that advanced or declined during the period or by the number of stocks hitting new highs or new lows.
Market Maker
Securities dealer in a specific over-the-counter stock who makes a market--that is, one who maintains firm bid and asked prices in a given security by standing ready to buy or sell round lots.
Market Order
An order to buy or sell a specific number of shares at the best available price once the order is received in the marketplace. Normally, a market order is executed at the quoted price given before the order was entered, or at a price quite close to the quote. However, if the security is volatile, the execution price could be better or worse than anticipated.
Market Price
The last reported price at which a security was sold or the current quote.
Market Risk
The chance that a security's value will decline. With fixed income securities, market risk is closely tied to interest rate risk--as interest rates rise, prices decline and vice versa.
Market Timing
Determination of when to buy or sell securities through use of fundamental or technical indicators. Mutual funds investors can accomplish market timing decisions by switching from different types of funds within a family as the market outlook changes. For example, the investor can switch from a stock fund to a money market fund and back again.
Market value
This value is typically a conclusion obtained during bank appraisal, and it is the result of weighing the comparative market value, the physical value and the value of profit capitalization.
Marketable Securities
Securities that can be easily sold--that is, any asset that can be readily converted into cash, for example--government securities and commercial paper.
Maturity Date
The date on which the principal amount of a loan, bond, or any other debt instrument becomes due and is to be paid in full.
Medium Term Bond
A bond that has a maturity of 2 to 10 years.
Member Firm
A brokerage firm that has at least one general partner, officer, or employee who is a member of the New York Stock Exchange. Although it is technically the employee who is a member, the firm enjoys the privileges of membership as well as the obligations of membership.
Member Short Sales Ratio
The ratio of the total shares sold short for the accounts of NYSE members in one week divided by the total short sales for the same week. The ratio is considered an indicator of market trends. A ratio of 68% or lower is considered bullish and a ratio of 82% or higher is considered bearish.
Merger
Two or more companies combined to achieve greater efficiencies of scale and productivity. This is accomplished through the elimination of duplicated plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.
Microeconomics
Analysis of the behavior of economic units such as companies, industries, or households.
Minimum cash ratio
The deposit ratio financial institutions maintain as reserve, based on their country’s Central Bank requirements.
Minimum Maintenance Requirement
As required by the NYSE, the FINRA, and brokerage firms, the amount of equity that must be maintained in brokerage clients' margin accounts. Regulation T of the Federal Reserve Board requires $2,000 in cash or eligible securities to be deposited in margin accounts before brokers can extend credit. Additionally, upon a margin transaction, an initial margin requirement must be met, presently 50% of the market value of eligible securities long or short in customers' accounts. The NYSE and FINRA require a margin account's equity to equal at least 25% of the market value of securities in margin accounts. Brokerage firm requirements are usually a more conservative 30%. When the market value of margined securities falls below these minimums, margin calls are issued to clients requesting additional equity to be delivered by a specified date. If customers fail to comply, brokers may sell margined securities or close out short positions (from short sales).
Minority Interest
Shareholders who own less than half the shares in a corporation.
Missing The Market
Said when a broker, acting as agent, fails to execute a transaction at a price that was available, and the resultant transaction is unfavorable to the client. The agent is required to make the client whole by reimbursing the amount lost.
Mixed Account
A brokerage account in which some securities are long positions and some are short positions.
Moderate profile
Investors who choose a moderate profile have a portfolio composition of 70% fixed income instruments (bonds) and 0-25% variable income (stock). Their risk is lower than average; volatility is relatively low.
Money laundering
Money laundering refers to operations aimed at filtering or hiding resources obtained from criminal or fraudulent activities, through transactions that make these resources appear to have been obtained or generated in a legitimate manner.
Money Market
The market for short term debt instruments maturing in one year or less. Examples of money market instruments include Treasury bills, commercial paper, and certificate of deposits.
Money Market Fund
A mutual fund investing in short term money market instruments, such as certificates of deposit, treasury bills and commercial paper. The fund's net asset value is usually $1 a share and its interest rate goes up or down. Most money market funds offer checkwriting privileges.
Money Supply
The total amount of money in the economy as defined by M1 or M2 measurements. If there is too much money in the economy, interest rates tend to go down while inflation tends to rise. Conversely, if there is too little money in the economy, interest rates tend to go up, and prices and production tend to go down This can cause unemployment and idle plant capacity.
Monthly Investment Plan
Investment technique whereby an investor puts a fixed dollar amount into a particular investment every month.
Moody ’s Investment Grade
Rating assigned to investment grade or bank quality municipal short-term debt securities. The debt securities are classified as MIG-1, 2, 3, 4 to signify best, high, favorable, and adequate quality, respectively.
Moody ’s Investors Service
One of the two best known bond rating services, the other being Standard & Poor's. Moody's also rates commercial paper, preferred and common stocks, and municipal short-term issues. It publishes six manuals annually that provide information on issuers and securities. The manuals are updated weekly. It also publishes Moody's Handbook of Common Stocks on a quarterly basis. The handbook follows over 500 companies and provides an analysis of the company's financial background, recent financial results, and its future outlook.
Most Active List
Stocks with the heaviest trading volume for a given day. If a stock's trading volume is much greater than its normal volume, it may be caused by a release of earnings figures, institutional trading, bad news, and other factors.
Moving Average
An average that is based on security or commodity prices over a period of time (few days to few years) that shows trends for the latest period. It is a rolling average when the latest day's figures are included in the average and the oldest day's figures are not included.
Municipal Bond
A debt obligation issued by a state, state agency or authority, or a political subdivision, such as county, city, town or village. They may be issued for general governmental needs or special projects. Issuance must be approved by referendum or by an electoral body.
Before the Tax Reform Act of 1986, interest paid on municipal bonds was exempt from federal income tax and state and local income tax within the issuing state. The terms municipal and tax-exempt were synonymous. However, the Act separated municipal bonds into two broad groups--public purpose bonds and private purpose bonds. Public purpose bonds are tax-exempt and may be issued without limitations. Private purpose bonds are taxable unless specifically exempted. The difference between public and private purpose bonds is based on the percentage in which the bonds benefit private parties.
Municipal Bond Insurance
Insurance policies that protect investors if a municipal bond should default--the bonds will be purchased from investors at par. The insurance may either be purchased by the issuer or the investor. Two major insurers of municipal bonds are the Ambac Indemnity Corporation and the Municipal Bond Insurance Association (MBIA). Insured municipal bonds usually have the highest ratings. Subsequently, the bond's marketability increases, which lowers the cost to their issuers. However, the yield on an insured bond is usually lower than similarly rated uninsured bonds--the cost of the insurance is passed on to the investor. To obtain the extra degree of safety, many investors do not care if the yields are slightly lower.
Munifacts
The newswire service for the municipal bond industry. It provides information on both new issues and secondary market offerings.
Mutilated Securities
A certificate that is torn or defaced in such a manner that the name of the issuer or other necessary details cannot be identified. If such a certificate is delivered to make settlement of a sell transaction, it is difficult to effect the transfer of title. It is up to the seller (seller's broker) to take corrective action--getting the transfer agent to guarantee the buyer's rights of ownership.
Mutual Fund
An open-end investment company that offers the investor the benefits of portfolio diversification (provides greater safety and reduced volatility), and professional management. The shares are redeemable on demand at their net asset value. The fund invests the pooled assets into various investment vehicles including stocks, bonds, options, commodities and money market securities. How the fund invests is determined by the fund's objectives. The mutual fund's prospectus details this type of information plus information on any fees, the management company and other relevant data.
Mutual Fund "Family"
A group of mutual funds supervised by the same investment company. Funds can be moved easily from one type of fund to another if conditions (market or personal) dictate a change.
Mutual Fund "Family"
A group of mutual funds supervised by the same investment company. Funds can be moved easily from one type of fund to another if conditions (market or personal) dictate a change.
Naked Option
Industry lingo for call or put options that are written and not covered or have another position that will limit their liability. In the case of call options, writers are naked if they do not own either the underlying security, a security convertible into the underlying security, or a long call at a strike price equal to or lower than the strike price that was written and that does not expire before the written call. In the case of put options, writers are naked if they do not either have a short position in the underlying security, a bank guarantee letter, or do not own a long put with a strike price equal to or higher than the strike price of the put that was written and that does not expire before the put that was written.
Naked Position
A securities position that is not protected from market risk in any manner. For instance, the position of person who writes a call option without owning a long position in the underlying security, or writing a put option without having a short position in the underlying security.
Narrow Market
Said of a securities market that is characterized by light trading, and larger price fluctuations relative to volume than would be the case if trading is active. A stock is said to be in a narrow market when its price drops more than a point between round lot trades without any obvious reason; this infers a lack in investor interest and too few orders.
Narrowing the Spread
Closing the difference between a security's bid (highest price anyone is willing to buy) and asked (lowest price anyone is willing to sell) prices. When a stock's bid price, for example, is $8 a share and the asked price is $8 5/8, the spread is 5/8 of a point. If a broker enters a bid to buy at $8 3/8, the bid and ask are now $8 3/8 to $8 5/8, thus the spread has been narrowed to 1/4 of a point.
Nasdaq
A stock exchange made up of around 3,700 technology companies in the United States. The NASDAQ transaction volume is the largest one in the world.
National Market System (NMS)
An informational system that is part of the NASDAQ system. NMS displays actual transactions, last trade and volume data.
National Quotation Bureau Inc. (NQB)
Daily service that provides its subscribers bid and asked quotes from market makers in securities traded over-the-counter. Stock quotes are published in Pink Sheets and corporate bonds in Yellow Sheets.
NAV (Net Asset Value)
An open-ended mutual fund's per share market value. In mutual funds, the net asset value is synonymous with "bid price" and "redemption price". In no load funds, the NAV is also the asked price. They are all one figure. In load funds, the asked price is quoted after the sales charge is added to the net asset value. Most funds compute the NAV after the close of the exchanges each day. It is calculated by taking the closing market value of all securities within the fund plus all other assets (i.e., cash), subtracting all liabilities, then dividing the result (total net assets) by the total number of outstanding shares. The total number of outstanding shares usually varies daily because of redemptions and purchases.
ND (Nothing Done)
In a day order, upon expiring at the end of the day, the status given to the order if it has not been executed.
Nearest Month
In options trading or commodity futures, the expiration month that is closest to the current month. For an option that has expiration dates available in September, December, March, and June, for example, the nearest month would be December if a trade was made in November. Nearest month contracts are more heavily traded then "furthest month" contracts.
Negative Cash Flow
Within an accounting period, a condition in which a business spends more cash than it receives through earnings.
Negative Yield Curve
On securities that are of similar quality, a condition in which yields on short term securities are higher than the yields on long term securities. Typically, short term interest rates are lower than long term rates--those who invest their money for longer periods are taking more risk.
Negotiable
A security that can be sold--that is, the ownership is transferable by delivery of a security.
Nest Egg
Assets reserved for a person's retirement. A nest egg is accumulated to assure the retiree with a secure standard of living for the rest of their life. IRAs are considered part of a nest egg.
Net
The gain or loss from the sale of a security--that is, the difference between the cost to purchase and the sale proceeds.
Net Asset Value (NAV)
An open-ended mutual fund's per share market value. In mutual funds, the net asset value is synonymous with "bid price" and "redemption price". In no load funds, the NAV is also the asked price. They are all one figure. In load funds, the asked price is quoted after the sales charge is added to the net asset value. Most funds compute the NAV after the close of the exchanges each day. It is calculated by taking the closing market value of all securities within the fund plus all other assets (i.e., cash), subtracting all liabilities, then dividing the result (total net assets) by the total number of outstanding shares. The total number of outstanding shares usually varies daily because of redemptions and purchases.
Net Assets
The difference between a company's total assets and liabilities.
Net Change
Difference between a security's last trading price from the previous day to the next day. However, in the over-the-counter market, the net change in a security is usually the difference between bid prices from the previous day to the next day. For example, XYZ's last trade yesterday was at $34. Today's last trade was at $34 1/2. The net change is +1/2--that is, XYZ's final price on that day was 50 cents higher than the final price on the previous trading day.
Net Investment Income Per Share
In a particular accounting period, the amount of income received by an investment company from dividends and interest (minus any management fees and administrative expenses) divided by the number of outstanding shares. Short term trading profits are treated as dividend income. Net investment income is paid shareholders as a dividend.
Net Realized Capital Gains Per Share
Net amount (capital gains minus capital losses) that an investment company realized on the sale of securities divided by the number of outstanding shares. An investment company will usually distribute any net gains at least annually. These distributions are treated as long term capital gains to shareholders, regardless of the length of time they have held the investment company shares.
Net Worth
Dollar amount by which assets exceed liabilities. An individual's net worth equals the total value of all possessions (house, stocks, bonds, etc.) minus all outstanding debts (mortgage, credit cards, etc.). For a corporation, net worth is also known as "net assets".
New Issue
A security being offered to the public for the first time. New issues may be initial public offerings by private companies going public or additional securities of corporations already public. The distribution of new issues are governed by Securities and Exchange Commission rules.
New York Futures Exchange (NYFE)
A subsidiary of the New York Stock Exchange that concentrates on the trading of financial futures contracts.
New York Stock Exchange (NYSE)
The oldest and largest stock exchange in the United States--also known as the "Big Board" and "The Exchange". The exchange is a not-for-profit corporation consisting of 1,366 individual members. It is governed by a Board of Directors that is made up of 10 public representatives, 10 exchange members, and a full-time paid chairman and president.
The NYSE does not buy, sell, own or set the prices of securities traded there. The NYSE has operating divisions that are concerned with market operations, member firm regulation and surveillance, finance and office services, product development and planning, and customer relations. The NYSE imposes requirements on corporations who wish to have their securities listed on the exchange.
NH (Not Held)
A market order to buy or sell that allows a floor broker discretion as to the time and price in executing the best possible trade. NH means the customer will not hold the floor broker responsible if a better execution might have been possible. This type of order qualification is principally used for large block orders.
Nikkei Stock Average
Index of 225 leading stocks traded on the Tokyo Stock Exchange. The Nikkei is similar to the Dow Jones Industrial Average. Both are composed of representative blue chip corporations (called "first-section" companies in Japan) and are price-weighted indexes--the movement of each stock is weighted equally regardless of its market capitalization. The Nikkei Stock Average is the most widely quoted Japanese stock index.
NL (No Load)
Abbreviation used in newspaper listings of mutual funds to indicate a no-load fund.
NMS (National Market System)
An informational system that is part of the NASDAQ system. NMS displays actual transactions, last trade and volume data.
No Load Mutual Fund
A mutual fund that allows shares to be purchased without a sales charge to imposed on its investors.
Noise
Market activity caused by program trades and other circumstances that are not reflective of general opinion.
Nominal intereste rate
Percentage applied to calculate interest due.
Nominal Quotation
Bid and asked prices given by a market maker as valuation of a security, but not for trading purposes. Security rules require that nominal quotations be specifically identified as such.
Nominal value
The face value of an equity or security, which appears printed on it. It may vary from its market value.
Nominee
Person or firm, such as a brokerage house, whose name is inscribed on a security certificate if it is different from that of the beneficial owner. The purpose is to expedite transfers of title when the security is sold. The beneficial owner is the true shareholder and he retains all rights of ownership.
Non-Callable
A bond that cannot be redeemed before its maturity by the issuer. Call provisions in a bond's indenture agreement specify whether the bond is callable or non-callable. Because so many bonds issues are callable, bond yields are often quoted to the first date at which the bonds could be called instead of maturity.
Non-Cumulative Preferred Stock
Preferred stock on which unpaid dividends do not accrue. Omitted dividends, for the most part, will never be paid. This contrasts with cumulative preferred stock in which omitted dividends accumulate until paid to shareholders.
Non-Public Information
In the securities industry, non-public information most often refers to corporate information that will have a material effect on its stock price when it is released to the public. The information can be either negative or positive. An example of non-public information is an earnings report about to be released that is substantially worse than what most analysts anticipated. It is illegal for insiders to make transactions based on non-public information as they would have an unfair advantage over the rest of the public.
Non-Qualified Plan
A retirement plan or an annuity in which contributions are made with after-tax dollars. The contributions are not tax deductible because the plan or annuity is not an IRS approved pension plan. However, just as with a Qualified Plan, earnings accumulate tax deferred until withdrawn.
Non-Recurring Charge
A one-time write-off or expense--also called "extraordinary charge". These charges are required to be displayed in a corporation's financial statement. An example of a non-recurring charge would be a division that was closed down and written-off.
Nonvoting Stock
Corporate securities in which shareholders of such securities have no voting powers--that is, they may not vote on the election of directors or on any corporate resolutions.
Normal Trading Unit (NTU)
Standard minimum size of a trading unit for a particular security--more commonly referred to as a "round lot". Stocks typically have a normal trading unit of 100 shares. However, inactive stocks may have normal trading units equal to 10 shares. Any amount of shares less than a round lot is called an "odd lot".
Not Held (NH)
A market order to buy or sell that allows a floor broker discretion as to the time and price in executing the best possible trade. NH means the customer will not hold the floor broker responsible if a better execution might have been possible. This type of order qualification is principally used for large block orders.
Not Rated (NR)
Indication used by various rating services to show that a security or a company has not been rated. The abbreviation "NR" is placed next to the security's or company's name.
Nothing Done (ND)
In a day order, upon expiring at the end of the day, the status given to the order if it has not been executed.
Notice of Sale
Advertisement used by a municipal issuer to announce its plan to sell a new issue and to solicit investment bankers to enter bids for the issue.
Novation
1: The substitution of an older debt or obligation with a newer one.
2: An agreement to substitute one party to a contract with a new party. The new party has both the rights and obligations required by the original party. To make the transfer effective, consent of all parties is required.
NQB (National Quotation Bureau)
Daily service that provides its subscribers bid and asked quotes from market makers in securities traded over-the-counter. Stock quotes are published in Pink Sheets and corporate bonds in Yellow Sheets.
NTU (Normal Trading Unit)
Standard minimum size of a trading unit for a particular security--more commonly referred to as a "round lot". Stocks typically have a normal trading unit of 100 shares. However, inactive stocks may have normal trading units equal to 10 shares. Any amount of shares less than a round lot is called an "odd lot".
OB (Or Better)
A limit order to buy or sell a security that specifies to the broker that he should try to execute the order at a better price than the limit price. If the broker cannot do so, the order will be executed at the limit price. The abbreviation "OB" must be written on the order ticket.
Obligation
Any type of debt.
Obligation Bond
A mortgage bond that has a face value greater than the underlying property's value. The excess amount is the lender's cost that exceeds the mortgage value.
Obligator
Person or organization that has an obligation outstanding. The debtor is legally bound to pay the obligator any interest, if applicable, when due.
OBV (On Balance Volume)
Technical Analysis method that tries to pinpoint when a security's shares are being accumulated (being bought) or are being sold. The on balance volume line and the stock price line are placed on one chart. When the two lines cross, the analyst considers it to be meaningful. When the chart indicates that a security is being accumulated, it is considered a buy signal and when being distributed, a sell signal.
OCC (Option Clearing Corporation)
Organization equally owned by the exchanges through which the various options exchanges clear their trades. Some of OCC's responsibilities are supervising the listing of options, issuing and guaranteeing option transactions, processing the money transactions, and the assignment of option exercises to writers. The OCC also issues an options prospectus that outlines the rules and risks of trading options.
Odd Lot
Any number of shares traded that is less than its normal trading unit (round lot). Typically, an odd lot is 1 to 99 shares with a round lot being multiples of 100 shares. However, certain inactive stocks have round lots of 10 shares, with odd lots being 1 to 9 shares.
Odd Lot Differential
An extra charge, usually 1/8 of a point, that dealers may add to purchases and subtract from sales when the order's share quantity is less than the standard trading unit or round lot--also referred to as a "differential".
Odd Lot Theory
An investment strategy that assumes small investors are always wrong because they react emotionally to the market and are usually guilty of bad timing. In a rising market, a lot of odd lot buying is considered an indication of a technical weakness in the market and a signal to sell. On the contrary, in a declining market, a lot of odd lot selling is seen as an indication of technical strength and a signal to buy. However, studies of odd lot trading have proven that the theory does not have too much substance and that investors trading odd lots of market leader stocks have generally managed to do reasonably well.
Off Floor Order
A security order that is initiated off an exchange floor. These customer orders are placed with a broker and are required to be executed before orders that were initiated on the floor (on-floor orders--floor member orders who are trading for their own accounts).
Off-Board
Said of listed security transactions that are not executed on a national exchange, or of unlisted security transactions executed over-the-counter.
Offer
The price at which a person is willing to sell a security--also called "asked price". In contrast, the bid price is the price at which a person is willing to buy a security. The asked price is always higher than the bid price.
Offering Date
The date in which a new issue distribution is available to investors to purchase.
Offering Price
The price at which a new or secondary distribution of securities is sold to investing public--also called "public offering price".
Office Of Supervisory Jurisdiction (OSJ)
As defined by the Financial Industry Regulatory Authority' (FINRA)--a member's parent office(s) that is responsible for supervising an office, or a group of offices.
Official checks
StateTrust Bank issues official checks, also known as cashier’s checks, in the United States, as often as the accountholder requests them.
Official Notice Of Sale
A solicitation published, usually in financial newspapers, by municipalities that requests investment bankers to proffer a competitive bid on its pending bond issue. The notice lists the basic facts about the issue, such as its par value, and names the official who can provide further details.
Official Statement
A document prepared for a new municipal issue by or for the issuer. It describes the issue, financial details about the issuer and other relevant facts.
OID (Original Issue Discount)
A new bond issue that is usually offered below par. The bond's value is increased (accreted) over its life from the original discounted price up to par. At the bond's maturity, it will be valued at par. Interest on these types of bonds are not paid until maturity. However, the interest is taxed as it is accreted. An example of an OID is a zero coupon bond.
Omitted Dividend
A dividend that is scheduled to be declared, but has not been voted for by a corporation's board of directors. The board may not vote for the dividend because the corporation is having financial problems and has determined that it is more important to conserve the cash than to pay a dividend to shareholders. Once announced to the public, if the omitted dividend is not expected, the corporation's stock price will usually decline.
On Balance Volume
Technical Analysis method that tries to pinpoint when a security's shares are being accumulated (being bought) or are being sold. The on balance volume line and the stock price line are placed on one chart. When the two lines cross, the analyst considers it to be meaningful. When the chart indicates that a security is being accumulated, it is considered a buy signal and when being distributed, a sell signal.
On Floor Order
A security order that is initiated on an exchange floor. These orders are initiated by members on the exchange floor who are trading for their own accounts.
On The Close Order
A brokerage client's order to trade a NYSE security only if it can be executed on the moment the closing bell starts ringing on the exchange. The client has no guarantee of receiving the stock's final price.
On The Opening Order
A brokerage client's order to trade a NYSE security only if it can be executed as the first transaction of the trading session for that security. If the order cannot be executed as such, it is canceled immediately.
OPD
A ticker tape symbol that signifies that a security's price has changed materially from the previous day's close. A material change is usually 2 or more points on stocks selling at $20 or higher, 1 or more points on stocks selling at less than $20. OPD also designates a security's first transaction of the trading session after it has had a delayed opening.
Open
The status of an order that has not yet been executed.
Open End Indenture
A secured bond indenture that allows collateral to be repledged for the issuance of additional bonds.
Open End Management Company
A management investment company that issues new shares on demand when people buy them. The shares are bought at net asset value and may be redeemed back to the management company at any time at the current market price. Commonly called a "mutual fund", the type of vehicle that the shareholder's funds are invested in is dependent on the type of fund and its objectives.
Open Interest
The amount of outstanding contracts on a specific underlying security. A contract is considered to be outstanding if it is has not expired, or been exercised or closed out. Open interest also applies to the total number of contracts in an options market and is included in the options and commodity pages of daily newspapers.
Open Order
A good-til-canceled order. It stays in effect until it is either canceled or executed.
Open Repo
Repurchase agreement that has an undefined repurchase date that continues on a day-to-day basis--either party may end it at any time. Each day the interest rate is adjusted to reflect changes in the market.
Opening Transaction
The purchase or sale of an option. If a sale is an opening transaction, the investor is a writer.
Opening, The
At the beginning of a trading day, the price for a particular security or commodity.
Operating Income
A corporation's net sales minus its cost of goods sold, depreciation and selling and administrative costs. The total, shown on the corporation's income statement, indicates how much of the company's profits is attributable to its principal business.
Operating Profit Margin
Ratio, used by fundamental analysts, that relates operating income to net sales. Operating profit margin equals operating income divided by net sales.
Operating Profit Or Loss
Before tax profit (loss) that a corporation earns from operations after all operating costs have been deducted.
Operator
Person in charge of executing purchase/sales orders requested by the stockbroker.
OPM (Other People ’s Money
Industry lingo used when individuals or corporations use borrowed funds to increase their investment returns.
Option
A right, not an obligation, to buy/sell an asset at a specific strike price on or before a specific expiration date.
Option Agreement
An agreement by which a brokerage firm client agrees to follow the rules and regulations of the Options Clearing Corporation.
Option Fund
Mutual fund that trades options to increase the value of fund shares. The fund may either be conservative or aggressive. A conservative fund, commonly called an "option income fund", may buy stocks and increase shareholders' income through the premium earned by writing options on the stocks within the portfolio. An aggressive fund, commonly called an "option growth fund", may buy options in securities that the fund manager thinks will fall or rise sharply in the near term. If the manager is correct, large profits can be made on the exercise of the options.
Option Holder
Person who has bought a call or put option that has not yet expired and who has not yet exercised or sold it. A holder of a call option wants the underlying security's price to rise. A holder of a put option holder wants the underlying security's price to fall.
Option Premium
The market price of an option that is paid by an option buyer to the option writer (seller) for the right to buy (call) or sell (put) the underlying security at a specified price (called "strike price" or "exercise price") by the option's expiration date. The premium is set by the supply and demand of option traders as they evaluate the underlying security's future market value. Premium prices are quoted in increments of eighths or sixteenths.
Optional Dividend
A dividend in which the shareholder has a choice of whether to be paid in either cash or stock.
Optional Payment Bond
A bond in which the bondholder has the choice of receiving principal and/or interest in one or more foreign currencies as well as in domestic currency.
Options
A contract giving an investor a right to buy (call) or sell (put) a fixed amount of shares (usually 100 shares) of a given stock (or indexes and commodities) at a specified price within a limited time period (usually three, six, or nine months). The purchaser hopes that the stock's price will go up (if he bought a call) or down (if he bought a put) by an amount sufficient to provide a profit when he sells the option. If the stock price holds steady or moves in the opposite direction, the price paid for the option is lost entirely. Individuals may write (sell) as well as purchase options.
A buyer of a call option, for the right to buy 100 shares of the underlying security at a fixed (strike) price before a specified future date (expiration), pays the call option writer a fee called a premium. If the option is not exercised before it expires, the premium paid is lost. Thus, a call buyer believes that the price of the underlying shares will rise before the option expires. If the call buyer does exercise the option, the shares are bought from the writer at the option's strike price. The amount due to the writer equals the strike price multiplied by the number of shares. A buyer of a call option is generally bullish about the security, or in the case of index options, the market. A writer of a call option usually believes the security or the market will not move substantially up--thus, not making it worthwhile for the buyer to exercise.
A buyer of a put option, for the right to sell 100 shares of the underlying security at a fixed price before a specified future date, also pays a premium to the writer of the put. A put buyer believes that the price of the underlying security is going to decline. If the put buyer exercises the option, the underlying security shares are sold to the put writer at the option's strike price. A put buyer is generally bearish about the security or the overall market. The writer typically believes the security or the overall market will not move substantially down--thus, not making it worthwhile for the buyer to exercise.
Buyers of options do not have to exercise an option in order to profit--they may attempt to profit on the option by selling it before its expiration by trading on the rise and fall of premium prices. Writers may also attempt to profit by buying back the option sold at a lower price (or it can expire worthless). An option seller can either write uncovered (interchangeably called "naked") or covered options. Naked options are far riskier.
Order Ticket
A form that is completed by a broker when receiving an order from a client. The order ticket will show the type of order (buy or sell), the number of shares, the security's name, the price qualifications (such as market or limit) and the client's name and account number.
Orders
In regard to securities, it is a client's instruction to a broker to buy or sell a security. There are many types of order qualifiers that stipulate such things as the amount of time in which to leave an order in and at what price to execute an order.
Original Issue Discount (OID)
A new bond issue that is usually offered below par. The bond's value is increased (accreted) over its life from the original discounted price up to par. At the bond's maturity, it will be valued at par. Interest on these types of bonds are not paid until maturity. However, the interest is taxed as it is accreted. An example of an OID is a zero coupon bond.
OSJ (Office Of Supervisory Jurisdiction)
As defined by the Financial Industry Regulatory Authority' (FINRA)--a member's parent office(s) that is responsible for supervising an office, or a group of offices.
OTC (Over The Counter)
A market for securities that are not listed on an exchange. Security orders are transacted via telephone and a computer network that connects dealers. As opposed to the NYSE, which is an auction market, the OTC is a negotiated market. OTC dealers may either act as either principals or agents for customers. The OTC market is regulated by the FINRA.
OTC Margin Stock
Corporations whose stocks, which are traded over-the-counter, have met specific criteria under Regulation T of the Federal Reserve Board that qualifies them as a margin security.
Out Of Favor Stock Or Industry
Stock or industry that investors do not currently like. There are many reasons that can cause this disfavor. The banking industry, for example, would be out of favor if interest rates rise because it could harm the bank's profit. Investors who buy stocks that are out of favor are called "contrarian investors". Their goal is to purchase the stock cheaply and to sell it when their earnings increase.
Out Of Line
Said of a stock whose price is either too high or low in comparison to similar stocks in the same industry. The comparison is usually based on the price/earnings ratio (PE).
Out Of The Money
An option that has no intrinsic value--for example, an option whose strike price, in the case of a put, is lower than the stocks current price, or in the case of a call, is higher. An investor who buys an out-of-the-money option is speculating that the option will rise in value and become in-the-money.
Out The Window
Said of a new issue that has been distributed very quickly to investors--also called "hot issue".
Outstanding Stock
Common shares of a corporation that are held by investors. The figure is shown on the corporation's balance sheet as "capital stock issued and outstanding".
Over The Counter (OTC)
A market for securities that are not listed on an exchange. Security orders are transacted via telephone and a computer network that connect dealers. As opposed to the NYSE, which is an auction market, the OTC is a negotiated market. OTC dealers may either act either as principals or as agents for customers. The OTC market is regulated by the FINRA.
Overbought
A single security or a market that technical analysts believe has risen to an unreasonable level and thus, should start to decline. If all shareholders who want to buy the stock have already done so, there should only be sellers in the market, and thus, the price will drop.
Overheating
An economy that is expanding so quickly that there is concern about inflation rates rising. The Federal Reserve usually tries to slow the economy's pace by tightening the money supply. This causes less money to be chasing after goods and services.
Overissue
Capital stock shares issued above the amount authorized to be issued. The security's registrar (typically a bank acting as an agent) works with the security's transfer agent in issuing new shares and canceling and reissuing certificates for transfer to new owners. These two parties keep track of the outstanding shares to prevent overissuance of shares.
Overlapping Debt
Debt of a political entity, such as a state, where its tax base extends to the tax base of another political entity, such as a county within the state. When evaluating a municipal bond, if the issuer has overlapping debt, it should be considered.
Overnight Position
Broker-dealer who has a long position or a short position in a security at the end of a trading day.
Oversold
A single security or a market that technical analysts believe has declined to an unreasonable level and thus, should start to rise. If all shareholders who want to sell the stock have already done so, there should only be buyers in the market, and thus, the price will rise.
Oversubscribed
Term used when a new stock issue has more potential buyers than shares. The stock will usually rise in price when it starts trading on the open market as buyers who could not previously purchase the issue will now do so.
Ownership transfer trust
A trust designed to allow compounding of assets and benefits until beneficiaries reach a certain age or achieve certain goals, as set forth by the trustor.
P&L (Profit And Loss Statement)
A summary of a corporation's revenues, costs, and expenses within an accounting period--also called an "Income Statement".
P/E Ratio
The relationship between a stock's price and its earnings per share. It is calculated by dividing the stock's price per share by earnings per share for a twelve month period. For instance, a stock selling for $25 a share and earning $5 a share is said to be selling at a P/E ratio of 5.
The ratio, also known as the "multiple", gives an investor an approximation of how much they are paying for a corporation's earning power. Low P/E stocks are usually in mature industries. They may be blue chip or out of favor companies. In either case, their growth potential is limited. Companies with high P/E ratios (over 20) are usually up-and-comers that are fast growing. These companies are riskier investments.
Paper Profit (Loss)
Any profit or loss on a security that is not realized because it has not actually been sold.
Par
1: The face value or principal value of a bond, usually $1,000 per bond. A bond trading at par is trading at its face value.
2: A preferred stocks' face value, usually $100 per share. The stock's book value, liquidating value and dividend payments are based on the par value.
3: A common stock's stated value. It is primarily used for bookkeeping purposes and has no relationship to its market value.
Partial Delivery
Term used when a seller does not deliver the full amount of shares sold. Partial delivery would occur, for example, if 500 shares were sold and the seller only delivers 400.
Payment Date
Date on which declared stock dividend or bond interest is paid to holders of record.
Payment-In-Kind Securities (PIK)
Bonds and preferred stocks whose interest and dividends are paid in additional bonds or preferred stock.
Payout Ratio
The percentage of a corporation's earnings that are paid to shareholders as dividends. For example, a corporation that pays a $.12 dividend out of every $1.00 of earnings has a payout ratio of 12%.
Penny Stock
A low priced stock that is traded in the over-the-counter market. It typically sells for less than $1 a share. Penny stocks are very volatile and speculative.
Pension Fund
A fund that is set up to pay pension benefits to retired employees of a corporation, government entity, or to other organizations. The fund's earnings are tax deferred until withdrawn by the retiree, who is then responsible for paying taxes on the amount withdrawn.
Performance Fund
A mutual fund whose goal is to achieve maximum growth of capital--sometimes called "aggressive growth funds". The fund invests in companies that are in high growth cycles. Such companies typically do not pay dividends as its earnings are plowed back into the firm for expansion. Although these funds have a higher risk than a growth or balance fund, it is not considered to be speculative
Perpetual Warrant
A warrant that gives the holder the right to buy a fixed number of common shares of stock at a fixed price. It does not have an expiration date.
Personal assets ccompany
A legal entity created in an international jurisdiction to receive funds (bank accounts, investments) from a customer’s financial assets, as part of an estate succession process.
PFD (Preferred Stock)
An abbreviation that is commonly used on order tickets to indicate a preferred stock. A preferred stock is a type of capital stock that pays dividends at a set rate (at the time of issuance). Dividend payments to preferred holders must be made before common stock dividends can be paid. Preferred stocks usually do not have voting rights.
PIK Securities (Payment-In-Kind)
Bonds and preferred stocks whose interest and dividends are paid in additional bonds or preferred stock.
Pink Sheets
A National Quotations Bureau daily publication that lists market maker's bid and asked prices from the prior day for over-the-counter securites. Equity securites are printed on long pink paper, hence the name. Debt securities are printed on long yellow sheets, hence their name, yellow sheets.
Pledge
The transfer of property, such as securities, to a creditor (or lender) as collateral for an obligation--such as securities bought on margin or a bank loan. "Assign" differs from pledge (or hypothecate) as an assignment involves a transfer of title, whereas pledging does not.
Pledged assets
An asset controlled by the bank, which serves as warranty or collateral for a loan.
Pledged warranty
Financing which uses an asset to secure payment of a short-term debt.
Plus
1: A sign used to indicate that a transaction for a particular security was at a higher price than the previous transaction.
2: A fractional variation used to indicate a Treasury note or bond that is being quoted in 64ths. For instance, 93.16+ means 93 and 33/64th of par. The numerator is 2 times 16 plus 1; 64 is the denominator.
3: In newspaper stock listings, a + in the change column means that the closing price of a security is higher than the previous day's close by the amount in the column.
Plus Tick
Security transaction executed at a price higher than the preceding transaction in the same security--also called an "uptick". For each security in which its last price is higher than the preceding transaction, a plus sign is displayed next to its price at the trading post on the floor of the NYSE. Short sales can only be executed on upticks or zero plus ticks.
PMV (Private Market Value)
The aggregate value of a corporation if it is broken into individual operations and each piece is given its own stock price--also called "breakup value" or "takeover value". Analysts look for corporations with high PMV relative to its current market value to identify potential takeover targets and bargains. It differs from the corporation's liquidating value because it does not include going-concern value.
POA (Power Of Attorney)
Written document that permits a third party to do transactions on the behalf of the person signing the document. Depending on the specifications within the document, a power of attorney may be full or limited.
Point
1: In stocks, a point equals $1. If ABC shares rise 1 1/4 points, each share has risen $1.25.
2: In bonds, a point equals $10 since a bond is quoted as a percentage of $1,000. A bond that rises 2 1/2 points gains 2.5% of 1,000, or $25. Thus, a bond that advances from 89 to 91 1/2 means a gain in dollar value from $890 to $915.
3: In market averages, the point is a unit of movement in an average. It is not equivalent to any dollar value. For example, if the Dow-Jones Industrial average rises from 4236 to 4258.5, it has risen 22.5 points.
Portfolio
The holdings of more than one stock, bond, cash equivalent or other asset by an individual or institution. A portfolio may be designed to achieve the investors goals--such as obtaining maximum returns or reducing risk through diversification.
Portfolio and account report
The account statements in a WorldPass portfolio. Account statements are divided into sections that show activity by product type. All monthly account statements are archived and are available online.
Portfolio-backed lending
These loans provide immediate credit access to customers with portfolios containing high liquidity assets, without the need to sell or dispose of their securities.
Position Building
The accumulation of a long or short position in such a manner as to not push the security's price up or down. This method of slowly building a large position is used by institutional investors.
Positive Yield Curve
On debt securities of similar quality, a condition in which the yields on long term securities are higher than the yields on short term securities. Typically, short term interest rates are lower than long term rates--those who invest their money for longer periods are taking more risk.
Post
A structure shaped like a horseshoe that is located on the floor of the NYSE. Specific securities are traded at each post. Monitors surrounding the post display quotations for the securities traded at that particular post.
Power Of Attorney (POA)
Written document that permits a third party to do transactions on the behalf of the person signing the document. Depending on the specifications within the document, a power of attorney may be full or limited.
Preemptive Right
A right given to shareholders that allows them to purchase shares of a new issue before it is offered to non-shareholders. This allows shareholders to retain the same percentage of ownership in a corporation.
Preferred Stock
A preferred stock is a type of capital stock that pays dividends at a set rate (at the time of issuance). Dividend payments to preferred holders must be made before common stock dividends can be paid. Preferred stocks usually do not have voting rights.
Premium Bond
A bond that is selling above its face value or redemption price.
Premium Income
Money received by option writers (sellers) from option buyers in payment for specific rights. A person who writes options to collect premiums hopes that the market price for underlying security remains stable. A put writer does not want the security to fall, and a call writer does not want it to rise.
Premium Raid
An attempt to take control of a company by offering its shareholders an amount over the current market value of their shares.
Pretax Earnings Or Profit
The amount of profit a corporation earns before paying its taxes. It is calculated by subtracting all costs and expenses (other than taxes) from total revenues.
Price Change
The difference in a security's price at the close of a trading session as compared to its previous session's closing price. In the case of an average (or index), all of its components' price changes are taken into account.
Price Range
The high and low price that a security traded at during a designated period. In annual reports, a corporation will show the price range for its fiscal year. In daily newspapers, the period is a rolling 52 weeks.
Price/Earnings Ratio (P/E)
The relationship between a stock's price and its earnings per share. It is calculated by dividing the stock's price per share by earnings per share for a twelve month period. For instance, a stock selling for $25 a share and earning $5 a share is said to be selling at a P/E ratio of 5.
The ratio, also known as the "multiple", gives an investor an approximation of how much they are paying for a corporation's earning power. Low P/E stocks are usually in mature industries. They may be blue chip or out of favor companies. In either case, their growth potential is limited. Companies with high P/E ratios (over 20) are usually up-and-comers that are fast growing. These companies are riskier investments.
Prime Paper
The best quality commercial paper as rated by agencies such as Moody's Investors Services and is investment grade. Moody's has three ratings for prime paper--P1 (highest quality), P2 (higher quality), and P3 (high quality).
Prime Rate
Interest rate charged by banks to their most creditworthy and largest corporate customers. The prime rate is used as a base rate for other types of loans such as personal, commercial and financing. These types of loans are normally of an interest rate a few points above the prime rate. Additionally, as the customer's creditworthiness declines, the interest rate will increase.
Principal
1: The face value or par value of a debt instrument that is separate from interest.
2: A person's capital, or the amount invested.
3: An employee of a securities firm who has supervisory responsibilities.
Principal Amount
The face value of a bond, or other obligation, that is required to be paid to the holder at maturity.
Principal Stockholder
A shareholder who owns a 10% or more voting stock in a registered company.
Private Market Value (PMV)
The aggregate value of a corporation if it is broken into individual operations and each has its own stock price--also called "breakup value" or "takeover value". Analysts look for corporations with high PMV relative to its current market value to identify potential takeover targets and bargains. It differs from the corporation's liquidating value because it does not include going-concern value.
Private Purpose BondPrivate Purpose Bond
A municipal bond whose interest may (or may not) be federally tax-exempt--also called "private activity bonds". It is dependent on the percentage of the bond's benefits that goes to private activities. A private purpose bond for a sports arena would not be tax-exempt, while one for an airport would. A sports arena generally does not help the general public whereas an airport can help the entire community.
Probate
Process whereby a decedent's will is proffered to a court and an executor is appointed to handle the settlement of the will.
Proceeds
An amount received from selling a security after commissions are deducted.
Producer Price Index
A measure of changes in wholesale prices. The index is calculated monthly by the US Bureau of Labor Statistics. Its components are broken down by industry sector, commodity and processing stage.
Profit
The difference between a security's purchase price and selling price. If the selling price is higher than the purchase price, there is a profit. Conversely, if the selling price is lower than the purchase price, there is a loss.
Profit And Loss Statement (P & L)
A summary of a corporation's revenues, costs, and expenses within an accounting period--also called an "Income Statement".
Profit Sharing Retirement Plan
A plan that is established so that a corporation's employee may share in the company's profits. When there are profits, the corporation makes an annual contribution for each of its employees. The funds within the plan are tax deferred until withdrawn by the employee upon retirement or leaving the firm. Profit sharing plans are considered institutional investors.
Profit Taking
Selling securities that have appreciated in value since purchase, to realize the profit. In a rising market, profit taking temporarily pushes down prices.
Program Trading
Use of a computer-driven program by arbitrageurs and institutional traders for buying and selling baskets of 15 or more stocks. The program monitors various markets and securities and gives buy and sell signals when opportunities for profits arise or when market conditions warrant the accumulation or liquidation of a position.
Proprietorship
An unincorporated business owned by one person who is entitled to all the profits (or losses) generated from the business and is responsible for its taxes and other liabilities.
Prospectus
A printed document that summarizes a corporation's registration statement for a new issue of non-exempt securities that was filed with the SEC. It details material information about the corporation and the security being issued. A prospectus must be given to all buyers and potential buyers of the new issue.
A preliminary prospectus is given to investors when brokers obtain indications of interest. Although the document does not have all the information included in the offering circular, it does include the major facts. A preliminary prospectus is often called a "red herring" because its front-page notice is printed in red ink. The notice states that the preliminary prospectus is "subject to completion or amendment" and "shall not constitute an offer to sell...".
Prospectus
For investment products, the prospectus is a written document that explains the costs, characteristics, objectives and other details of an investment portfolio. A copy of the prospectus must be given to a customer before the purchase of mutual funds, and the customer should read it carefully before making investments or sending money.
Proxy
A written authorization by a shareholder allowing a representative to vote for or against business proposals and directors at annual meetings. The results of these votes are announced at the meeting.
Proxy Fight
A strategy used by an acquiring company in its attempt to take control of a target company. The acquirer and target solicit the target's shareholders to obtain proxy votes. Whichever company obtains more votes, wins--that is, if the acquirer receives the majority of the proxy votes, it has effectively gained control of the target without paying a premium price for the firm.
Proxy Statement
Information given to shareholders on company matters that need to be voted on. The statement is sent in conjunction with the proxy solicitations.
Prudent Man Rule
An investment standard used by fiduciaries as a guide for identifying acceptable investment vehicles. Some US states allow the fiduciary to invest in securities that would be bought by a prudent man of discretion and intelligence, and who looks for a reasonable income and preservation of capital. Other states require that the fiduciary only invest in a list of securities designated by the state.
Public issuance
The sale of shares to public investors through a stock exchange.
Public offering
The offer of financial instruments for sale to the public.
Public Offering
An offering of new securities to the investing public at a public offering price that has been agreed upon by the issuer and the investment bankers. This can only be done after the issue has been registered with the SEC. The term is also used when refering to a secondary distrution of securities previously issued.
Public Offering
An offering of new securities to the investing public at a public offering price that has been agreed upon by the issuer and the investment bankers. This can only be done after the issue has been registered with the SEC. The term is also used when refering to a secondary distrution of securities previously issued.
Public Offering Price
The price at which a new issue is offered to the public by underwriters.
Public Offering Price
The price at which a new issue is offered to the public by underwriters.
Publicly Held
A company whose shares are publically available to the general public. A publicly held company is usually regulated by the SEC.
Put Bond
A bond, at the holder's option, that can be redeemed at face value on a specific date or dates. In return for this right, the holder recieves a lower yield than on a similar fixed-rate bond.
Put Bond
A bond, at the holder's option, that can be redeemed at face value on a specific date or dates. In return for this right, the holder recieves a lower yield than on a similar fixed-rate bond.
Put Option
A contract that gives the holder the right to sell a specified number of shares (usually 100) of a particular stock, stock index or dollar face value of bonds, at a predetermined price--called the "strike price"--on or before the option's expiration date. For this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the stock's price drops. If the holder decides to exercise the option (as opposed to selling it), the writer must buy the security. The writer profits when the underlying security's price remains the same, rises or drops by less than the premium received.
Put To The Seller
Term used when the holder of a long put option exercises the position. The put option writer (seller) is required to buy the underlying security at the strike price. For example, if an ABC July 50 put is "put to the seller", the writer has to buy 100 shares of ABC at $50 a share from the put holder. The actual current market price for ABC may be less than $50 a share.
Q-TIP Trust (Qualified Terminable Interest Property Trust)
A type of trust that is frequently used to provide for the welfare of a spouse. It keeps the assets out of the estate of another (such as a future marriage partner) if the grantor dies first. It allows assets to be transferred between spouses. The grantor of a Q-Tip trust directs the income generated from the assets to their spouse for life, but has the power to distribute the assets upon the death of the spouse. The trust qualifies the grantor for unlimited marital deductions if the spouse dies first.
Qualified Legal Opinion
A contingent confirmation regarding the legality of a new municipal bond issue. If there is a lawsuit to block a new municipal bond issue, the bond counsel will examine the situation. If the counsel concludes that there may be a premise for the suit, a qualified opinion is issued that expresses their doubt as to the result of the lawsuit. A non-qualified opinion has no uncertainty concerning the new issue.
Qualified Pension Plan or Trust
A retirement plan (or annuity) set up by an employer for an employee into which the employee and/or the employer may make tax deductible contributions. The plan's investment earnings are tax deferred. The employees pay taxes only when they draw money from the plan. If the money is withdrawn before the legal age, penalties may also be incurred. IRA's, and most corporate pension plans are deemed to be qualified.
Qualified Terminable Interest Property Trust (Q-TIP Trust)
A type of trust that is frequently used to provide for the welfare of a spouse. It keeps the assets out of the estate of another (such as a future marriage partner) if the grantor dies first. It allows assets to be transferred between spouses. The grantor of a Q-Tip trust directs the income generated from the assets to their spouse for life, but has the power to distribute the assets upon the death of the spouse. The trust qualifies the grantor for unlimited marital deductions if the spouse dies first.
Qualified Terminable Interest Property Trust (Q-TIP Trust)
A type of trust that is frequently used to provide for the welfare of a spouse. It keeps the assets out of the estate of another (such as a future marriage partner) if the grantor dies first. It allows assets to be transferred between spouses. The grantor of a Q-Tip trust directs the income generated from the assets to their spouse for life, but has the power to distribute the assets upon the death of the spouse. The trust qualifies the grantor for unlimited marital deductions if the spouse dies first.
Qualifying Share
In order to qualify as a director of a corporation, the potential director must own a share of the corporation's common stock.
Qualitative Analysis
Securities analysis that looks at a corporation's management experience, employee morale and the status of labor relations instead of the corporation's financial data.
Quantitative Analysis
Securities analysis that looks at a corporation's financial data and projections. Such items include its assets, liabilities, sales pattern and profitability.
Quarter Stock
Stock with a par value of $25 per share.
Quick Asset
Current assets that can be converted to cash quickly and easily. Quick assets are current assets less inventory.
Quick Asset Ratio
Also called acid test ratio or quick ratio, it is a corporation's current assets minus inventories divided by current liabilities. By excluding inventory from the formula, the ratio focuses on a corporation's liquid assets, and helps determine if the corporation can meet its current liabilities with its convertible assets if sales ceased. A corporation is considered sound when quick assets exceed current liabilities.
Quid Pro Quo
In the securities industry, it is an agreement in which a company, using institutional research, will execute all trades based on that research with the firm providing it and thus, makes payment in soft dollars. This is done instead of directly paying for the research.
R
Abbreviation used in stock listings of newspapers to indicate stock dividends that have either been declared or paid in the preceding 12 months.
Raider
Individual or corporation who purchases a controlling interest in a company's stock. The raider's purpose is to gain control of the target company and to instate new management. Accumulation of more than 5% of the target company's outstanding shares must be reported to the SEC, the exchange in which the target is listed, and the target itself.
Rally
A marked rise that follows a period of decline or sideways movement in the general level of the market or in individual securities.
Random Walk
A stock market theory that hypothesizes that past prices are of no use in forecasting future price movements. The theory maintains that prices move in a random pattern and that they are no more predictable than the walking pattern of a wandering person. This directly contradicts technical analysts' use of charts to forecast stock prices.
Range
A security's, or the general market's, highest and lowest price in which it has traded over a specified time--usually a rolling 52 week time period. In newspaper stock listings, a security's 52 week high and low price range is published. Technical analysts watch trading ranges carefully because they believe it is of great importance when a security breaks out of its trading range--high or low end.
Rate Of Return
1: In common stock, the rate of return equals its dividend yield--calculated by dividing the annual dividend by the original purchase price. Rate of return may also refer to the total return, which is capital appreciation plus the dividend.
2: In fixed-income securities such as bonds and preferred stock, the rate of return equals the current yield, which is the coupon or dividend rate divided by the original purchase price.
Rating
The evaluation of credit risk of securities by an established rating service such as Moody's Investors Services, Standard & Poor's Corporation, Fitch Investors Service or Value Line Investment Survey.
Real interest rate
Rate reflecting income flow based on its real value, corrected for the effects of inflation.
Real Rate Of Return
An investment's return that is adjusted for inflation.
Realized Profit (Loss)
Any profit or loss attributable to a security's sale or the transfer of title representing ownership of the security.
Recession
As reflected in the gross national product, a decline in economic activity in at least two consecutive quarters.
Reclamation
The procedure whereby certificates, already delivered to settle a transaction, are returned because they are in non-deliverable form. The party who is affected by the bad delivery may recover any losses incurred.
Record Date
The date on which a shareholder must officially own a stock's shares in order to receive a company's declared dividend or, among other things, to vote on company issues.
Redemption
The repayment of the principal (par) amount of a debt security, or a preferred stock, at or before its maturity. Mutual fund shares are redeemed at net asset value when a shareholder liquidates their shares.
Redemption Price
1: In bonds and preferred stocks, it is the call price.
2: In mutual funds, it is the net asset value.
Reg T (Regulation T)
Federal Reserve Board regulation that governs the extension of credit to clients of broker-dealers. The rules specify the amount and type of credit that may be extended or must be maintained when clients purchase, carry, or trade eligible securities. It defines eligible securities and establishes initial margin requirements. Reg T does not cover the extension or maintenance of credit by a broker-dealer for clients who purchase or trade in exempt securities. Regulation T of the Federal Reserve Board is commonly abbreviated as Reg T.
Regional Stock Exchanges
National exchanges located around the United States that are registered with the SEC. When referring to a regional exchange, the NYSE is not included. Regional exchanges include Boston, Cincinnati, Midwest (Chicago), Pacific, and Philadelphia. These exchanges list regional issues and many issues that are also listed with the NYSE.
Registered Company
A company that has issued securities in compliance with the registration requirements of the Securities Exchange Act of 1934.
Registered Options Principal (ROP)
A brokerage firm employee who supervises registered representatives regarding their client's options account activities and their solicitation of new options clients.
Registered Representative (RR)
A brokerage firm employee who acts as an account executive for clients. In a full brokerage house, a registered representative solicits clients' business and provides advice on when to buy and sell securities. For this advice, the RR may receive a percentage of the commission that is charged to the client for making such transactions. In a discount firm, a RR facilitates the execution of client orders. The RR does not solicit new customers or give investment advice.
Registered Security
A securities certificate that is recorded in the name of the owner on the books of the issuer. Ownership of the security can only be transferred when the certificate is endorsed by the registered owner.
Registrar
An agency, usually a trust company or bank, who has the responsibility of keeping a record of the owners of a corporation's securities and the issuance of securities.
Reinvestment Privilege
Shareholders' right that allows them to reinvest their dividends to purchase additional shares in a mutual fund or a corporation, typically without any additional fees.
Relative Strength
In a rising market, the rate at which a security's price rises in relation to other securities. In a declining market, the rate at which a security's price drops in relation to other securities. Analysts contend that a security that holds its value in a down market will be a solid performer on the upside and vice versa.
Reorganization
1: Financial restructuring of a corporation in bankruptcy.
2: A department within a brokerage firm that handles client's securities that are merging, being taken over, etc. The department is usually just called "Reorg".
Required Rate Of Return
Return that an investor requires before they are willing to earmark money for an investment that has a certain risk level. The expected return must be greater than the required return for the investment to be acceptable.
Research Department
A department within a brokerage firm, or other institutional investing organization, that analyzes securities and markets using both fundamental analysis and technical analysis. The analyst makes trading recommendations for firm accounts, institutions and retail clients (provided by their broker). If followed by many investors, an analyst's recommendations can have an impact on security prices.
Resistance Level
The upper limit of a security's trading range in which selling pressure tends to cause the price of a stock to decline. For example, if ABC's stock ranges between a low of $24 and a high of $36 per share, $24 is the support level and $36 is the resistance level. When a security breaks through the resistance level, technical analysts believe the security will reach new high prices.
Restricted Stock
Stock that is not registered under the Securities Exchange Act of 1933. Restricted stock is either purchased through a company's stock option plan, or a private placement. The investor is required to sign a letter agreeing that the purchase is for investment and not short term profit. The investor is required to hold the stock for two years before it can be sold. Sale of restricted stock is governed by SEC Rule 144.
Restrictions
Limitations or exclusions in a policy.
Retail House
A brokerage firm that provides services to individual clients as opposed to institutions.
Retail Investor
An investor who buys and sells securities for their own behalf--not for an organization. Retail investors typically trade in much smaller quantities than institutional investors.
Retained Earnings
Net profits that have been reinvested back to the business after dividends are paid to stockholders--also called "earned surplus". Retained earnings are customarily an important component of stockholders' equity.
Retirement
In the securities industry, the term refers to the repayment of a debt obligation or the cancellation of securities that have been redeemed.
Return
Realized profit on capital investments or securities stated as an annual percentage rate.
Return On Equity (ROE)
An amount, stated as a percentage, that informs common shareholders how effectively the funds invested are being utilized during a specific period. Trends can be found if current and prior periods are compared and if compared with industry composites, it shows whether or not the company is keeping up with its competitors. The rate is calculated by dividing net earnings by average stockholders' equity.
Reversal
As charted by technical analysts, a sustained change in direction of stock or commodity markets. This may either be a change from a rising market to a declining market or vice versa.
Reverse Split
Procedure whereby a corporation reduces the number of outstanding shares. The total market value of the shares remains the same after the reverse split, however, a share is worth more. A company, for example, executes a 1 for 2 split. An investor owning 1000 shares will deliver them to the issuer and they will receive half as many new shares--but the shares will have double the value of the original shares. Thus, the investor now has 500 shares with a value of $8, instead of 1000 at $4--that is, the investor shares are worth the same amount as before the split.
Reverse splits may be used by corporations whose shares are selling at very low market prices. They believe that if the security's price is raised, it will attract more investors.
Revocable beneficiary
A beneficiary who can be revoked or changed at any time by the policyholder.
Revocable Trust
A trust in which any of its provisions can be changed, or the trust itself can be canceled at any time by the grantor. The grantor receives income from the assets. This contrasts with an irrevocable trust in which the trust cannot be amended or canceled and the assets are not subject to estate taxes.
Risk
The possibility that an investment may result in relationship loss.
Risk premium
The difference between the required rate of return of a specific risky asset and the rate of return of a risk-free asset with the same expected life.
Risk tolerance
In financial terms, risk tolerance refers to an individual’s or institution’s capacity to be exposed to the volatility of markets. This tolerance is related to each investor’s age, financial capacity, and knowledge of investment instruments, among other factors.
S&P (Standard & Poor ’s Corporation)
Acronym for Standard & Poor's, a provider of a wide variety of investment-related services including ratings for bonds, stocks, and commercial paper; publishing statistical information and reports; and compiling indexes, including the Standard & Poor's Index of 500 Stocks.
Sales Charge
A fee paid to a broker in connection with the purchase of a load mutual fund or a limited partnership. The sales charge, or load, generally decreases as the size of the investment increases.
Same Day Substitution
The purchase and sale of securities on the same day in a margin account, both having equal dollar value. When a same-day substitution is made, a margin call is not generated, and there is no credit release to the special miscellaneous account (SMA). A long sale and a short sale are also considered a same-day substitution.
Same Side Of The Market
In options, it relates to the investor's expectations for the underlying security--that is either bullish or bearish. Short calls and long puts are bearish. Long calls and short puts are bullish.
Saucer
A technical chart pattern that indicates a security's price has begun to increase after declining and bottoming out. An inverse saucer has a reverse pattern characterized by a decline after increasing and then reaching a plateau.
Script Certificate
A fractional share of a stock issued by a corporation.
Seasonal Stock
A stock whose value fluctuates due to holidays, vacations, and changes in the climate. For instance, a toy company may experience an increase in sales and earnings during the Christmas season.
Seat
Membership on an exchange.
SEC (Securities And Exchange Commission)
A federal agency created in 1934 by an act of Congress to regulate various aspects of the securities industry. The SEC is made up of five commissioners, each appointed by the President, with the advice and consent of the Senate, for a five-year term. In order to ensure the political independence of the commissioners, no more than three may be from the same political party at any one time.
SEC Fee
A nominal fee charged by the SEC on the sale of listed equity securities.
Secondary Distribution
The sale of previously issued shares of a security to the public. Usually these are shares owned by large institutions or corporations, rather than by the issuer as is the case with an initial public offering.
The sale is usually not handled on an exchange, but instead is handled by an investment banker or group of investment bankers. Also known as a "secondary offering".
Secondary Market
The trading in existing or outstanding shares of securities as opposed to new issues, or initial public offerings. Transactions in the secondary market occur either on an exchange or in the over the counter market.
Secondary market
A market where previously issued securities, that are already in circulation, are traded.
Sector Fund
A mutual fund that invests in the stocks of a particular industry, such as the airline industry.
Securities Investor Protection Corporation (SIPC)
A nonprofit corporation established by an act of Congress in 1970 in order to protect the customers of brokerage firms from the insolvency of those firms. All broker-dealers registered with the Securities and Exchange Commission and with a national exchange are required to join. SIPC provides up to $500,000 in protection, of which no more than $100,000 may be in cash.
Security
Any instrument that represents ownership, or the right to ownership, of a corporation, or that represents the debt of a corporation.
Seek a Market
To look for a buyer or a seller.
Self Directed IRA
Individual retirement account that is managed by an account holder who appoints a custodian to carry out instructions. This kind of IRA is subject to the same types of restrictions and limitations as a regular IRA.
Sell Out Procedures
Liquidation of a margin account that has failed to meet the equity requirements established by margin regulations, or liquidation of a security that has not been paid for by the customer in accordance with industry regulations.
Sell Stop Order
An order to sell a security at the market price once the security trades through a specified price, called the stop price.
Seller ‘ s Option Contract
A transaction in which normal settlement cycles are not followed, and instead the seller has the right to make delivery within a specified period of time, ranging from not less than six business days to not more than 60 calendar days. The seller is required to provide written notification to the buyer one full business day prior to making delivery.
Sellers Market
A situation where demand for a security or product exceeds supply, thereby causing an increase in the price of the security or product and allowing sellers to set the terms of sale.
Selling Climax
A sudden drop in the market due to panic on the part of investors.
Selling Dividends
An practice whereby a broker encourages a customer to buy mutual fund shares in order to receive an anticipated dividend. Since the dividend is part of the net asset value of the fund and already reflected in the price, the customer earns no benefit by purchasing the fund prior to the scheduled dividend.
Selling Off
The act of selling securities in a panic situation in order to avoid a greater loss than already sustained.
Selling On The Good News
The act of selling a security shortly after a positive news article is disseminated to the public. Very often, investors are eager to buy a stock if there is good news, thereby pushing the price up. Sellers who think the stock has peaked will sell on the good news rather than risk a subsequent decline.
Selling On The Good News
The act of selling a security shortly after a positive news article is disseminated to the public. Very often, investors are eager to buy a stock if there is good news, thereby pushing the price up. Sellers who think the stock has peaked will sell on the good news rather than risk a subsequent decline.
Selling Short
The sale of a security that the investor does not own in order to take advantage of an anticipated decline in the price of the security. In order to sell short, the investor must borrow the security from his broker in order to make delivery to the buyer. The short seller will eventually have to buy the security back, or buy to cover, in order to return it to the broker. Short selling Is regulated by Regulation T of the Federal Reserve Board.
Selling Short Against The Box
A short sale where the investor owns the security, but does not want to use the shares for delivery, so he borrows them from the brokerage firm. This is usually done to lock in a profit, while delaying the tax consequences to a subsequent year.
Senior Securities
Debt securities and preferred stocks. These securities are senior to common stock because they have prior claim to a corporation's assets in the event of bankruptcy.
Sensitive Market
A market highly susceptible to new announcements, either good or bad.
SEP (Simplified Employee Pension)
Acronym for simplified employee pension plan, a type of pension plan whereby both the employee and employer contribute to the employee's individual retirement account.
Series Of Options
All call or put options on a security having the same exercise price and expiration date. For example, all XYZ October 30 calls would comprise a series of options.
Settlement
The conclusion of a securities transaction, as evidenced by the seller delivering the security and the buyer paying for it. Most securities, but not all, settle in three business days.
Settlement Date
The date upon which the buyer and seller of a security are expected to settle a transaction, as evidenced by the seller delivering the security and the buyer paying for it. Most securities, but not all, settle in three business days.
Share
A single unit of ownership in a corporation or mutual fund.
Shareholder
An individual who owns one or more shares of a corporation or mutual fund. Shareholders may earn dividends and shareholders of common stock have voting rights with regard to matters that affect the corporation.
Shareholder ’s Equity
The assets of a corporation minus the liabilities of the corporation. Also called equity, or net worth.
Short Covering
Buying stock in order to close out, or cover, a position previously created by a short sale.
Short Interest
The total number of shares that have been sold short and have yet to be repurchased.
Short Interest Theory
The belief that a large short interest in a particular security means the market price of the security is about to increase because the short positions must eventually be covered, or repurchased. The theory asserts that this cushion of potential buyers will serve to support a declining market or accelerate a rising market.
Short Market Value
The number of shares of a short security multiplied by the current market price.
Short Position
Stock shares that an individual has sold short and has not yet covered, as of a particular date.
Short Squeeze
A situation that occurs when the price of a security increases dramatically, thus pressuring short sellers to cover their short positions in order to avoid greater losses. The covering of short positions serves to raise the price of the security even more, thus increasing the losses of short sellers who have still not covered their short positions.
Short Swing Profit
A profit earned on a security held less than six months. Insiders are prohibited from taking short swing profits on the stock of their firm.
Short Term
An investment with a maturity of a year or less.
Short Term Debt
A debt obligation due within a year.
Short Term Gain (Loss)
A realized profit or loss on an investment held for six months or less.
SIA (Securities Industry Association)
A trade association for broker-dealers.
Sideways Market
Situation that occurs when prices move within a narrow range, with minimal fluctuations.
Sideways Market
Situation that occurs when prices move within a narrow range, with minimal fluctuations.
Simple trust fund
This type of trust fund has a Personal Holding Company (PHC). The trustee allocates benefits based on ratios established by the customer or trustor. The customer is appointed as director of the PHC, which grants him control of the assets in the company and trust fund while he is alive.
Simplified Employee Pension Plan (SEP)
A type of pension plan whereby both the employee and employer contribute to the employee's individual retirement account.
Simplified Employee Pension Plan (SEP)
A type of pension plan whereby both the employee and employer contribute to the employee's individual retirement account.
Simultaneous Transaction
A transaction which involves no risk for the broker-dealer because he is able to match purchase and sale orders for customers.
Simultaneous Transaction
A transaction which involves no risk for the broker-dealer because he is able to match purchase and sale orders for customers.
SIPC (Securities Investor Protection Corporation)
A nonprofit corporation established by an act of Congress in 1970 in order to protect the customers of brokerage firms from the insolvency of those firms. All broker-dealers registered with the Securities and Exchange Commission and with a national exchange are required to join. SIPC provides up to $500,000 in protection, of which no more than $100,000 may be in cash.
SIPC (Securities Investor Protection Corporation)
A nonprofit corporation established by an act of Congress in 1970 in order to protect the customers of brokerage firms from the insolvency of those firms. All broker-dealers registered with the Securities and Exchange Commission and with a national exchange are required to join. SIPC provides up to $500,000 in protection, of which no more than $100,000 may be in cash.
Size
The number of shares that are available at a particular price.
SMA (Special Miscellaneous Account)
A memorandum account that records a customer's excess margin and buying power. Excess funds may come from several sources: sales proceeds, market value appreciation, dividends, and cash or securities put up in response to a margin call.
Small Investor
An individual that purchases small quantities of stocks and bonds--also called "retail investor".
Soft Market
A market characterized by excess supply, thus causing a decrease in prices. Also called a buyer's market.
Special Miscellaneous Account (SMA)
A memorandum account that records a customer's excess margin and buying power. Excess funds may come from several sources: sales proceeds, market value appreciation, dividends, and cash or securities put up in response to a margin call.
Special Purpose Funds
Funds that invest primarily in a certain industry or group of related industries, or in a certain geographic area.
Specialist
A member of an exchange who is responsible for maintaining a fair and orderly market in those securities for which he is registered. The specialist accomplishes this by buying and selling for his own account to reduce any temporary disparities between supply and demand, to the extent possible. The specialist may also act as a broker's broker by executing orders for other members in return for a share of the commission.
Speculation
Purchasing high-risk investments which may provide above average gains, but also carry a higher than average possibility for loss of principal.
Speculator
An investor who is willing to assume great risk in return for potentially great rewards.
Split
Partitioning the outstanding shares of a corporation into a larger number of shares, without affecting shareholders' equity or the total market value at the time of the split. For instance, if a stock valued at $100 splits 2-for-1, an investor who owns 100 shares would now own 200 shares valued at $50.
Spot Market
Commodities market in which commodities are sold for cash and immediate delivery takes place.
Spot rates
The exchange rate of a currency at a given time.
Spot transactions
Funds are available 48 hours after these transactions are executed.
Spousal IRA
An individual retirement account (IRA) opened in the name of a nonworking spouse. A married couple that establishes such an IRA may contribute up to $2,250 between two IRAs as long as neither account exceeds a contribution of $2,000. If both spouses were employed, they could each contribute up to $2,000 for a combined total of $4,000.
Spread
1: The difference between a security's bid and asked price.
2: The difference between a new issue's public offering price and the proceeds received by the issuer--commonly know as the "underlying spread".
Spread
Difference between the rate of purchase and rate of sale of a currency.
Spread Option
The simultaneous purchase and sale of options of the same type and of the same class. For example, an investor may purchase an XYZ September 50 call and sell an XYZ September 40 call.
Spread Position
The existence of a spread option in an account, i.e. a long and short position in options of the same class and type.
Squeeze
A situation that occurs when the price of a security increases dramatically, thus pressuring short sellers to cover their short positions in order to avoid greater losses. The covering of short positions serves to raise the price of the security even more, thus increasing the losses of short sellers who have still not covered their short positions.
Stand by letter of credit
An effective means to guarantee that debt obligations acquired through contracts will be fulfilled. This avoids the risk of incompliance or unsatisfactory execution of obligations. These letters are often used in international business transactions. The seller can request this type of letter of credit and execute it if the buyer does not comply with due dates set forth on the contract.
Standard & poor’s 500
A stock index that includes the top 500 companies in terms of capitalization in the United States.
Statutory Voting
A method of voting whereby a shareholder receives one vote for each share and may cast his votes for each of the directorships. A shareholder, for example, who owns 1000 shares of a corporation that is electing three directors, can cast 1000 votes for each of the three candidates.
Stock
Ownership of a corporation as evidenced by shares which are a claim on the corporation's earnings and assets.
Stock Ahead
A condition that occurs when an order is not executed because there are other orders awaiting execution, which were entered earlier, at the same price. If two orders are entered for the same price at the same time, the order for the larger number of shares takes precedence.
Stock Buyback
A corporation's purchase of its own shares, usually to discourage a takeover attempt.
Stock Certificate
A document evidencing ownership in a corporation.
Stock Dividend
A dividend that is paid in securities, rather than cash. The additional shares may be of the issuing company, or of a subsidiary.
Stock Exchange
An organized marketplace where members gather to trade securities. Members may act either as agents for customers, or as principals for their own accounts.
Stock Power
A form used in the transfer of registered securities from one owner to another. A stock power replicates the assignment form on the back of the stock certificate, but it is separated from the certificate. Hence, a stock power is sometimes called an "assignment separate from certificate". Although both achieve the same goal, a stock power has a safety advantage in being separate.
Stock Split
Partitioning the outstanding shares of a corporation into a larger number of shares, without affecting shareholders' equity or the total market value at the time of the split. For instance, if a stock valued at $100 splits 2-for-1, an investor who owns 100 shares would now own 200 shares valued at $50. Splits usually must be voted on by directors and approved by shareholders.
Stock Symbols
A unique code, using all letters, given to all securities trading on the NYSE, AMEX or NASDAQ. The symbols identify the corporation and facilitates trading and ticker reporting.
Stockholder
An individual who owns one or more shares of a corporation's stock, whether common or preferred stock. Stockholders may earn dividends and stockholders who have common stock have voting rights with regard to matters that affect the corporation.
Stockholder Of Record
A stockholder whose name is registered on the books of the issuing corporation as owning the shares as of a particular date. Dividends and other distributions are made to stockholders of record.
Stockholders ’ Equity
The total equity ownership of a corporation by its shareholders, consisting of preferred stock, common stock, retained earnings, and capital surplus. It is the difference between a company's total assets and total liabilities.
Stop Limit Order
A combination of a stop order and limit order--that is, the order becomes a limit order after the specified stop price has been reached.
Stop Order
An order that becomes a market order when a round lot in an NYSE or AMEX listed security trades at or through a specified price (stop price) or when the national best bid in a NASDAQ listed security reaches the specified price. A stop order is usually used to protect paper profits or limit the extent of possible losses.
Stopped Stock
A term used by a specialist who guarantees that a public order to buy or sell will be executed at the best bid or offer price in his book, unless it can be executed at a better price within a certain time period. This allows brokers to possibly obtain a better price for their clients without the fear of missing the market (if buying--the security rises, if selling--the security drops). For example, a broker with a market order to buy is stopped at 22 by a specialist. This means that the broker will not pay more than 22 for the stock, but may be able to buy at a better price.
Street Name
Said of securities held in the name of the broker-dealer rather than in the name of the client. The client remains the beneficial owner. All dividends that would otherwise be mailed directly from the company to the stockholder are credited to the client's account or forwarded as the client directs. Corporate reports and proxy statements are forwarded to the customer.
Strike Price
The predetermined exercise price of a put or call option--also called "striking price".
Subject
Term used by a dealer giving bids and/or offers that must be reviewed before a final decision to buy or sell can be made.
Subscription Right
A certificate that evidences a shareholder's privilege to buy additional shares of new securities in proportion to the number of shares already owned. A company, when raising more funds by issuing new securities, may issue rights to its shareholders to give them the chance to buy additional shares before the general public. Because rights usually allow the stockholder to buy below the current market price, they ordinarily have a value of their own and are actively traded. Most rights are valid for a relatively short period. Failure to exercise or sell rights may result in monetary loss.
Subscription Warrant
A certificate that gives a shareholder the right to purchase a security at a specified price within a predetermined time period or perpetually. At the issuance of the warrant, the specified price is usually higher than its current market value. Corporations issue warrants directly and they are sometimes offered along with a security as incentive to buy. Warrants are transferable and are traded on major stock exchanges. The abbreviation "WT" is used in newspaper stock listings.
Support Level
The lower level of a security's trading range where buying pressure tends to bid up the price of the security. That is, its price stops falling because there is more demand for the security than there is supply. If, however, the security's price falls below its support level, analysts consider this to be very bearish.
Suspended Trading
A halt in the trading of a particular security that is usually temporary. This may occur because of an imbalance of buy and sell orders or because of a significant news announcement.
Sweetener
A feature, such as being convertible or having a right or warrant attached, that is added to security offerings to make it more attractive to investors.
Switching
In mutual funds, the movement of assets from one fund to another. This is usually done within a family of funds, but can be done between different fund families. Within a no load family, there usually is no charge or a nominal transaction fee. This is also usually true for a load family as long as the fund being switched into has the same sales charge (or less) as the one that the investor already owns. When switching to a mutual fund that belongs to a different family of funds, if the new fund is a no load--there is no charge, and if the new fund is a load fund--it is sales charge of the new fund.
Systematic risk
Part of the risk of securities that cannot be avoided through diversification. Structural risk associated with behavior of the economy.
T-Bill (Treasury Bill)
A short-term debt obligation of the US Government that is purchased at a discount from face value--that is, they are bought at a discounted price and mature at face value. The amount of the discount is considered the interest. They are sold in denominations of $10,000 to $1 million and have maturities of either 13 weeks, 26 weeks or 52 weeks. T-bills are a common abbreviation for "Treasury bills".
T-Bond (Treasury Bond)
A long term debt obligation of the US government that has a maturity of more than 10 years. They are issued in $1,000 denominations and pay interest semiannually. T-bonds are a common abbreviation for "Treasury bonds".
T-Note (Treasury Note)
A intermediate term debt obligation of the US government that has maturities of one to ten years. They are issued in $1,000 denominations and pay interest semiannually. T-notes are a common abbreviation for "Treasury notes.
Take A Bath
Said of an investor who sustains a large loss on an investment or speculation.
Take A Flier
The process of buying securities with the full knowledge that the investment is highly risky. The investor is said to be speculating.
Take A Position
1: Term used when a broker-dealer has a security that is held in inventory. The position may be either long or short.
2: Said of investors who buy securities with the intention of holding them for the long term or using them to take control of the company.
Takeover
A change in a corporation's controlling interest through either a friendly acquisition or a hostile bid. Hostile takeovers aim to replace the target company's existing management and are usually attempted through a public tender offer. Other takeover methods are unsolicited merger proposals to directors, accumulation of shares in the open market, or proxy fights.
Taking Delivery
Procedure whereby the buyer's broker accepts receipt of security certificates from the seller's broker.
Tape
Commonly called a "ticker tape", it is a service that reports the prices and size of transactions that took place on major exchanges. The term also refers to the Dow Jones news wire, however, this is more commonly known as the "Broad Tape".
Target Company
A firm that has been deemed as attractive for takeover by a potential acquirer.
Tax Deferred
Phrase used to describe investments whose accumulated earnings are not taxed until the investor takes possession of them. In IRAs, for example, all dividends, interest and appreciation accumulate until the account owner starts withdrawing funds from the account, usually at age 59 1/2.
Tax Exempt Money Market Fund
A mutual fund that invests in short term municipal securities that are tax-exempt. The fund distributes the income tax-free to shareholders.
Tax Exempt Security
A debt obligation whose interest is exempt from federal, state and/or local taxes--commonly called a "municipal bond" or just "municipals". All tax-exempt bonds are federally exempt as well as in the state and, if applicable, local jurisdiction in which the securities are issued.
Tax rate
Rate that applies to payment of taxes.
Tax Selling
Securities sold to realize a loss that can be used to offset any capital gains. This is usually done at the end of the year.
TD (Time Deposit)
Certificate of deposits or savings accounts that are held in a financial institution for a set amount of time. The funds cannot be withdrawn until the depositor gives the institution notice. Technically, certificates of deposit do not require any notification to withdraw as the date is set beforehand.
Tear Sheet
A sheet (report) from Standard & Poor's Stock Reports. The reports provide information on over 4000 corporations. Each report details a corporation's financial data and provides data on the company's fundamental business and its future outlook. These reports are often torn out of the books by brokers and mailed to their clients--hence, the origination of the term.
Technical Analysis
Research and examination of the market and securities as it relates to their supply and demand in the marketplace. The technician uses charts and computer programs to identify and project price trends. The analysis includes studying price movements and trading volumes to determine patterns such as Head and Shoulder Formations and W Formations. Other indicators include support and resistance levels, and moving averages. In contrast to fundamental analysis, technical analysis does not consider a corporation's financial data.
Technical Rally
A brief rise in securities' prices within a general market descent. These rallies usually occur when analysts observe a support level at which securities will rebound or bargain hunters perceive the securities to be good buy. Once the market has rebounded, it normally resumes its decline.
Technical Sign
A short term trend that a technician ascertains as being significant in a security's price movement.
Tender
1: Act of surrendering ownership in a corporation's securities in response to an offer to buy them at a set price as in a tender offer.
2: The submittal of a bid to buy a security such as in a US Treasury bill auction.
Tender Offer
An offer to buy shares from the target company's stockholders by another company or organization. The offer may be for cash, securities or both. Often, the goal is to take control of the target company. The suitor may be hostile or friendly. During a specified time period, shareholders are asked to tender (surrender) their shares for a stated value, usually at a premium, subject to the tendering of a minimum and maximum number of shares.
Testamentary Trust
A trust that is established within a person's will. This differs from an inter vivos trust that is created during the grantor's lifetime.
Thin Market
Market on a security that has too few bids and too few offers to sell. Large trades can have a marked affect on a security's prices, making the security much more volatile. Institutional investors usually avoid buying stocks that have a thin market for this reason--that is, it is hard for them to get in or out of a position without substantially affecting the security's price.
Third Market
The buying and selling of exchange listed stocks in the over-the-counter market by non-exchange member brokers and institutional investors.
Third Market
The buying and selling of exchange listed stocks in the over-the-counter market by non-exchange member brokers and institutional investors.
Thirty Day Wash Rule
IRS rule stipulating that losses incurred from selling securities may not be used to offset gains if an equivalent security is bought within thirty days before or after the date of sale.
Tick
The downward or upward price movement in a security's transactions.
Ticker Symbol
Letters used in trading to identify a corporation's securities on the ticker tape.
Tight Market
Market for a security, or the overall market, that is characterized by very active trading and narrow bid and asked price spreads.
Tight Money
Tight credit--that is, an economic condition in which there is little money available for loans.
Time Deposit (TD)
Certificate of deposits or savings accounts that are held in a financial institution for a set amount of time. The funds cannot be withdrawn until the depositor gives the institution notice. Technically, certificates of deposit do not require any notification to withdraw since the date is set beforehand.
Time Value
The amount of an option premium that exceeds the intrinsic value of an in-the-money option. A call option with a strike price of 30, for example, has a premium of 3. If the underlying stock is at 32, the call has an intrinsic value of 2, and the time value is 1. The premium for an option that is at- or out-of-the-money is all time value.
Topping Out
A market or security that has reached a point where its price is no longer rising. It is expected to plateau or decline.
Total accumulated value
The accumulated value on a specific date. When a policy is surrendered, its value can be reduced because of the surrender charge, additional costs, or debts in the form of loans.
Total Return
An investments annual return based on appreciation and dividends or interest.
Trade
The completion of an order to buy or sell securities--that is, an order is executed.
Trade Date
The day on which a securities order to buy or sell is executed.
Trader
An investor who buys and sells securities to take advantage of small price changes within a short time period--sometimes days or hours. A trader may also be an employee of a broker-dealer or financial institution who buys and sells securities for their firm's accounts or for the firm's clients.
Trading Authorization
Written document that permits a third party to do transactions on the behalf of the account owners. The document must be signed by all account owners. In brokerage, a full trading authorization allows the third party to place security orders and remove assets from the account. A limited authorization just allows buying and selling of securities--assets cannot be removed from the account.
Trading Floor
The area of an exchange where securities are bought and sold.
Trading Halt
A security that has temporarily stopped trading because of a major news announcement or an imbalance of orders to buy and sell.
Trading Range
A security's highest and lowest price in which it has traded over a specified time. Technical analysts watch trading ranges carefully as they believe It is of great importance when a security breaks out of its trading range--high or low end.
Trading Unit
Number of shares, bonds, or commodities that is considered the normal unit of trading on an exchange. For stocks, it is usually a round lot (100 shares). For corporate bonds, it is usually $1,000 or $5,000 par value. Commodities do not have a set unit--it varies depending upon the actual commodity.
Transaction
An order to buy or sell securities that has been executed.
Transfer
1: Process whereby a seller's broker delivers the certificates to the buyer's broker to effect a legal change of ownership.
2: To record the change of ownership on a corporation's books by its transfer agent. The buyer's name is recorded and all dividends, financial reports, proxies, and other literature are mailed directly to the new owner.
Transfer Agent
Appointed by a corporation, an agent keeps records on registered shareholders, cancels sold certificates, issues new certificates to new owners, and resolves any problems arising from lost, stolen or damaged certificates.
Transfer And Hold
A designation made to a client's account to denote that securities are to be registered in the client's name and are to be kept for the client in the brokerage firm's vault. When the security is sold, the client will need to sign a stock/bond power allowing transferal to the new owner.
Transfer And Ship
A designation made to a client's account to denote that securities are to be registered in the client's name. The certificates are then mailed directly to the client at the address on record. This process normally takes two to six weeks. Upon receiving the certificate, the client must find a safe location to keep the certificates. If they are lost, stolen or damaged, it is the shareholder's responsibility to have the certificates replaced, which is a labor intensive process.
Treasuries
Negotiable debt obligations backed by the full faith and credit of the US government. The obligation's maturity date determines whether it is a Treasury bill, Treasury bond or Treasury Note. All income generated from Treasuries are exempt from state and local taxes, but not federal.
Treasury Bill (T-Bill)
A short term debt obligation of the US government that is purchased at a discount from face value--that is, they are bought at a discounted price and mature at face value. The amount of the discount is considered the interest. They are sold in denominations of $10,000 to $1 million and have maturities of either 13 weeks, 26 weeks or 52 weeks. Treasury bills are commonly abbreviated as "T-bills".
Treasury Bond (T-Bond)
A long term debt obligation of the US government that has a maturity of more than 10 years. They are issued in $1,000 denominations and pay interest semiannually. Treasury bonds are commonly abbreviated as "T-bonds".
Treasury Note (T-Note)
A intermediate term debt obligation of the US government that has a maturity from one to ten years. They are issued in $1,000 denominations and pay interest semiannually. Treasury notes are commonly abbreviated as "T-notes".
Treasury notes
Discounted debt security with a maturity of less than a year, issued by the US Federal Government.
Treasury Stock
Issued stock that has been re-acquired by the corporation from the stockholders--it is not outstanding. The stock is not eligible to receive dividends or to vote. These shares may be held by the company indefinitely, reissued to the public or retired. Among other reasons, treasury stock may be created to counter a tender offer and to provide shares for the exercise of stock options, warrants and convertible securities.
Trend
The direction in which price and trading volume are moving over a short or long term basis. The movement may either be up, down or sideways. Technical analysts study market and security trends to forecast future movements.
Trendline
A chart used by technical analysts. A line is drawn by connecting the highest or lowest prices to which a security has risen or fallen within a period. The line's angle shows whether the security is in a downtrend or an uptrend. If the security's price rises above a downward sloping line or drops below a rising uptrend line, analysts believe the security will start to move in a new direction.
Trin
A measure of stock market strength that relates the number of stocks that advanced or declined to the total number of shares that advanced or declined. A trin under 1.00 is bullish and a trin over 1.00 is bearish.
Triple Tax Exempt
Municipal bonds in which interest is free from federal, state, or local taxes for residents of the states and localities that issue them. If the bondholder is not a resident of the state, the interest is only exempt from federal taxes. Typically, bonds issued by US territories are triple tax exempt.
Triple Witching Hour
The last trading hour on the third Friday on which stock options, stock index options, and stock index futures all expire simultaneously. This occurs in the months of March, June, September and December. There may be a large amount of trading as traders and investors attempt to close their positions in the option and/or the underlying stock. This may create a volatile market.
Trust
A legal contract whereby a customer (trustor) transfers assets to a trust fund managed by a third party (fiduciary or trustee). The trust fund maintains the assets that were transferred to the customer for the gain of beneficiaries, subject to the rules and conditions set forth by the trustor. The trustee is responsible for managing and reimbursing the assets and benefits in the trust fund in order to make payments or transfer the capital to the beneficiaries.
Trustor
Also known as the founder or settlor, the trustor is the person transferring the fiduciary estate to the trust. Generally speaking, this person is the owner of the transferred estate.
Two Dollar Broker
A floor broker who executes orders for other brokers--hence, sometimes called a "broker's broker".
UGMA (Uniform Gift To Minors Act)
Law adopted by most US states, with few changes, that sets up rules for the distribution and administration of assets in the name of a child. The Act requires a custodian of the assets--usually one parent but may be an independent trustee. (It can only be one person.)
It is used in the securities industry as a qualifier to indicate accounts and securities purchased or sold under the provisions of the Act.
A gift to a minor is irrevocable. When a minor reachs majority, UGMA accounts become the child's property.
UIT (Unit Investment Trust)
A trust, registered with the SEC under the Investment Company Act of 1940, in which a fixed portfolio of income-producing securities are purchased and held to maturity. This type of investment vehicle is commonly used with municipal bonds. Each unit usually costs $1,000 and is sold by brokers to investors for an average load of 4% which is included in the per share price. Investors receive an undivided interest of the portfolio's principal and income proportionate to the amount they invested. All unit investment trusts are redeemable securities and can be resold in the secondary market.
Unamortized Bond Discount
Difference between a bond's face value and the proceeds received from the bond's sale, less the amount written off to expense as reported on the profit and loss statement--that is, amortized. The amount still to be expensed at any point is the unamortized bond discount.
At the time of the bond's issuance, the corporation has two choices. It can immediately include the discounted amount plus costs associated with the bond's issuance--such as legal and registration costs. Or, the corporation may treat the total discount and expenses as a deferred charge. It will be reported as an asset and will be written off over the bond's life or by any other schedule the corporation finds expedient.
Uncollected Funds
Bank deposit consisting of checks that have not yet been affirmed by the bank on which a check was drawn.
Uncovered Call Option
An uncovered call writer must deposit and maintain sufficient margin with his broker to assure that the stock can be purchased for delivery if and when he is assigned. The potential loss of uncovered call writing is unlimited. However, writing uncovered calls can be profitable during periods of declining or generally stable stock prices, but investors considering this strategy should recognize the significant risks involved.
Uncovered Option
Industry lingo for call or put options that are written and not covered or have another position that will limit their liability.
Uncovered Put Option
A put writer is considered to be uncovered if he does not have a corresponding short stock position or has not deposited cash equal to the exercise value of the put. Like uncovered call writing, uncovered put writing has limited rewards (the premium received) and potentially substantial risk (if prices fall and you are assigned)
If the stock price declines below the strike price of the put and the put is exercised; you will be obligated to buy the stock at the strike price. Your cost will, of course, be offset at least partially by the premium you received for writing the option.
Underbanked
Term used when the initiating investment banker has trouble recruiting other firms to become underwriting group members for a new issue underwriting.
Underbooked
Period when brokers report proposed buyers limited indications of interest for a new issue of securities. It occurs during the preoffering registration period. The term "fully circled" is the opposite of underbooked.
Undercapitalization
Condition, caused by lack of capital, whereby a business cannot conduct its normal business.
Underlying Debt
Municipal bond lingo pertaining to debt of a government entity that exists within the jurisdiction of a larger government entity. The larger entity has partial responsibility for the debt. A city, for instance, is within the jurisdiction of its state. The state may share responsibility for the city's debt. From the state's standpoint, the debt of the city is underlying debt.
The term underlying debt should not be confused with overlapping debt, which is underlying debt whereby the debt exists within equally ranked entities.
Underlying Security
In options, the security that needs to be delivered when call options or put options are exercised. When stock index options and stock index futures are exercised they are settled in cash because it is impossible to deliver stock indexes.
In securities, common stock that other securities issued by the same corporation are based upon. This stock has to be delivered when convertible bonds or preferred stocks are converted into common shares, incentive stock options are exercised and when warrants or rights are exercised.
Undermargined Account
A brokerage customer's margin account that has dropped below margin requirements or minimum maintenance requirements. The customer will receive a margin call from the broker. The call will be for at least the amount that will bring the account up to minimum maintenance requirements.
Undervalued
A security that is selling beneath its liquidation value or when analysts believe its price is below what it merits. Amongst other reasons, a stock may be undervalued because the corporation has an inconsistent earnings' history or because the corporation is not well known. Fundamental analysts try to identify undervalued corporate stocks to invest in before they become fully valued. Undervalued companies are often takeover targets because acquiring companies can buy the assets inexpensively.
Underwrite
A process whereby investment bankers (underwriters) buy a new issue of securities from the issuing corporation or government entity and resell them to the public. The underwriter makes a profit from the underwriting spread--the difference between the price paid to the issuer and the public offering price.
Underwriters usually form an underwriting group--also called "purchase group" or a "syndicate" to limit risk, assure successful distribution of the issue, and to obtain capital to buy the issue. The syndicate works under an underwriting agreement--referred to as a syndicate contract or a purchase group contract.
The lead underwriter, also known as "managing underwriter", "syndicate manager", is usually the originating investment banker--the firm that worked with the issuer to plan the issue and prepare the registration materials to be filed with the SEC. The manager, as agent for the group, signs the underwriting agreement with the issuer. The agreement sets forth the conditions of the arrangement and the responsibilities of both parties. The manager may select a selling group, consisting of the underwriters and dealers, to aid in distribution of the issue.
Customarily, "underwrite" is properly used only in a firm commitment underwriting where the securities are purchased outright from the issuer.
Other investment banking arrangements to which the term is applied are Best Effort, All Or None, and Standby Commitments; in each of these, the risks are shared between the issuer and the investment banker.
There are two basic methods by which underwriters are chosen by issuers and underwriting spreads are determined: Negotiated Underwriting and Competitive Bid underwriting. Generally, the negotiated method is used in corporate equity issues and corporate debt issues. The competitive bidding method is used by municipalities and public utilities.
Underwriter
In regard to securities, investment bankers who handle the offering of a new issue of securities. They buy all the securities from the issuer and distribute them to investors. They make a profit on the underwriting spread. The investment banker may be acting alone or as a member of an underwriting group or syndicate.
As the word relates to insurance, a company that takes on the cost risk of death, fire, theft, illness, etc., in exchange for payments, called premiums.
Underwriting Agreement
An agreement established between the managing underwriter, as agent for the underwriting group, and the corporation issuing new securities--also termed the "purchase agreement" or "purchase contract". It sets the conditions of the arrangement and the responsibilities of both parties. Details include: the underwriter's promise to purchase the issue; the issue's public offering price; the underwriting spread; the settlement date and; the issuer's net proceeds.
Underwriting Group
Group of investment bankers formed by the originating investment banker in a new issue of securities. The group operates under an agreement among underwriters. It agrees to purchase securities from the issuing corporation at the agreed upon price and to resell them at the stated public offering price--the difference being the underwriting spread. The purpose of the underwriting group is to limit risk and assure successful distribution of the issue. Most underwriting groups operate under a "divided syndicate" contract, meaning that a member's liability is limited to their participation.
Underwriting Group
Group of investment bankers formed by the originating investment banker in a new issue of securities. The group operates under an agreement among underwriters. It agrees to purchase securities from the issuing corporation at the agreed upon price and to resell them at the stated public offering price--the difference being the underwriting spread. The purpose of the underwriting group is to limit risk and assure successful distribution of the issue. Most underwriting groups operate under a "divided syndicate" contract, meaning that a member's liability is limited to their participation.
Underwriting Spread
Difference between the amount paid to an issuer in a primary distribution and the public offering price. The spread amount varies and is contingent on the issue's size, the issuer's financial strength, the type of security (stock, bonds, etc.), the status of the security (senior, junior, etc.), and the type of commitment made by the underwriters. The spread may range from a fraction of 1% for a bond issue to 25% for an initial public offering of a small company. The spread is divided between the managing underwriter, the selling group, and the participating underwriters.
Undigested Securities
Newly issued securities that remain unsold because there is not enough public demand at the issue's offering price.
Undivided Account
A form of a new issue syndicate, also known as an Eastern Account, where a member is liable for any unsold securities equal to the percentage of its participation. This is regardless of the amount the member has sold (even if the amount sold is greater than their percentage of participation).
Unencumbered
Property free and clear of all creditors' claims. Securities, for example, bought with cash instead of on margin are unencumbered.
Unfunded Pension Liabilities
A retirement fund in which money is owed to it by an employer.
Uniform Practice Code (UPC)
Rules and procedures established by the Financial Industry Regulatory Authority (FINRA) to regulate operational details of executing, clearing, and settling over the counter transactions in non-exempt securities. Also, within the 13 districts of the FINRA, the Uniform Practice Committees settle disputes at the local level and interpret the Uniform Practice Code.
Uniform Securities Agent State Law Examination
Test that is taken by all registered representative candidates in many US states--also known as "Blue Sky Examination". Before taking this exam, all registered representatives must pass the General Securities Representative Examination (Series 7).
Unissued Stock
Shares of stock that are authorized in the corporate charter but not yet issued. Unissued shares are issued on the direction of the corporation's board of directors. However, shares needed for rights, warrants, convertible securities and unexercised employee stock options must be reserved and cannot be issued.
Unissued shares cannot pay dividends nor can it be voted. These shares are not the same as treasury stocks, which are issued shares but no longer outstanding.
Unissued Stock
Shares of stock that are authorized in the corporate charter but not yet issued. Unissued shares are issued on the direction of the corporation's board of directors. However, shares needed for rights, warrants, convertible securities and unexercised employee stock options must be reserved and cannot be issued.
Unissued shares cannot pay dividends nor can it be voted. These shares are not the same as treasury stocks, which are issued shares but no longer outstanding.
Unit
1: Number of shares, bonds, or commodities that is considered the normal unit of trading on an exchange.
2: More than one class of securities traded together as one security. A corporation, for example, might issue a security that consists of one common share and one warrant that sells as a unit.
Unit Investment Trust (UIT)
A trust, registered with the SEC under the Investment Company Act of 1940, in which a fixed portfolio of income-producing securities are purchased and held to maturity. This type of investment vehicle is commonly used with municipal bonds. Each unit usually costs $1,000 and is sold by brokers to investors for an average load of 4%. Investors receive an undivided interest of the portfolio's principal and income proportionate to the amount they invested. All unit investment trusts are redeemable securities and can be resold in the secondary market.
Unit of Trading
Number of shares, bonds, or commodities that is considered the normal unit of trading on an exchange. For stocks, it is usually a round lot (100 shares). For corporate bonds, it is usually $1,000 or $5,0000 par value. Commodities do not have a set unit--it varies depending upon the actual commodity.
Unit Share Investment Trust (USIT)
A unit investment trust that includes one unit of prime and one unit of score.
Unleveraged Program
Limited partnership who borrows 50% or less of the purchase price to finance the purchase of property. Investors who wish to maximize income usually prefer unleveraged partnerships because interest expense and other income deductions are minimal.
Unlimited Tax Bond
Municipal bond backed by the pledge to levy taxes until the bond is repaid.
Unlimited Tax Bond
Municipal bond backed by the pledge to levy taxes until the bond is repaid.
Unlisted Stock
A security not listed on a stock exchange and is traded in the over the counter market.
Unlisted Stock
A security not listed on a stock exchange and is traded in the over the counter market.
Unlisted Trading
Trading securities on a particular exchange as a service to its members even though the security is not listed on that exchange. Exchanges that want to trade unlisted securities must file an application with the SEC and make required information accessible to investors. The NYSE does not permit unlisted trading.
Unloading
Selling a security when its price is falling to prevent further losses.
V Formation
A V formation is a technical chart pattern indicating that the security being charted has bottomed out and is now in a rising (bullish) trend. An inverse (upside-down) V is indicative of a bearish trend.
Value increase
The value added to a property due to inflation or greater demand.
Value Line Equity Rating Criteria
Using a computerized model based on a corporation's earnings growth potential, Value Line's Equity Rating Criteria ranks corporations for both timeliness and safety as follows:
- Highest rank
- Above average rank
- Average rank
- Below average rank
- Lowest rank.
Value Line Investment Survey (VL)
An investment advisory service that ranks hundreds of securities for safety and timeliness. It projects which securities should have the best or worst price performance over the next year. Moreover, each corporation is assigned a risk rating. The ratings identify the volatility of a corporation's stock price behavior compared to the market average. Subscribers to the service receive weekly write-ups detailing corporations' financial information, and data such as corporate insider buying and selling decisions and the percentage of a corporation's shares held by institutions.
Variable Rate Demand Note
Note representing borrowings that are payable on demand. Its interest is tied to a money market rate (e.g., the bank prime rate). The note's rate is adjusted downward or upward every time the base rate changes.
VD (Volume Deleted)
Note appearing on the consolidated tape indicating that for transactions of less than 5000 shares only the stock symbol and the trading price will be displayed. This usually occurs when the tape is running behind because of heavy trading.
Velocity of Money
The amount of times a dollar is spent in a specific time period. Velocity affects economic activity produced by a given money supply, which includes bank deposits and cash in circulation. The Federal Reserve Board considers the velocity of money as a factor in their management of monetary policy. This is because a rise in velocity may preclude the need to stimulate an increase in the money supply. Conversely, a decline in velocity may slow down economic growth.
Venture Capital
Source of financing for start-up companies and new or turnaround ventures that involve investment risk but offer the prospect for above average future profits--also called "risk capital". Venture capital financing supplements other funds that an entrepreneur is able to tap (or takes the place of loans that conventional financial institutions are unwilling to risk). Venture capital sources include wealthy individual investors, subsidiaries of banks, small business investment companies (SBICs), groups of investment banks and venture capital limited partnerships. In return for taking an investment risk, venture capitalists are commonly rewarded with either profits, royalties, preferred stock, capital appreciation of shares or any combination thereof.
Venture Capital Limited Partnership
Investment vehicle set up by a brokerage firm or entrepreneurial company to raise capital for start-up businesses or those in the early stages of development. In return for taking an investment risk, the partnership usually takes shares of stock in the company. Venture capital limited partners receive income from profits the company earns, regardless of what services or products are sold.
Versus Purchase (VSP)
Method of identifying specific shares of securities to be sold for tax purposes--also called vs. purchase. If versus purchase is not specifically stated, the IRS deems the securities sold are on a first-in first-out (FIFO) basis.
Vertical Line Charts
A type of technical charting that displays on one vertical line the low and high prices of a security or market and a short horizontal mark that denotes the closing price. Each vertical line represents one day. The chart shows the trend of a security or a market over a period of days, weeks, months, or years. Technical analysts determine from these charts whether a security or a market is frequently closing at the low or high end of its trading range during a day. This information is useful in discerning whether the security or a market is weak or strong, and thus, if prices will decline or advance in the near future.
Vertical Spread
Strategy where an investor concurrently buys and sells options on the same underlying security--also called a price spread. Both options have identical expiration dates but different strike prices. For instance, a vertical spread is created by buying an XYZ April 20 call and selling an XYZ April 25 call. This strategy is used in hopes of profiting as the difference between the option premium on the two option positions widens or narrows.
Vesting
The process by which an employee becomes entitled to receive employer-contributed benefits in a qualified retirement plan. The Tax Reform Act of 1986 stipulates that employees must be vested 100% after five years of employment or at 20% a year in the third year and 100% vested after seven years.
VL (Value Line Investment Survey)
An investment advisory service that ranks hundreds of securities for safety and timeliness. It projects which securities should have the best or worst price performance over the next year. Moreover, each corporation is assigned a risk rating. The ratings identify the volatility of a corporation's stock price behavior compared to the market average. Subscribers to the service receive weekly write-ups detailing corporations' financial information, and data such as corporate insider buying and selling decisions and the percentage of a corporation's shares held by institutions.
VOL (Volume)
The total number of shares traded in a security or an entire market during a given period of time. Volume figures are reported daily by exchanges and a daily average is computed for longer periods. Technical analysts stress the importance on the amount of volume that occurs in the trading of a security. A sharp rise in volume is deemed to signal future sharp rises or falls in price, because it reflects increased interest in a security.
Volatile
The term describes the size and frequency of fluctuations in the price of a particular security. A security may be volatile because the company's outlook is uncertain, there are only a few outstanding shares (see Thin Market), or many other reasons. When the reasons for the variation have to do with the particular security and not the market as a whole, return is measured by alpha. Market-related volatility is measured by beta--also called systematic risk.
Volatility
A security, market, or commodity that rises or falls severely in price within a short time period.
Volume
The total number of shares traded in a security or an entire market during a given period of time. Volume figures are reported daily by exchanges and a daily average is computed for longer periods. Technical analysts stress the importance on the amount of volume that occurs in the trading of a security. A sharp rise in volume is deemed to signal future sharp rises or falls in price, because it reflects increased interest in a security.
Volume Deleted (VD)
Note appearing on the consolidated tape indicating that for transactions of less than 5000 shares only the stock symbol and the trading price will be displayed. This usually occurs when the tape is running behind because of heavy trading.
Voting Right
Right to vote in corporate business matters in which they are common shareholder. This right may be delegated to another person by the shareholder.
Voting Stock
Shares in a company that give a shareholder voting and proxy rights.
Voting Trust
A limited-life trust established to center authority of a corporation to a few individuals, called voting trustees.
Voting Trust Certificate (VTC)
Transferable certificate of beneficial interest in a voting trust that is issued to stockholders in exchange for their common stock. The certificates represent all the rights of common stock (the shareholder retains rights to earnings and dividends) but delegates voting rights to the trustees. The common stock is then registered on the corporation's books in the names of the trustees. The common purpose for such an arrangement is to facilitate reorganization of a corporation in financial difficulty by preventing resistance to management.
VTC (Voting Trust Certificate)
Transferable certificate of beneficial interest in a voting trust that is issued to stockholders in exchange for their common stock. The certificates represent all the rights of common stock (the shareholder retains rights to earnings and dividends) but delegates voting rights to the trustees. The common stock is then registered on the corporation's books in the names of the trustees. The common purpose for such an arrangement is to facilitate reorganization of a corporation in financial difficulty by preventing resistance to management.
Vulture Funds
A limited partnership that invests in undervalued property and whose goal is to profit when prices rebound.
W Formation
Technical chart pattern of a security's price that shows the price has hit a support level two times and is moving up--also called a "double bottom" formation. A double top is a reverse W-- the price has hit a resistance level and is headed downward.
W/Tax (Withholding Tax)
The Internal Revenue Service (IRS) requires financial institutions to report all client's social security numbers, interest and dividend payments and sale proceeds. This practice applies to all US citizens and resident aliens. Those clients who have not furnished a W-9 or W-8 form to the institution are subject to withholding tax--also known as "backup withholding".
Waiting Period
The Securities and Exchange Commission (SEC) requires a twenty day time period between a corporation's filing of its security offering registration and when its security may be legally sold to investors. If additional time is required to make corrections or append information to the registration statement and prospectus, the waiting period--also called "cooling off period"--may be prolonged.
Wallflower
A security that is no longer preferred by investors. Wallflower securities are apt to have low price/earnings ratios.
Warrant
A certificate that gives a shareholder the right to purchase a security at a specified price within a predetermined time period or perpetually. Corporations issue warrants directly and is sometimes offered along with a security as incentive to buy. The abbreviation "WT" is used in newspaper stock listings.
Wash Sale
1: A security that is bought or sold, either concurrently or within a short period of time, to create artificial market activity to profit from a rise in the security's price.
2: The sale of a security and then the repurchase of shares within 30 days. The Internal Revenue Service (IRS) automatically disallows any losses for tax purposes. The IRS also extends the wash sale prohibition to closing short sales.
Wasting Asset
1: Securities with a value that expires at a specified time in the future. The time values of the securities deteriorate as their termination date approaches. Examples of wasting assets are option contracts, warrants and rights.
2: Fixed assets that have a limited life. Thus, they are subject to depreciation.
3: Natural resources that diminish in value as the assets are depleted and therefore are subject to amortization. Examples are oil and gas extractions.
Watch List
List of securities under surveillance by either a brokerage firm, exchange or other self-regulatory organization. A security may be on a watch list for various business or regulatory reasons.
Watered Stock
Stock representing ownership of overvalued assets whose total worth is less than their invested capital. The condition of overcapitalized corporations may result from inflated accounting values, operating losses or excessive dividends. Some negative characteristics of watered stock are the inability to recoup full investment in liquidation, insufficient return on investment, low market value and the firm's reduced ability to capitalize on growth opportunities. The customary method of correcting the situation is for a corporation to either increase its assets without increasing its outstanding shares or reduce outstanding shares without reducing assets. Other methods do exist.
WD
Conditional transactions on the secondary distribution of shares issued and outstanding. An example is a wholly owned subsidiary. The abbreviation "WD" is used in newspaper stock listings.
Weak Market
Market typified by larger number of sellers then buyers along with a prevailing trend of declining prices.
Wedge
Technical chart pattern where two converging lines connect a series of peaks and troughs to form a wedge. These converging lines move in the same direction. Rising wedges normally occur when there are interruptions of a falling price trend. Falling wedges normally occur when there are interruptions of price rallies.
Western Account
A corporate underwriting agreement that syndicate members jointly sign with the issuer. However, each member's individual liability is limited to the specific number of shares or bonds that they individually underwrite--also called a "divided account".
When Distributed (WD)
Conditional transactions on the secondary distribution of shares issued and outstanding. An example is a wholly owned subsidiary. The abbreviation "WD" is used in newspaper stock listings.
When Issued (WI)
The abridged form of "When, as, and if issued" is a conditional transaction in a security authorized for issuance but has not been issued yet. The abbreviation "WI" is used in newspaper stock listings.
Whipsawed
In volatile price swings, the act of making losing trades as prices rise and fall. Traders are whipsawed if they buy just before prices fall and sell just before prices rise. Technicians also use this term to refer to misleading indicators in chart trends of a security or a market.
White ’ s Rating
Short for "White's Tax-Exempt Bond Rating Service", it classifies municipal securities based upon market conditions (not credit considerations) to determine appropriate yields.
Wholesaler
1: Broker-dealer that trades with other broker-dealers instead of retail investors.
2: An investment banker who performs as an underwriter in a new issue or as a distributor in a security's secondary offering.
3: A mutual fund sponsor.
WI (When Issued)
The abridged form of "When, as, and if issued" is a conditional transaction in a security authorized for issuance but has not been issued yet. The abbreviation "WI" is used in newspaper stock listings.
Wide Opening
At the trading session's opening, an unusually large spread exists between a security's bid and asked prices.
Widow-And-Orphan Stock
A very safe stock that pays high dividends. The company usually has a noncyclical business and frequently has a low beta coefficient.
Wire House
National or international brokerage firms whose branch offices are linked by communication networks. The term dates back to when only the largest firms had high speed communications. The networks rapidly disperse information and research about securities and markets. Through increased technology, regional brokers and small retail firms now have the same ability. However, the designation as a wire house is used only to refer to the largest brokerage firms.
With Warrants (WW)
A security that trades with warrants as apart of the issue. The abbreviation "WW" is used in newspaper stock listings.
Withdrawal Plan
Open-end mutual fund program in which shareholders can receive fixed payments of income and/or capital gains on a monthly or quarterly basis.
Withheld Orders
A sales violation that occurs when a broker fails to promptly enter a client's mutual fund order.
Withholding Tax (W/Tax)
The Internal Revenue Service (IRS) requires financial institutions to report all client's social security numbers, interest and dividend payments and sale proceeds. This practice applies to all US citizens and resident aliens. Those clients who have not furnished a W-9 or W-8 form to the institution are subject to withholding tax--also known as "backup withholding".
Working Capital
A financial calculation that is equal to a corporation's current assets minus its current liabilities. Working capital finances a business's cash conversion cycle--period needed to convert raw materials into finished goods, finished goods into sales, and accounts receivable into cash. Sources of working capital include retained earnings, short-term loans and trade credit.
Working Control
Effective control of a corporation exerted through ownership, whether individually or by a group acting in concert, of less than 51% voting interest.
Workout Market
A price range where a broker-dealer feels that a buy or sell may be transacted. For example, a client wishes to sell a block of stock and asks the broker-dealer to estimate the sale price. The broker-dealer's reply would be, "It is 30 to 32, workout." The estimation is that the block can be sold somewhere between $30 and $32 per share.
Write-Off
The act of charging an asset amount to expense or loss to reduce or eliminate the value of the asset, which reduces profits. Write-offs are taken in accordance with allowable tax depreciation of a fixed asset, and with the amortization of certain other assets.
Writer
Sellers of option contracts who obligate themselves to the performance agreed upon in the contract: to sell (if a call was written) or to buy (if a put was written) the underlying security at the predetermined price by a specific date if the option is exercised. In return for the sellers' obligation, they collect a p
Writing Naked
Strategy used by Option sellers (writers) in which they do not own the underlying security. This strategy can lead to profits if the stock moves in the anticipated direction. However, large losses can be incurred if the stock moves in the opposite direction. The writer will have to go into the open market to purchase the stock to effect delivery to the option buyer.
Writing Puts To Acquire Stock
An option writer, who believes a stock's price is going to decline, will write a put option exercisable at the price in which the purchase of the stock represents a good investment. If the stock goes down and the option is exercised, the writer has bought the stock at the price that was decided represents a good investment. In addition, the writer has the premium income. If the stock goes up, the option will not be exercised and the writer is ahead by the premium amount received.
WT (Warrant)
A certificate that gives a shareholder the right to purchase a security at a specified price within a predetermined time period or perpetually. Warrants are issued by corporations directly and are sometimes offered along with a security as incentive to buy. The abbreviation "WT" is used in newspaper stock listings.
WW (With Warrants)
A security that trades with warrants as a part of the issue. The abbreviation "WW" is used in newspaper stock listings.
X (Ex-Interest)
A security that is trading without the interest. The abbreviation "X" is used in newspaper listings and in bond tables.
XD (Ex-Dividend)
A security that is trading without the quarterly dividend. The abbreviation "XD" is used in newspaper stock listings.
XR (Ex-Rights)
A security that is trading without rights attached. The abbreviation "XR" is used in newspaper stock listings.
XW (Ex-Warrants)
A security that is trading without warrants attached. The abbreviation "XW" is used in newspaper stock listings.
Yankee Bond
Dollar-denominated bonds issued in the US by foreign banks and corporations when the US market is more favorable than the Eurobond market or domestic markets overseas.
Yellow Sheets
Daily publication that provides bid and ask prices of corporate bonds traded over the counter (OTC) and firms that are market makers in the particular bond.
Yield
An investment's return from dividends or interest expressed as a percentage of either cost at purchase or the investment's current price. For example, a security with a current market value of $36 a share paying a dividend of $2.50 annually will give an investor a return of 7% ($2.50/$36.00).
Yield Advantage
When an investor buys a corporation's convertible security instead of its common stock, the yield advantage is the additional amount of return an investor can earn. For example, if XYZ Corporation's convertible security yields 12% and XYZ common share yields 7%, the yield advantage is 5%.
Yield Curve
Graph depicting the term structure of interest rates. It plots the yields of bonds of the same class (corporates, governments, etc.) and quality with maturities that range from the shortest to the longest term. The yields are plotted on the y-axis, and time to maturity on the x-axis. The curve will show whether short-term interest rates are higher or lower than long-term interest rates.
In general, the yield curve is positive. Investors usually receive a higher yield for the extra risk of tying up their money long term. However, if short-term rates are higher, the curve is considered to be a "negative (or inverted) yield curve". And, if a small variation exists between short-term and long-term rates, the curve is considered to be a "flat yield curve".
To make a sound judgment about the direction of interest rates, fixed income analysts and economists will carefully watch the yield curve.
Yield Equivalence
The interest rate at which a taxable security and a tax-exempt bond have the same rate of return. To calculate the tax equivalent yield of a tax-exempt bond for investors in different tax brackets, the tax-exempt yield is divided by the reciprocal of the tax bracket (e.g., 100 less 28%). Thus, a person in the 28% tax bracket who wants to know the tax equivalent yield of a 8% tax free municipal bond would divide 8% by 72% to get 11%--the yield a taxable security would have to return to be equivalent, after taxes, to an 8% municipal bond. To convert a taxable yield to a tax-exempt yield, the formula is reversed--the tax-exempt yield is equal to the taxable yield multiplied by the reciprocal of the tax bracket.
Yield To Average Life
Calculation used, where bonds are retired systematically during the life of the issue, as in a sinking fund. To satisfy its sinking fund requirements the issuer will buy its bonds on the open market. If the bonds are trading below par, there is automatic price support for such bonds. Therefore, they are apt to trade on a yield-to-average-life basis. In this scenario, this yield calculation will be used instead of "yield to maturity" or "yield to call".
Yield To Call (YTC)
Rate of return an investor earns from a bond assuming the bond is called (redeemed) by the issuer on the first call date specified in the indenture agreement prior to the bond's maturity date. The formula used to calculate yield to call is the same as "yield to maturity" except that the principal value at maturity is replaced by the first call price and the maturity date is replaced by the first call date. The lower of the yield to call and the yield to maturity will be used to determine an investor's realistic rate of return.
Yield To Maturity (YTM)
The compound rate of return that investors will receive for a bond with a maturity greater than one year if they hold the bond to maturity and reinvest all cash flows at the same rate of interest. It also takes into account purchase price, redemption value, coupon yield, and the time between interest payments. The YTM will be greater than the current yield when the bond is selling at a discount and will be less if it is selling at a premium. YTM can be approximated using a bond yield table or can be determined using a programmable calculator equipped for bond calculations.
YTM is used extensively in comparing fixed income investments, making fixed income portfolio decisions, and in financial planning.
YLD (Yield)
An investment's return from dividends or interest expressed as a percentage of either cost at purchase or the investment's current price. For example, a security with a current market value of $36 a share paying a dividend rate of annually is will give an investor said to return 7% ($2.50/$36.00).
YTC (Yield To Call)
Rate of return an investor earns from a bond assuming the bond is called (redeemed) by the issuer on the first call date specified in the indenture agreement prior to the bond's maturity date. The formula used to calculate yield to call is the same as "yield to maturity" except that the principal value at maturity is replaced by the first call price and the maturity date is replaced by the first call date. The lower of the yield to call and the yield to maturity will be used to determine an investor's realistic rate of return.
YTM (Yield To Maturity)
The compound rate of return that investors will receive for a bond with a maturity greater than one year if they hold the bond to maturity and reinvest all cash flows at the same rate of interest. It also takes into account purchase price, redemption value, coupon yield, and the time between interest payments. The YTM will be greater than the current yield when the bond is selling at a discount and will be less if it is selling at a premium. YTM can be approximated using a bond yield table or can be determined using a programmable calculator equipped for bond calculations.
YTM is used extensively in comparing fixed income investments, making fixed income portfolio decisions, and in financial planning.
Zero Coupon Security
Debt security that makes no periodic interest payments but is sold at a deep discount from its face value. The bondholder does not receive interest payments, only the full face value at redemption on the specified maturity date. The owner of a zero-coupon bond owes income taxes on the interest that has accrued each year, even though the bondholder does not receive payment until maturity.
There are several kinds of zero coupon securities. The most popular is the zero coupon bond. This bond can either be issued by a corporation or by a brokerage firm when it strips the coupons off a bond and sells the principal and the coupons separately. This technique is used frequently with Treasury bonds. Zero coupon bonds are also issued by municipalities.
Because zero coupon securities do not make interest payment, they are considered more volatile than bonds making periodic payments. When interest rates rise, zeros fall more sharply than interest paying bonds. However, zero coupon securities rise more rapidly in value when interest rates drop.
Zero Minus Tick
Transaction that takes place at the same price as the previous round-lot price, but at a lower price than the last different price--also called a "zero downtick". For example, a stock trade is consecutively executed at $22, $21 and $21. The last transaction at $21 was at a zero minus tick. It was executed at the same price as the prior trade, but at a lower price than the last different price of $22.
Zero Plus Tick
Transaction that takes place at the same price as the previous round-lot price, but at a higher price than the last different price--also called a "zero uptick". For example, a stock trade is consecutively executed at $21, $22 and $22. The last transaction at $22 was at a zero plus tick. It was executed at the same price as the prior trade, but at a lower price than the last different price of $21. Short sales can only be executed on plus tick or a zero plus tick.
Zero-Coupon Convertible Security
1: Zero-coupon bond convertible into the common stock of the issuing company when the stock reaches a predetermined price.
They are apt to trade at a small premium over conversion value and provide a lower yield to maturity than nonconvertible bonds.
2: Zero coupon bond, usually a municipal bond, that is convertible into an interest bearing bond at some point before maturity.
ZR (Zero Coupon Issue)
An abbreviation for Zero Coupon Issue that is used in bond listings of newspapers.