Series 7 Glossary Of Terms

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METHOD. ACCREDITED INVESTOR

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Under Securities and Exchange Commission Regulation D a wealthy investor who does not count as one of the maximum of 35 people allowed to put money into a PRIVATE PLACEMENT OF SECURITIES. To be accredited such an investor must have a net worth of at least $1 million or an annual income of at least $200,000 or must put at least $150,000 into the deal, and the investment must not account for more than 20% of the investor's worth. Private placements use accredited investors to raise a larger amount of capital than would be possible of only 35 less-wealthy people would contribute

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ACCRUAL BASIS

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Accounting method whereby income and expense items are recognized as they are earned or incurred even though they may not have been received or actually paid in cash. The alternative is CASH BASIS accounting.

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ACCRUED INTEREST

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Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. At the time of sale, the buyer pays the seller the bond's price plus accrued interest up to, but not counting, the settlement date, calculated by multiplying the coupon rate by the number of days that have elapsed since the last payment.

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ADDITIONAL BONDS TEST

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Test limiting the amount of new bonds that can be issued. Since bonds are secured by assets or revenues of a corporate or governmental entity the underwriters of the bond must ensure that the bond issuer can meet the debt service requirements of any additional bonds.

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AD VALOREM

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Latin term meaning “according to value” and referring to a way of assessing duties or taxes on goods or property. For example ad valorem tax assessment is based on value of real property.

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ADVANCE REFUNDING

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Sale of new bonds (the refunding issue) in advance usually by some years

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AFFILIATED PERSON

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Individual in a position to exert direct influence on the actions of a corporation. Among such persons are owners of 10% or more of the voting shares, directors, and senior elected officers and any persons in a position to exert influence through them. Sometimes called a control person or insider.

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EXERCISE PRICE

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In stock options trading, the number of shares in a put or call CONTRACT (normally 100) multiplied by the EXERCISE PRICE. The price of the option, called the PREMIUM, is a separate figure not included in the aggregate exercise price. A July call option on 100 XYZ at 70 would, for example, have an aggregate exercise price of 100 (number of shares) times $70 (price per share), or $7,000, if exercised on or before the July expiration date.

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AGGRESSIVE GROWTH MUTUAL FUND

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Mutual fund holding stocks of rapidly growing companies. While these companies may be large or small, they all share histories of and prospects for above average profit growth. Aggressive growth funds are designed solely for capital appreciation, since they produce little or no income from dividends. This type of mutual fund is typically more volatile than the overall stock market, meaning its shares will rise far more that the average stock during bull markets and will fall much farther than the typical stock in a bear market. Investors in aggressive growth funds must realize that the value of their shares will fluctuate sharply over time.

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AGREEMENT AMONG UNDERWRITERS

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Contacts between participating members of an investment banking SYNDICATE; sometimes called syndicate contract or purchase group agreement. It is distinguished from the underwriting agreement, which is signed by the company issuing the securities and the SYNDICATE MANAGER, acting as agent for the underwriting group.

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ALL OR NONE (AON)

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Buy or sell order marked to signify that no partial transaction is to be executed. The order will not automatically be canceled, however, if a complete transaction is not executed; to accomplish that, the order entry must be marked FOK, meaning FILL OR KILL.

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ALTERNATIVE MINIMUM TAX (AMT)

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Federal tax aimed at ensuring that wealthy individuals and corporations pay at least some income tax. For individuals the AMT is computed by adding TAX PREFERENCE ITEMS such as PASSIVE losses and tax-exempt interest on PRIVATE-PURPOSE MUNI BONDS.

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AMERICAN DEPOSITORY RECEIPT (ADR)

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Receipt for the shares of a foreign-based corporation held in the vault of a U.S. bank and entitling the shareholder to all dividends and capital gains. Instead of buying shares of foreign-based companies in overseas markets Americans can buy shares in the U.S. in the form of an ADR.

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AMORTIZATION

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Accounting procedure that gradually reduces the cost value of a limited life or intangible asset through periodic charges to income. For fixed assets the terms used is DEPRECIATION, and for wasting assets (natural resources) it is depletion, both terms meaning essentially the same thing as amortization.

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ANNUITANT

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Individual receiving benefits from an annuity. The annuity owner can choose to annuitize the contract meaning that he or she begins to receive regular payment from the annuity.

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ANNUITIZE

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To begin a 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, thus guaranteeing income payments that cannot be outlived.

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ANNUITY

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Form of contract sold by life insurance companies that guarantees a fixed or variable payment to the annuitant at some future time, usually retirement. In a FIXED ANNUITY the amount will ultimately be paid out in regular installments varying only with the payout method elected. In a VARIABLE ANNUITY, the payout is based on a guaranteed number of units; unit values and payments depend on the value of the underlying investments. All earnings in the annuity grow TAX-DEFERRED.

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ANNUITY CERTAIN

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Annuity that pays a specified monthly level of income for a predetermined time period, such as ten years. The annuitant is guaranteed by the insurance company to receive those payments for the agreed upon time period. If the annuitant dies before the time period expires, the annuity payments are then made to the annuitant's designated beneficiaries.

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APPRECIATION

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Increase in the value of an asset such as a stock, bond or real estate. Also known as growth. ARBITRAGE," Profiting from differences in price when the same security or commodity is traded on two or more markets. For example, an arbitrageur simultaneously buys one contract of gold in the New York market and sells one contract of gold in the Tokyo market, locking in a profit because at that moment the price on the two markets is different.

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ARBITRATION

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Alternative to suing in court to settle disputes between brokers and their clients and between brokerage firms. Traditionally pre-dispute arbitration clauses in account agreements with brokers automatically assure that disputes would be arbitrated by objective third parties.

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ARTICLES OF INCORPORATION

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Document filed with a U.S. state by the founders of a corporation. After approving the articles the state issues a certificate of incorporation; the two documents together become the CHARTER that gives the corporation its legal existence.

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ASKED PRICE

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1. Price at which a security is offered for sale on an exchange or in the overthe-counter market. Generally it is the lowest round lot price at which a dealer will sell.

2. Pershare price at which mutual fund shares are offered to the public, usually the NET ASSET VALUE per share plus a sales charge, if any.

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ASSET ALLOCATION

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Apportioning of investment funds among categories of assets, such as CASH EQUIVALENTS, STOCK, FIXED-INCOME INVESTMENTS, and such tangible assets as real estate, precious metals, and collectibles.

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ASSET ALLOCATION MUTUAL FUND

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Mutual fund that switches between stocks, bonds, and money market securities to maximize shareholders' returns while minimizing risk.

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ASSUMED INTEREST RATE

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Rate of interest that an insurance company uses to project the payout on a variable ANNUITY contract. The higher the assumed interest rate the higher the monthly payout will be.

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AT RISK

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Also known as “recourse.” For example investors in an oil drilling limited partnership can claim tax deduction only if they can prove that there’s a chance of never realizing any profit and of losing their investment as well.

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AUCTION MARKET

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System by which securities are bought and sold through brokers on the securities exchanges, as distinguished from the over-the-counter market, where trades are negotiated. Best exemplified by the NYSE, it is a double auction system or TWO-SIDED MARKET.

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AUTHORIZED SHARES

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Maximum number of shares of any class a company may legally create under the terms of its ARTICLES OF INCORPORATION. Normally a corporation provides for future increases in authorized stock by vote of the stockholders. The corporation is not required to issue all the shares authorized and may initially keep issued shares at a minimum.

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AUTOMATED ORDER ENTRY SYSTEM

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Electronic system that expedites the execution of smaller orders by channeling them directly to the specialist on the exchange floor bypassing the FLOOR BROKER. The NYSE calls its system DOT (Designated Order Turnaround).

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BACK-END LOAD

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Sales charge an investor pays when withdrawing money from an investment. Most common in mutual funds and annuities, the back-end load is designed to discourage withdrawals. Back-end loads typically decline for each year that a shareholder remains in a fund. For example, if the shareholder sells shares in the first year, a 5% sales charge is levied. The charge is 4% in the second year, 3% in the third year, 2% in the fourth year, 1% in the fifth year, and no fees are charged if the shares are sold after the fifth year.

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BACKING AWAY

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Broker-dealer's failure, as market maker in a given security, to make good on a bid for the minimum quantity. This practice is considered unethical under the RULES OF FAIR PRACTICE OF THE NASD.

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BALANCED MUTUAL FUND

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Fund that buys common stock, preferred stock, and bonds in an effort to obtain the highest return consistent with a low-risk strategy. A balanced fund typically offers a higher yield than a stock fund and performs better when stocks are falling. In a rising market, however, a balanced mutual fund usually will not keep pace with all-equity funds.

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BALANCE OF TRADE

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Net difference over a period of time between the value of a country's imports and exports of merchandise. Movable goods such as automobiles, foodstuffs, and apparel are included in the balance of trade. When a country exports more than it imports, it is said to have a favorable balance of trade; when imports predominate the balance is called unfavorable.

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BALANCE SHEET

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Financial report, showing the status of a company's assets, liabilities, and owner's equity on a given date, usually the close of a month. Assets are equal to liabilities and equity, and the balance sheet is a listing of the items making up the two sides of the equation. Unlike a PROFIT AND LOSS STATEMENT, which shows the results of operations over a period of time, a balance sheet shows the net worth only at one point in time.

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BANKER’S ACCEPTANCE

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Time draft drawn on and accepted by a bank, the customary means of affecting payment for merchandise sold in import-export transactions and a source of financing used extensively in international trade. With the credit strength of a bank behind it, the banker's acceptance usually qualifies as a MONEY MARKET instrument.

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BASIS PRICE

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Original cost that must be used when an investment is sold and must be used in calculating capital gains or losses. If a stock was bought for $1000 two years ago and is sold today for $2000 the basis is $1000 and the profit is a long-term capital gain.

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BASIS POINT

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Smallest measure used in quoting yields on bills, notes, and bonds. One basis point is .01%, or one one-hundredth of a percent of yield. Thus, 100 basis points equal 1%. A bond's yield that increased from 8.00% to 8.50% would be said to have risen 50 basis points.

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BEAR MARKET

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Prolonged period of falling prices. A bear market in stocks is usually brought on by the anticipation of declining economic activity and a bear market in bonds is caused by rising interest rates.

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BEST EFFORTS

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Underwriting agreement whereby investment bankers, acting as agents, agree to do their best to sell an issue to the public. Instead of buying the securities outright, these agents have an option to buy and an authority to sell the securities. Depending on the contract, the agents exercise their option and buy enough shares to cover their sales to clients, or they cancel the incompletely sold issue altogether.

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BETA

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A beta factor measures the volatility of a stock in relation to the rest of the stock market. The S&P's 500 Stock Index has a beta coefficient of 1. Any stock with a higher beta is more volatile than the market, and any with a lower beta can be expected to rise and fall more slowly than the market. A conservative investor whose main concern is preservation of capital should focus on stocks with low betas, whereas one willing to take high risks in an effort to earn high rewards should look for high-beta stocks.

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BID

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Price a prospective buyer is ready to pay. Term is used by dealers who MAKE A MARKET (maintain firm BID and OFFER prices) in a given security by standing ready to buy or sell round lots at publicly quoted prices and by the SPECIALIST in a stock who performs a similar function on an exchange.

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BID AND ASKED

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Bid is the highest price a prospective buyer is prepared to pay at a particular time for a trading unit of a given security; asked is the lowest price acceptable to a prospective seller of the same security. Together the two prices constitute a QUOTATION; the difference between the two prices is the SPREAD.

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BLIND POOL

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Limited partnership that does not specify the properties the general partner plans to acquire. If, for example, a real estate partnership is offered in the form of a blind pool, investors can evaluate the project only by looking at the general partner's track record. In a specified pool, on the other hand, investors can look at the prices paid for property and the amount of rental income the buildings generate, then evaluate the partnership's potential.

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BLOCK

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Large quantity of stock or large dollar amount of bonds held or traded. As a general guide, 10,000 shares or more of a stock and $200,000 or more worth of bonds would be described as a block.

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BLUE CHIP

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Common stock of nationally known company that has a long record of profit growth and dividend payment and a reputation for quality management, products, and services. Also known as "value" stocks.

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BLUE LIST

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Published by S&P, it mainly contains data on municipal bonds. With its pertinent price, yield, and other data, the Blue List is the most comprehensive source of information on activity and volume in the SECONDARY MARKET for TAX-EXEMPT SECURITIES.

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BOND

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Any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bondholders are creditors of the issuer, but have no corporate ownership privileges.

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BOND DISCOUNT

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Amount by which the MARKET PRICE of a bond is lower than its FACE VALUE. Outstanding bonds with fixed COUPONS are discounted when interest rates rise. Discounts are also caused when supply exceeds demand and when a bond’s CREDIT RATING is reduced. When opposite conditions exist and market price is higher than face value the difference is termed a bond premium.

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BOND RATING

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Method of evaluating the possibility of default by a bond issuer. S&P's, Moody's Investors Service, and Fitch's Investors Service analyze the financial strength of each bond's issuer, whether a corporation or a government body. Their ratings range from AAA (highly unlikely to default) to D (in default). Bonds rated BB or below are not INVESTMENT GRADE.

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BOND SWAP

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Simultaneous sale of one bond issue and purchase of another. Maturity swapsaim to stretch out maturities but can also produce a profit because of the lower prices on longer bonds; yield swaps seek to improve return and quality swaps seek to upgrade safety; tax swaps create tax-deductible losses through the sale while the purchase of a substitute bond effectively preserves the investment.

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BOOK-ENTRY SECURITIES

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Securities that are issued without a certificate. Purchases and sales of some municipal bonds are recorded on customer’s accounts; no certificates change hands. This is increasingly popular because it cuts down on paperwork for brokers and leaves investors free from worry about their certificates.

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BORROWING POWER OF SECURITIES

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Amount of money that customers can invest in securities on MARGIN as listed every month on their brokerage account statements. This usually equals 50% of the value of their stocks. Also known as “loan value.”

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BREAKPOINT SALE

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In mutual funds the dollar investment required to make the investor eligible for a lower sales charge.

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BROKER

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Person who acts as an intermediary between a buyer and seller, usually charging a commission. A broker who specializes in stocks, bonds, or options acts as AGENT and must be registered with the exchange where the securities are traded.

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BROKER LOAN RATE

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Interest rate at which brokers borrow from banks to cover the securities positions of their clients. The broker loan rate is usually a percentage point or so above such short-term interest rates as the federal funds rate and the Treasury bill rate. Since brokers’ loans and their customers’ margin accounts are usually covered by the same collateral the term REHYPOTHECATION is used synonymously with broker loan borrowing. Because broker loans are callable on 24-hour notice, the term call loan rate is also used.

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BULL SPREAD

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Option strategy, executed with puts or calls, that will be profitable if the underlying stock rises in value. There are three varieties of bull spread: VERTICLE SPREAD: Simultaneous purchase and sale of options of the same class at different strike prices, but with the same expiration date. CALENDAR SPREAD: Simultaneous purchase and sale of options of the same class and the same price but at different expiration dates. DIAGONAL SPREAD: Combination of vertical and calendar spreads wherein the investor buys and sells options of the same class at different strike prices and different expiration dates.

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BUSINESS CYCLE

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Recurrence of periods of expansion (RECOVERY) and contraction (RECESSION) in economic activity with effects on inflation, growth, and employment. A business cycle affects profitability and CASH FLOW, making it a key consideration in corporate dividend policy, and is a factor in the rise and fall of the inflation rate, which in turn affects return on investment.

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BUYING POWER

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Amount of money available to buy securities, determined by tabulating the cash held in brokerage accounts, and adding the amount that could be spent if securities were margined to the limit.

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BUY STOP ORDER

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BUY ORDER marked to be held until the market price rises to the STOP PRICE then to be entered as a MARKET ORDER to buy at the best available price.

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CALENDAR SPREAD

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Options strategy that entails buying two options on the same security with different maturities. If the EXERCISE PRICE is the same (a June 50 call and a September 50 call) it is a HORIZONTAL SPREAD. If the exercise prices are different (a June 50 call and a September 45 call) it is a DIAGONAL SPREAD. Investors gain or lose as the difference in price narrows or widens.

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CALL OPTION

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Right to buy 100 shares of particular stock or stock index at a predetermined price before a preset deadline, in exchange for a premium. For buyers who think a stock will go up dramatically, call options permit a profit from a smaller investment than it would take to buy the stock. These options can also produce extra income for the seller, who gives up ownership of the stock if the option is exercised. CALL PREMIUM," Amount that the buyer of a call option has to pay to the seller for the right to purchase a stock or stock index at a specified price by a specified date.

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CALL PRICE

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Price at which a bond or preferred stock with a call provision or CALL FEATURE can be redeemed by the issuer. To compensate the holder for loss of income and ownership, the call price is usually higher than the par value of the security, the difference being the CALL PREMIUM.

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CALL PROTECTION

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Length of time during which a security cannot be called by the issuer. U.S. government securities are generally not callable. Corporate and municipal issuers generally provide 10 years of call protection. Investors who plan to live off the income from a bond should be sure they have call protection because without it the bond could be CALLED AWAY at any time specified in the indenture.

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CAP

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Short for CAPITALIZATION, or the total current value of a company's outstanding shares in dollars. A stock's capitalization is determined by multiplying the total number of shares outstanding by the stock's price. Analysts also refer to small, medium, and large-cap stocks as a way of distinguishing the capitalizations of companies they are interested in.

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CAPITAL STRUCTURE

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Corporation's financial framework, including LONG-TERM DEBT, PREFERRED STOCK, and NET WORTH. It is synonymous with capitalization. Analysts look at capital structure in terms of its overall adequacy and its composition as well as in terms of the DEBT-TO-EQUITY RATIO, called leverage.

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CASH ACCOUNT

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Brokerage firm account whose transactions are settled on a cash basis. It is distinguished from a MARGIN ACCOUNT for which the broker extends credit. Some brokerage customers have both cash and margin accounts. By law, a CUSTODIAL ACCOUNT for a minor must be a cash account.

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CASH DIVIDEND

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Cash payment to a corporation’s shareholders distributed from current earning or accumulated profits and taxable as income. Cash dividends are distinguished from STOCK DIVIDENDS, which are payments in the form of stock.

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CHINESE WALL

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Imaginary barrier between the investment banking, corporate finance, and research departments of a brokerage house and the sales and trading departments. Since the investment banking side has knowledge of impending deals such as takeovers and mergers, it would be unfair to the investing public if the sales and trading side of the firm had advance knowledge of such transactions.

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CHURNING

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Excessive trading of a client’s account. Churning increases the broker’s commissions but usually leaves the client worse off or no better off than before. Churning is illegal under SEC and NASD rules.

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CLOSED-END FUND

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Type of fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis. They tend to have specialized portfolios of stocks and bonds, and may be oriented toward income, capital gains, or a combination of these objectives.

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CLOSING SALE

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Sale of an option having the same features (i.e. of the same series) as an option previously purchased. The two have the effect of canceling each other out. Such a transaction demonstrates the intention to liquidate the holder’s position in the underlying securities upon exercise of the buy.

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COLLATERALIZED MORTGAGE OBLIGATION (CMO)

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Mortgage-backed bond that separates mortgage pools into different maturity classes, called tranches. This is accomplished by applying income (payments and prepayments of principal and interest) from mortgages in the pool in the order that the CMOs pay out. Tranches pay different rates of interest and can mature in a few months, or as long as 20 years. Issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) and private issuers, CMOs are usually backed by government-guaranteed or other top-grade mortgages and have AAA ratings. In return for a lower yield, CMOs provide investors with increased security over the life of their investment compared to purchasing a whole mortgage-backed security. Even so, if mortgage rates drop sharply causing refinancings, prepayment rates will soar and CMO tranches will be repaid before their expected maturity. CMOs are broken into different classes, called COMPANION BONDS or PLANNED AMORITIZATION CLASS (PAC) bonds.

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COLLATERAL TRUST BOND

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Corporate debt security backed by other securities usually held by a bank or other trustee. Such bonds are backed by collateral trust certificates and are usually issued by parent corporations that are borrowing against the securities of wholly owned subsidiaries.

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COMMERCIAL PAPER

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Short-term obligations with maturities up to 270 days issued by banks, corporations, and other borrowers. Such instruments are unsecured and usually discounted, although some are interest bearing. Issuers like commercial paper because the maturities are flexible and because the rates are usually marginally lower than bank rates. Investors like the flexibility and safety of an instrument that is issued only by top-rated concerns and is nearly always backed by bank lines of credit. Both Moody's and Standard & Poor's assign ratings to commercial paper.

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COMMON STOCK

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Units of ownership of a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings, if declared. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take priority over the claims of those who own common stock. However, common stock has more potential for appreciation.

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COMPANION BONDS

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One class of a COLLATERALIZED MORTGAGE OBLIGATION (CMO) which is paid off first when the underlying mortgages are prepaid as interest rates fall. When interest rates rise and there are fewer prepayments, the principal on companion bonds will be prepaid more slowly. Companion bonds absorb most of the prepayment risk inherent in a CMO, and are therefore more volatile. In return, they pay higher yields than the other class within a CMO, called PLANNED AMORTIZATION CLASS (PAC) bonds.

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COMPETITIVE BID

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Sealed bid, containing price and terms, submitted by a prospective underwriter to an issuer, who awards the contract to the bidder with the best price and terms. Many municipalities and most railroads and public utilities use this bid system. Corporations generally prefer NEGOTIATED UNDERWRITING on stock issues but sometimes use competitive bidding in selecting underwriters for bond issues.

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CONSTANT DOLLARS

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Dollars of a base year used as a gauge in adjusting the dollars of other years in order to ascertain actual purchasing power. Also called “indexing.”

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CONSUMER PRICE INDEX (CPI)

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Measures prices of a fixed basket of goods bought by a typical consumer, including food, transportation, shelter, utilities, clothing, medical care, 12 entertainment, and other items. It is widely used as a cost-of-living benchmark to adjust Social Security payments.

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CONTRACTUAL PLAN

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Plan by which fixed dollar amounts of mutual fund shares are accumulated through periodic investments for 10 years. The vehicle for such investments is the plan company or unit investment trust a selling organization operating on behalf of the fund’s underwriter. The plan company must be registered with the Securities and Exchange Commission, as the underlying fund must be, so the investor receives two prospectuses.

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CONVERSION PRICE

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The dollar value at which convertible bonds, debentures, or preferred stock can be converted into common stock, as stated on the certificate.

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CONVERTIBLE

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Corporate securities (usually preferred shares or bonds) that are exchangeable for a set number of common shares at a stated price. Convertibles are appropriate for investors who want higher income than is available from common stock together with greater appreciation potential than regular bonds offer. From the issuer’s standpoint the convertible feature is usually designed as a sweetener, to enhance the marketability of the stock or preferred. Also called deferred equity.

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CORPORATE BOND

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Debt instrument issued by a private corporation, as distinct from one issued by a government agency or a municipality. Corporates typically have four distinguishing features: (1) they are taxable; (2) they usually have a par value of $1,000; (3) they have a term maturity-which means they come due all at once-and are paid for out of a sinking fund accumulated for that purpose; (4) they are traded on major exchanges, with prices published in newspapers.

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COST BASIS

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Original price of an asset, used in determining capital gains. It usually is the purchase price, but in the case of an inheritance it is the appraised value of the asset at the time of the donor's death.

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COVERED OPTION

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Option contract backed by the shares underlying the option. For instance, someone who owns 500 shares of XYZ and sells 5 XYZ call options is in a covered call 13 option position. If the XYZ stock price goes up and the option is exercised, the investor has the stock to deliver to the buyer. Selling a call brings a premium from the buyer.

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COVERED WRITER

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Seller of covered options. In other words, an owner of stock who sells options against it to collect premium income. For example, when writing a call option, if a stock price stays stable or drops, the seller will be able to hold onto the stock. If the price rises sharply enough, it will have to be given up to the option buyer.

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CREDIT SPREAD

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Difference in the value of two options, when the value of the one sold exceeds the value of the one bought. More money is coming in than going out.

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CUMULATIVE PREFERRED

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Preferred stock whose dividends are omitted because of insufficient earnings or for any other reason, accumulate until paid out. They have precedence over common dividends, which cannot be paid as long as a cumulative preferred obligation exists. Most preferred stock issued today is cumulative.

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CUMULATIVE VOTING

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Voting method that improves minority shareholders' chances of naming representatives on the board of directors. In regular or statutory voting, stockholders must apportion their votes equally among candidates for director. Cumulative voting allows shareholders to cast all their votes for one candidate.

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CURRENT ASSETS

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Cash, accounts receivable, inventory, and other assets that are likely to be converted into cash, sold, exchanged, or expensed in the normal course of business, usually within a year.

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CURRENT YIELD

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Annual interest on a bond divided by the market price. It is the actual rate of return as opposed to the coupon rate (the two would be equal if the bond were bought at par) or the yield to maturity. For example, a 10% (coupon rate) bond with a face (or par) value of $1,000 is bought at a market price of $800. The annual income from the bond is $100. But since only $800 was paid for the bond, the current yield is $100 divided by $800, or 12½ %.

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CUSTODIAL ACCOUNT

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Account that is created for a minor, usually at a bank, brokerage firm, or mutual fund. Minors cannot make securities transactions without the approval of the custodian, who manages cash and other property gifted to minors under the UNIFORM GIFTS TO MINORS ACT or the Uniform Transfers to Minors Act.

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CYCLICAL STOCK

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Stock that tends to rise quickly when the economy turns up and to fall quickly when the economy turns down. Examples are housing, automobiles, and manufacturing. Stocks of noncyclical industries, such as foods, insurance or drugs, are not as directly affected by economic changes.

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DATED DATE

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Date from which accrued interest is calculated on new bonds. The buyer pays the issuer an amount equal to the interest accrued from the dated date to the issue's settlement date. With the first interest payment on the bond, the buyer is reimbursed.

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DATE OF RECORD

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Date on which a shareholder must officially own shares in order to be entitled to a dividend. For example, the board of directors of a corporation might declare a dividend on November 1 payable on December 1 to stockholders of record on November 15. Also called record date.

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DEALER

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Individual or firm acting as a PRINCIPAL in a securities transaction. Principals trade for their own account and risk. When buying from a broker acting as a dealer, a customer receives securities from the firm's inventory; the confirmation must disclose this. When specialists trade for their own account, as they must as part of their responsibility for maintaining an orderly market, they act as dealers. Since most brokerage firms operate both as brokers and as principals, the term broker-dealer is commonly used.

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DEBIT SPREAD

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Difference in the value of two options, when the value of the one bought exceeds the value of the one sold. The opposite of the CREDIT SPREAD. More money is going out than coming in.

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DEBT RETIREMENT

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Repayment of debt. The most common method of retiring corporate debt is to set aside money each year in a SINKING FUND. Most municipal bonds and some corporates are issued in serial form, meaning different portions of an issue are retired at different times.

Front 99

DEEP IN/OUT OF THE MONEY

Back 99

CALL OPTION whose exercise price is well below the market price of the underlying stock (deep in the money) or well above the market price (deep out of the money). The situation would be exactly the opposite for a PUT OPTION. The premium for buying a deep-in-the-money option is high, since the holder has the right to purchase the stock at a strike price considerably below the current price of the stock. The premium for buying a deep-out-of-the-money option is very small, on the other hand, since the option may never be profitable.

Front 100

DEFAULT RISK

Back 100

Risk that a debtholder will not receive interest and principal when due. One way to gauge default risk is the RATINGS issued by credit rating agencies such as Moody's, and Standard & Poor's. The higher the rating (AAA or Aaa is highest), the less risk of default.

Front 101

DEFENSIVE SECURITIES

Back 101

Low beta stocks and bonds that are more stable than average and provide a safe return on an investor's money. When the stock market is weak, defensive securities tend to decline less than the overall market.

Front 102

DELIVERY DATE

Back 102

Third business day following a REGULAR WAY transaction of stocks or bonds. Seller's option delivery can be anywhere from 3 to 60 days, though there may be a purchase-price adjustment to compensate for DELAYED DELIVERY.

Front 103

DEPLETION

Back 103

Accounting method available to companies that extract oil and gas, coal, or other minerals, usually in the form of an allowance that reduces taxable income. Oil and gas limited partnerships pass the allowance on to their limited partners, who can use it to reduce other passive income.

Front 104

DEPRECIATION

Back 104

Amortization of fixed assets, such as plant and equipment, so as to allocate the cost over their depreciable life. Depreciation reduces taxable income but does not reduce cash.

Front 105

DERIVATIVE

Back 105

A contract whose value is based on the performance of an underlying financial asset, index, or other investment. For example, an option is a derivative because its value changes in relation to the performance of an underlying stock.

Front 106

DESIGNATED ORDER TURNAROUND (DOT)

Back 106

Electronic system used by the NYSE to expedite execution of small MARKET ORDERS by routing them directly from the member firm to the SPECIALIST, thus bypassing the FLOOR BROKER. A related system called Super DOT routes LIMIT ORDERS.

Front 107

DEVELOPMENTAL DRILLING PROGRAM

Back 107

Drilling for oil and gas in an area with proven reserves to a depth known to have been productive in the past. Limited partners in such a program, which is considerably less risky than an EXPLORATORY DRILLING PROGRAM or WILDCAT DRILLING, have a good chance of steady income, but little chance of large profits.

Front 108

DIRECT PARTICIPATION PROGRAM

Back 108

Program letting investors participate directly in the cash flow and tax benefits of the underlying investments. Such programs are usually organized as limited partnerships, joint ventures or Sub "S" corporations.

Front 109

DISCOUNT RATE

Back 109

Interest rate that the Federal Reserve charges member banks for loans, using government securities or ELIGIBLE PAPER as collateral. 16

Front 110

DISINTERMEDIATION

Back 110

Movement of funds from low-yielding accounts at traditional banking institutions to higher-yielding investments in the general market. For example, withdrawal of funds from a passbook savings account paying 3% to buy a Treasury bill paying 7%.

Front 111

DIVERSIFICATION

Back 111

Spreading of risk by putting assets in several categories of investments stocks, bonds, money market instruments, and precious metals, or several industries, or a mutual fund, with its broad range of stocks in one portfolio.

Front 112

DIVERSIFIED INVESTMENT COMPANY

Back 112

Mutual fund or unit investment trust that invests in a wide range of securities. Under the Investment Company Act of 1940, such a company may not have more than 5 percent of its assets in any one company and may not own more than 10 percent of the voting shares of any one company.

Front 113

DIVIDEND PAYOUT RATIO

Back 113

Percentage of earnings paid to shareholders in cash. In general, the higher the payout ratio, the more mature the company. Public utilities tend to have the highest payout ratios, whereas growth companies usually reinvest all earnings and pay no dividends.

Front 114

DIVIDEND YIELD

Back 114

Annual percentage of return earned by an investor on a common or preferred stock. The yield is determined by dividing the amount of the dividends per share by the current market price per share of the stock. For example, a stock paying a $1 dividend per year that sells for $10 a share has a 10% dividend yield.

Front 115

DOLLAR PRICE

Back 115

Bond price expressed as a percentage of face value (normally $1000) rather than as a yield. Thus a bond quoted at 97½ has a dollar price of $975, which is 97½% of $1000.

Front 116

DO NOT REDUCE (DNR)

Back 116

Instruction on a LIMIT ORDER to buy, or on a STOP ORDER to sell, or on a STOP-LIMIT ORDER to sell, not to reduce the order when the stock goes EXDIVIDEND.

Front 117

DOUBLE-BARRELED

Back 117

Municipal revenue bond whose principal and interest are guaranteed by a larger municipal entity. For example, a bridge authority might issue revenue bonds payable out of revenue from bridge tolls. If the city or state were to also guarantee the bonds, they would be double-barreled, and the investor would be protected against default in the event that bridge toll revenue is inadequate.

Front 118

DOUBLE TAXATION

Back 118

Taxation of earnings at the corporate level, then again as stockholder dividends.

Front 119

DOWNTICK

Back 119

Sale of a security at a price below that of the preceding sale. If a stock has been trading at $15 a share, for instance, the next trade is a downtick if it is at 14 3/4. Also known as MINUS TICK.

Front 120

DUE BILL

Back 120

A statement of money owed. Commonly used to adjust a securities transaction when dividends, interest, and other distributions are reflected in a price but have not yet been disbursed. For example, when a stock is sold ex-dividend, but the dividend has not yet been paid, the buyer would sign a due bill stating that the amount of the dividend is payable to the seller.

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EARNINGS PER SHARE

Back 121

Portion of a company's profit allocated to each outstanding share of common stock. For instance, a corporation that earned $10 million last year and has 10 million shares outstanding would report earnings of $1 per share. The figure is calculated after paying taxes and after paying preferred shareholders and bondholders.

Front 122

ECONOMIC GROWTH RATE

Back 122

Rate of change in the GROSS DOMESTIC PRODUCT, as expressed in an annual percentage. If adjusted for inflation, it is called the real economic growth rate. Two consecutive quarterly drops in the growth rate mean recession, and two consecutive advances in the growth rate reflect an expanding economy.

Front 123

EFFECTIVE DATE

Back 123

Date when an offering registered with the SEC may commence, usually 20 days after filing the registration statement.

Front 124

EQUIPMENT TRUST CERTIFICATE

Back 124

Bond, usually issued by a transportation company such as a railroad or airline, used to pay for new equipment. The certificate gives the bondholder the first right to the equipment in the event that interest and principal are not paid when due. Title to the equipment is held in the name of the trustee, usually a bank, until the bond is paid off.

Front 125

EQUIVALENT TAXABLE YIELD

Back 125

Comparison of the taxable yield on a corporate or government bond and the tax-free yield on a municipal bond. Depending on the tax bracket, an investor's after-tax return may be greater with a municipal bond than with a corporate or government bond offering a higher interest rate.

Front 126

ESTATE TAX

Back 126

Tax imposed by a state or the federal government on assets left to heirs in a will. Under the Economic Recovery Tax Act of 1981, there is no estate tax on transfers of 18 property between spouses. An exclusion which began at $250,000 in 1982 rose to $675,000 in 2000 and will gradually increase to $3,500,000 by 2009.

Front 127

EURODOLLAR

Back 127

U.S. currency held in banks outside the United States, mainly in Europe, and commonly used for settling international transactions. Some securities are issued in Eurodollars with a promise to pay interest in dollars deposited in foreign bank accounts.

Front 128

EXCESS MARGIN

Back 128

Equity in a brokerage firm's customer account, expressed in dollars, above the regulation T minimum for a margin account. Also known as SMA.

Front 129

EXCHANGE PRIVILEGE

Back 129

Right of a shareholder to switch from one mutual fund to another within one fund family, often at no additional charge. Exchanges may be taxable.

Front 130

EX-DIVIDEND DATE

Back 130

Date on which a stock goes EX-DIVIDEND, typically about three weeks before the dividend is paid to shareholders of record. Shares listed on the NYSE go exdividend two business says before the RECORD DATE.

Front 131

EXERCISE NOTICE

Back 131

Notification by a broker that a client wants to exercise a right to buy the underlying stock in an option contract. Such notice is transmitted to the option seller through the Options Clearing Corporation, which ensures that stock is delivered as agreed upon.

Front 132

EXERCISE PRICE

Back 132

Price at which the stock underlying a call or put option can be purchased (call) or sold (put) over the specified period. For instance, a call contract may allow the buyer to purchase 100 shares of XYZ at any time in the next nine months at an exercise or STRIKE PRICE of $50.

Front 133

EX-LEGAL

Back 133

Municipal bond that does not have the legal opinion of a bond counsel printed on it, as most municipal bonds do. When such bonds are traded, buyers must be warned that legal opinion is lacking.

Front 134

EXPENSE RATIO

Back 134

Amount, expressed as a percentage of total assets, that shareholders pay annually for mutual fund operating expenses and management fees. The expense ratio, which may be as low as 0.2% or as high as 2% of shareholder assets, is taken out of the fund's current income as an expense and is disclosed in the prospectus to shareholders.

Front 135

EXPLORATORY DRILLING PROGRAM

Back 135

Search for an undiscovered reservoir of oil or gas, a very risky undertaking. Exploratory wells are called wildcat (in an unproven area). Exploratory drilling programs are usually syndicated, and units are sold to limited partners.

Front 136

EX-RIGHTS

Back 136

Without the RIGHT to buy a company's stock at a discount from the prevailing market price, which was distributed until a particular date. Typically, after that date the rights trade separately from the stock itself.

Front 137

FACE-AMOUNT CERTIFICATE

Back 137

Debt security issued by face-amount certificate companies, one of three categories of mutual funds defined by the INVESTMENT COMPANY ACT OF 1940. The holder makes periodic payments to the issuer, and the issuer promises to pay the purchaser the face value at maturity.

Front 138

FACE VALUE

Back 138

Value of a bond, or other security as given on the certificate. Corporate bonds are usually issued with $1000 face values, municipal bonds with $5000 face values, and federal government bonds with $10,000 face values. Although the bonds fluctuate in price from the time they are issued until redemption, they are redeemed at maturity at their face value. The face value is the amount on which interest payments are calculated. Thus, a 10% bond with a face value of $1000 pays bondholders $100 per year. Face value is also referred to as PAR VALUE.

Front 139

FANNIE MAE (FEDERAL NATIONAL MORTGAGE ASSOCIATION)

Back 139

Publicly owned, government-sponsored corporation established to purchase both government-backed and conventional mortgages from lenders. Fannie Mae is a large issuer of debt securities which are used to finance its activities. Equity shares of Fannie Mae are traded on the NYSE.

Front 140

FEDERAL AGENCY SECURITY

Back 140

Debt instrument issued by an agency of the federal government such as the Federal National Mortgage Association. Though not general obligations of the U.S. Treasury, such securities are sponsored by the government and have high safety ratings.

Front 141

FEDERAL FUNDS

Back 141

Funds deposited by commercial banks at Federal Reserve Banks, including funds in excess of bank reserve requirements. Banks may lend federal funds to each other on an overnight basis at the federal funds rate.

Front 142

FEDERAL FUNDS RATE

Back 142

Interest rate charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. The federal funds rate is the most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the PRIME RATE, which is set by banks.

Front 143

FEDERAL GIFT TAX

Back 143

Federal tax imposed on the transfer of securities, property or other assets. The DONOR must pay the tax based on the fair market value of the transferred assets. However, federal law allows donors to give up to $12,000 per year to any individual without incurring gift tax liability. So, a husband and wife may give $24,000 to their child in one year without tax if each parent gives $12,000.

Front 144

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)

Back 144

ublicly chartered agency that buys qualifying residential mortgages from lenders, packages them into new securities backed by those pooled mortgages, provides certain guarantees, and then resells the securities on the open market. The corporation, nicknamed Freddie Mac, provides funds for 20 mortgage lending and allows investors to buy high-yielding securities backed by federal guarantees.

Front 145

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)

Back 145

Publicly chartered agency that buys qualifying residential mortgages from lenders, packages them into new securities backed by those pooled mortgages, provides certain guarantees, and then resells the securities on the open market. The corporation, nicknamed Freddie Mac, provides funds for 20 mortgage lending and allows investors to buy high-yielding securities backed by federal guarantees.

Front 146

FEDERAL OPEN-MARKET COMMITTEE (FOMC)

Back 146

The Committee decides whether to increase or decrease interest rates through open-market operations of buying or selling government securities. The Committee's decisions are closely watched and interpreted by economists and stock and bond market analysts, who try to predict whether the Fed is seeking to tighten credit to reduce inflation or to loosen credit to stimulate the economy.

Front 147

FEDERAL RESERVE BOARD (FRB)

Back 147

Governing board of the FEDERAL RESERVE SYSTEM. The Board establishes Federal Reserve System policies on such key matters as reserve requirements and other bank regulations, sets the discount rate, tightens or loosens the availability of credit in the economy, and regulates the purchase of securities on margin.

Front 148

FILL OR KILL (FOK)

Back 148

Order to buy or sell a particular security which, if not executed immediately, is canceled. Fill or kill orders are placed when a client wants to buy a large quantity of shares of a particular stock at a particular price.

Front 149

FIRM QUOTE

Back 149

Term referring to any round lot bid or offer price of a security stated by a market maker and not identified as a nominal (or subject) quote. Under National Association of Securities Dealers' (NASD) rules and practice, quotes requiring further negotiation or review must be identified as nominal quotes.

Front 150

FIRST CALL DATE

Back 150

First date specified in the indenture of a corporate or municipal bond contract on which part or all of the bond may be redeemed at a set price. An XYZ bond due in 2030, for instance, may have a first call date of May 1, 2013. This means that, if XYZ wishes, bondholders may be paid off starting on that date in 2013. Bond brokers typically quote yields on such bonds with both yield to maturity (in this case, 2030) and yield to call (in this case, 2013).

Front 151

FIVE PERCENT RULE

Back 151

One of the Rules of Conduct of the National Association of Securities Dealers (NASD). It proposes an ethical guideline for commissions in brokerage transactions, including PROCEEDS SALES and RISKLESS TRANSACTIONS.

Front 152

FIXED ANNUITY

Back 152

Investment contract sold by an insurance company that guarantees fixed payments, either for life or for a specified period, to an annuitant. In fixed annuities, the insurer takes both the investment and the mortality risks. A fixed annuity contrasts with a VARIABLE ANNUITY, where payments depend on an uncertain outcome, such as prices in the securities markets.

Front 153

FLAT

Back 153

In bond trading, without accrued interest. This means that accrued interest will be received by the buyer if and when paid but that no accrued interest is payable to the seller. Bonds in default and INCOME BONDS are normally quoted and traded flat.

Front 154

FLOOR BROKER

Back 154

Member of an exchange who is an employee of a member firm and executes orders, as agent, on the floor of the exchange for clients.

Front 155

FLOW OF FUNDS

Back 155

Statement found in the bond covenants of municipal revenue issues showing the priorities by which municipal revenue will be applied. Typically, the flow of funds in decreasing order of priority is operation and maintenance, bond debt service, expansion of the facility, and sinking fund for retirement of debt prior to maturity.

Front 156

FOREIGN CURRENCY OPTIONS

Back 156

Options contracts based on foreign currencies, such as the Japanese yen, Deutsche mark, British pound, and French franc. The buyer of a foreign currency futures contact acquires the right to buy a particular amount of that currency by a specific date at a fixed rate of exchange, and the seller agrees to sell that currency at the same fixed price. Most buyers and sellers of foreign currency options do not exercise their rights to buy or sell, but trade out of their contracts at a profit or loss before they expire. SPECULATORS hope to profit by buying or selling a foreign currency options contract before a currency rises or falls in value. HEDGERS buy or sell such contracts to protect their cash market position from fluctuations in currency values.

Front 157

FORWARD PRICING

Back 157

Securities and Exchange Commission requirement that open-end investment companies, whose share price is always determined by the NET ASET VALUE of the outstanding shares, base all incoming buy and sell orders on the next net asset valuation of fund shares.

Front 158

FOURTH MARKET

Back 158

Direct trading of large blocks of securities between institutional investors to save brokerage commissions. The fourth market is aided by computers, notably by a computerized subscriber service called INSTINET. The system permits subscribers to display tentative volume interest and bid-ask quotes to others in the system.

Front 159

FRACTIONAL SHARE

Back 159

Unit of stock less than one full share. If a shareholder is in a dividend reinvestment program, and the dividends being reinvested are not adequate to buy a full share at the stock's current price, the shareholder will be credited with a fractional share until enough dividends accumulate to purchase a full share.

Front 160

INDIVIDUAL RETIREMENT ACCOUNT (IRA)

Back 160

Personal, TAX-DEFERRED, retirement account that an employed person can set up with a deposit limited to $4,000 per year ($8,000 for a couple) in years 2005 through 2007.

Front 161

INFLATION

Back 161

Rise in the prices of goods and services, resulting when spending increases relative to the supply of goods on the market. Moderate inflation is a common result of economic growth. Hyperinflation causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.

Front 162

INITIAL MARGIN

Back 162

Amount of cash or eligible securities required to be deposited with a broker before engaging in margin transactions. A margin transaction is one in which the broker extends credit to the customer in a margin account. Under REGULATION T of the Federal Reserve Board, the initial margin is currently 50% of the purchase price when buying eligible stock or convertible bonds or 50% of the proceeds of a short sale.

Front 163

INITIAL PUBLIC OFFERING (IPO)

Back 163

Corporation's first offering of stock to the public. IPOs are an opportunity for the existing investors to make profits, since for the first time their shares will be given a market value reflecting expectations for the company's future growth.

Front 164

INSIDE INFORMATION

Back 164

Corporate data that has not yet been made public. Under SEC rules, an INSIDER is not allowed to trade on the basis of such information.

Front 165

INSIDE MARKET

Back 165

Highest bid or lowest asked quotes between dealers trading for their own inventories. Distinguished from the retail market, where quotes reflect the prices that customers pay to dealers.

Front 166

INSTITUTIONAL INVESTOR

Back 166

Organization that trades large volumes of securities, such as mutual funds, banks, insurance companies and pension funds.

Front 167

INSURED BONDS

Back 167

Municipal bonds that are insured against default by a MUNICIPAL BOND INSURANCE company. The company pledges to make all interest and principal payments when due if the issuer of the bonds defaults on its obligations. In return, the bond's issuer pays a premium to the insurance company. Insured bonds will pay slightly lower yields, because of the cost of the insurance protection, than comparable noninsured bonds. Some of the major municipal bond insurance firms include MBIA and AMBAC Indemnity Corporation.

Front 168

INTEREST-RATE OPTIONS

Back 168

Options contract based on an underlying debt security. Options give their buyers the right, but not the obligation, to buy the underlying bond at a fixed price before a specific date in the future. Yield-based calls become more valuable as yields rise, and puts become more valuable as yields decline. There are interest rate options on Treasury bills, notes, and bonds; GNMA mortgage-backed securities; certificates of deposit; municipal bonds; and other interest-sensitive instruments.

Front 169

INTEREST-RATE RISK

Back 169

RISK that changes in interest rates will adversely affect the value of an investor's securities portfolio. For example, an investor with large holdings in long-term 26 bonds has a significant interest-rate risk, because the value of those bonds will fall if interest rates rise.

Front 170

IN THE MONEY

Back 170

Option contract on a stock whose current market price is above the striking price of a call option or below the striking price of a put option. A call option on XYZ at a striking price of 100 would be in the money if XYZ were selling for 105, for instance, and a put option with the same striking price would be in the money if XYZ were selling for 95.

Front 171

NTRINSIC VALUE

Back 171

Difference between the EXERCISE PRICE or strike price of an option and the market value of the underlying security. For example, if the strike price is $50 on a call option to purchase a stock with a market price of $55, the option has an intrinsic value of $5. Or, in the case of a put option, if the strike price was $55 and the market price of the underlying stock was $50, the intrinsic value of the option would also be $5. Options AT THE MONEY or OUT OF THE MONEY have no intrinsic value. Also known as "in-the-money."

Front 172

INVERTED YIELD CURVE

Back 172

Unusual situation where short-term interest rates are higher than long-term rates. Normally, lenders receive a higher yield when committing their money for a longer period of time.

Front 173

INVESTMENT LETTER

Back 173

In the private placement of new securities, a letter of intent between the issuer of securities and the buyer establishing that the securities are being bought as an investment and are not for resale.

Front 174

ISSUED AND OUTSTANDING

Back 174

Shares of a corporation, authorized in the corporate charter, which have been issued and are outstanding. These shares represent capital invested by the firm's shareholders and owners, and may be all or only a portion of the number of shares authorized.

Front 175

ISSUER

Back 175

Legal entity that has the power to issue and distribute a security. Issuers include corporations, municipalities, foreign and domestic governments and their agencies.

Front 176

JOINT AND SURVIVOR ANNUITY

Back 176

Annuity that makes payments for the lifetime of two or more annuitants, often a husband and wife. When one of the annuitants dies, payments continue to the survivor in the same amount or in a reduced amount as specified in the contact.

Front 177

JOINTLY AND SEVERALLY

Back 177

Term used to refer to municipal bond underwritings where the account is undivided and syndicate members are responsible for unsold bonds in proportion to their participations. A participant with 5% of the account would still be responsible for 5% of the unsold bonds, even though that member might already have sold their share.

Front 178

JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP

Back 178

When two or more people maintain a JOINT ACCOUNT with a brokerage firm or a bank, it is normally agreed that, upon the death of one account holder, ownership of the account assets passes to the remaining account holders.

Front 179

JUNK BOND

Back 179

Bond with a credit rating of BB or lower by RATING agencies. Junk bonds are issued by companies without long track records of sales and earnings, or by those with questionable credit strength. They are more volatile and pay higher yields than INVESTMENT GRADE bonds.

Front 180

KEOGH PLAN

Back 180

Tax-deferred pension account designated for employees of unincorporated businesses or for persons who are self-employed, eligible people can contribute up to 25% of earned income, up to a specified maximum limit. Like the INDIVIDUAL RETIREMENT ACCOUNT (IRA), the Keogh plan allows all investment earnings to grow tax deferred until capital is withdrawn, as early as age 59½ and starting no later than age 70½.

Front 181

KEYNESIAN ECONOMICS

Back 181

Body of economic thought originated by the British economist, John Maynard Keynes. Keynes believed that active government intervention in the marketplace was the only method of ensuring economic growth and stability. He held that insufficient demand causes unemployment and that excessive demand results in inflation; and that government should manipulate the level of demand by adjusting levels of government expenditure and taxation.

Front 182

KNOW YOUR CUSTOMER

Back 182

Article 3 of the NASD Rules of Fair Practice: "In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs."

Front 183

FRONT LOAD

Back 183

Sales charge applied to an investment at the time of initial purchase. There may be a front load on a mutual fund FROZEN ACCOUNT Brokerage account under disciplinary action by the Federal Reserve Board for violation of REGULATION T. During the period an account is frozen (90 days), the customer may not sell securities until their purchase price has been fully paid and the certificates have been delivered. Purchases must be cash" transactions.

Front 184

FULL FAITH AND CREDIT

Back 184

The full taxing and borrowing power, plus revenue other than taxes, is pledged in payment of interest and repayment of principal of a bond issued by a government entity. U.S. government securities and municipal general obligation bonds of states and local governments are backed by this pledge.

Front 185

FULLY DILUTED EARNINGS PER (COMMON) SHARE

Back 185

Figure showing earnings per common share after assuming the exercise of warrants and stock options, and the conversion of convertible bonds and preferred stock.

Front 186

FUNDAMENTAL ANALYSIS

Back 186

Analysis of the balance sheet and income statements of companies in order to forecast their future stock price movements. Fundamental analysts consider past records of assets, earnings, sales, products, management, and markets in predicting future trends in these indicators of a company's success or failure.

Front 187

FUND FAMILY

Back 187

Mutual fund company offering funds with many investment objectives. A fund family may offer several types of stock, bond, and money market funds and allow free switching among their funds, although gains are taxable.

Front 188

GENERAL OBLIGATION BOND

Back 188

Municipal bond backed by the FULL FAITH AND CREDIT (which includes the taxing power) of a municipality. A GO bond, as it is known, is repaid with general revenue, in contrast to the revenue from a specific facility built with the borrowed funds, such as a tunnel or a toll road.

Front 189

GENERAL PARTNER

Back 189

Managing partner of a LIMITED PARTNERSHIP, who is responsible for the operations of the partnership and, ultimately, any debts taken in by the partnership. The general partner's liability is unlimited.

Front 190

GINNIE MAE PASS-THROUGH

Back 190

Security, backed by a pool of mortgages and guaranteed by the GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (Ginnie Mae), which passes through to investors the interest and principal payments of homeowners. Ginnie Mae passthroughs have benefited the home mortgage market, since more capital has become available for lending. For investors, however, the rate of principal repayment on a Ginnie Mae pass-through is uncertain. If interest rates fall, principal will be repaid faster, since homeowners will refinance their mortgages. If rates rise, principal will be repaid more slowly, since homeowners will hold onto the underlying mortgages.

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GOOD DELIVERY

Back 191

Meaning that a certificate has the necessary endorsements and meets all other requirements (signature guarantee, proper denomination, and other qualifications), so that title can be transferred by delivery to the buying broker, who is then obligated to accept it.

Front 192

GOOD-TILL-CANCELED ORDER (GTC)

Back 192

Brokerage customer's order to buy or sell a security, usually at a particular price, that remains in effect until executed or canceled.

Front 193

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)

Back 193

Governmentowned corporation, nicknamed Ginnie Mae, which is an agency of the U.S. Department of Housing and Urban Development GNMA guarantees, with the full faith and credit of the U.S. Government, full and timely payment of all monthly principal and interest payments on the mortgage-backed PASS-THROUGH SECURITIES of registered holders.

Front 194

GOVERNMENTS

Back 194

Securities issued by the U.S. government, such as Treasury bills, bonds, notes, and savings bonds. Governments are the most credit-worthy of all debt instruments since they are backed by the FULL FAITH AND CREDIT of the U.S. government.

Front 195

GROSS DOMESTIC PRODUCT (GDP)

Back 195

Market value of the goods and services produced by labor and property in the United States. GDP is made up of consumer and government purchases, private domestic investments, and net exports of goods and services.

Front 196

GROWTH STOCK

Back 196

Stock of a corporation that has exhibited rapid gains in earnings over the last few years and is expected to continue to show high levels of profit growth. Growth stocks are riskier investments than average stocks, however, since they usually sport higher price/earning ratios and make little or no dividend payments to shareholders.

Front 197

GUARANTEED INVESTMENT CONTRACT

Back 197

Contract between an insurance company and a pension plan that guarantees a specific rate of return on the invested capital over the life of the contract. For pension plans, guaranteed investment contracts, also known as GICs, are a conservative way of assuring beneficiaries that their money will achieve a certain rate of return.

Front 198

HEAD AND SHOULDERS

Back 198

Patterns resembling the head and shoulders outline of a person, which is used to chart stock price trends. The pattern signals the reversal of a trend. As prices move down to the right shoulder a head and shoulder top is formed, meaning that prices should be falling. A reverse head and shoulders pattern has the head at the bottom of the chart, meaning that prices should be rising.

Front 199

HEDGING

Back 199

Strategy used to offset investment risk. A stockholder worried about declining stock prices, for instance, can hedge his holdings by buying a PUT OPTION on the stock or selling a CALL OPTION. Mutual funds frequently hedge their exposure to currency or interest rate risk by buying or selling options contracts. For example, a MUTUAL FUND manager with a large position in Japanese stocks who thinks the Japanese yen is about to fall in value against the U.S. dollar may buy options on the Japanese yen to offset the projected loss on the currency.

Front 200

HIDDEN LOAD

Back 200

Sales charge which may not be immediately apparent to an investor. For example, a 12b-1 MUTUAL FUND assesses an annual asset based charge to cover marketing, distribution, and promotion expenses incurred by the fund. Even though it has been disclosed in the prospectus, many investors do not realize that they are paying this load.

Front 201

HORIZONTAL SPREAD

Back 201

Options strategy that involves buying and selling the same number of options contracts with the same exercise price, but with different maturity dates; also called a CALENDAR SPREAD.

Front 202

HYPOTHECATION

Back 202

Pledging of securities to brokers as collateral for loans made to purchase securities or to cover short sales, called margin loans. When the same collateral is pledged by the broker to a bank to collateralize a broker's loan, the process is called rehypothecation.

Front 203

IMMEDIATE FAMILY

Back 203

Parents, brothers, sisters, children, relatives supported financially, father-in-law, mother-in-law, sister-in-law, and brother-in-law. As defined by the NASD RULES OF CONDUCT regarding the sale of new issues to restricted persons.

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INCOME BOND

Back 204

Obligation on which the payment of interest is contingent on sufficient earnings from year to year. Such bonds are traded FLAT, with no accrued interest and are often an alternative to bankruptcy.

Front 205

INCOME MUTUAL FUND

Back 205

Mutual fund designed to produce current income for shareholders. All distributions from income funds are taxable in the year received by the shareholder unless the fund is held in a tax-deferred account such as an IRA or Keogh or the distributions come from tax-exempt bonds, such as with a municipal bond fund.

Front 206

INDENTURE

Back 206

Formal agreement, also called a deed of trust, between an issuer of bonds and the bondholder. The indenture also provides for the appointment of a trustee to act on behalf of the bondholders, in accordance with the TRUST INDENTURE ACT of 1939.

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INDEX FUND

Back 207

Mutual fund that has a portfolio matching that of a broad-based portfolio. This may include the Standard & Poor's 500 Index, indexes of mid- and small-capitalization stocks, foreign stock indexes, or bond indexes.

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INDEX OPTIONS

Back 208

Calls and puts on indexes of stocks. Broad-based indexes cover a wide range of companies and industries, whereas narrow-based indexes consist of stocks in oneindustry or sector of the economy. Index options allow investors to trade in a particular market or industry group without having to buy all the stocks individually.

Front 209

LAGGING INDICATORS

Back 209

Economic indicators that lag behind the overall pace of economic activity. The six components of the lagging indicators are the unemployment rate, business 28 spending, unit labor costs, bank loans outstanding, bank interest rates, and the book value of manufacturing and trade inventories.

Front 210

LEADING INDICATORS

Back 210

Include; manufacturers' new orders for consumer goods and materials; contracts and orders for plant and equipment; building permits; stock prices; and the MONEY SUPPLY. The index of leading indicators, the components of which are adjusted for inflation, accurately forecasts the ups and downs of the business cycle.

Front 211

LEAPS

Back 211

Acronym for Long-Term Equity Anticipation Securities. LEAPS are long-term equity options traded on U.S. exchanges and over the counter. LEAPS expire in two or three years, giving the buyer a longer time for his strategy to work.

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LEGAL LIST

Back 212

Securities selected by a state agency, usually a banking department, as permissible holdings of mutual savings banks, pension funds, insurance companies, and other FIDUCIARY institutions. To protect the money that individuals place in such institutions, only investment grade debt and equity securities are included.

Front 213

LEGAL OPINION

Back 213

Statement as to the legality of a MUNICIPAL BOND issue, usually written by an independent law firm specializing in public borrowings. It is part of the official statement, the municipal equivalent of a PROSPECTUS. Unless the legality of an issue is established, an investor's contract is invalid at the time of issue and he cannot sue under it.

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LEVERAGE

Back 214

Debt in relation to equity in a firm's capital structure. It's LONG-TERM DEBT, PREFERRED STOCK, and SHAREHOLDERS' EQUITY as measured by the DEBT-TOEQUITY RATIO. The more long-term debt there is, the greater the financial leverage. Shareholders benefit from financial leverage to the extent that return on the borrowed money exceeds the interest costs and the market value of their shares rises. For this reason, financial leverage is popularly called trading on the equity. Because leverage also means required interest and principal payments and thus ultimately the risk of default, how much leverage is desirable is largely a question of stability of earnings. As a rule of thumb, an industrial company with a debt to equity ratio of more than 30% is highly leveraged, exceptions being firms with dependable earnings and cash flow, such as electric utilities.

Front 215

LEVEL LOAD

Back 215

Sales charge that does not change over time. In mutual funds, level load shares are called C class shares, compared to A class for up front loads and B class for back-end loads.

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LIMITED LIABILITY

Back 216

Underlying principle of the CORPORATION and the LIMITED PARTNERSHIP in the United States that LIABILITY is limited to an investor's original investment. In contrast, a general partner or the owner of a sole proprietorship has unlimited liability.

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LIMITED PARTNERSHIP

Back 217

Organization made up of a GENERAL PARTNER, who manages a project, and limited partners, who invest money but have limited liability, are not involved in day-to-day management, and usually cannot lose more than their capital contribution.

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LIMIT ORDER

Back 218

Order to buy or sell a security at a specific price or better. The broker will execute the trade only within the price restriction. For example, a customer puts in a limit order to buy XYZ Corp. at 40 when the stock is selling for 42. Even if the stock reached 40 1/8 the 29 broker will not execute the trade. Similarly, if the client put in a limit order to sell XYZ Corp. at 43 when the price is 41. The trade will not be executed until the stock price hits 43.

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LIMIT PRICE

Back 219

Price set in a LIMIT ORDER. For example, a customer might put in a limit order to sell shares at 45 or to buy at 40. The broker executes the order at the limit price or better.

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LISTED SECURITY

Back 220

Stock or bond that has been accepted for trading by one of the organized and registered securities exchanges in the United States. Listed securities include stocks, bonds, convertible bonds, preferred stocks, warrants, rights, and options. Unlisted securities are traded in the OVER-THE-COUNTER market.

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LOAN VALUE

Back 221

With respect to REGULATION T of the FEDERAL RESERVE BOARD, the maximum percentage of the current market value of eligible securities that a broker can lend a margin account customer. Currently set at 50%.

Front 222

LONG POSITION

Back 222

Ownership of a security, giving the investor the right to transfer ownership to someone else by sale or by gift; the right to receive any income paid by the security; and the right to any profits or losses as the security's value changes.

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LONG-TERM LOSS

Back 223

A CAPITAL LOSS can be used to offset a CAPITAL GAIN plus $3,000 of ORDINARY INCOME.

Front 224

LOOSE MONEY

Back 224

Policy by the Federal Reserve Board to make loans less expensive and more widely available in the economy. The Fed implements a loose credit policy by reducing interest rates by buying Treasury securities, which gives banks more funds than they need to satisfy loan demand. Also called easy money. The opposite policy is called TIGHT MONEY. Tight money policy is used to dampen inflation in an overheated economy.

Front 225

MAINTENANCE CALL

Back 225

A margin call for additional money or securities when a brokerage customer's margin account equity falls below the requirements of the NASD, or of the brokerage firm. Unless the account is brought up to the levels complying with maintenance rules, some of the client's securities may be sold to meet the call. Payable upon demand.

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MALONEY ACT

Back 226

Legislation, which provides for the regulation of the OVER-THECOUNTER market (OTC) by the NASD.

Front 227

MANAGEMENT FEE

Back 227

A charge against investor assets for managing the portfolio of an openor closed-end MUTUAL FUND. The fee, as disclosed in the PROSPECTUS, is a fixed percentage of the fund's net asset value, typically between 0.5% and 2% per year.

Front 228

MANAGING UNDERWRITER

Back 228

Leading investment-banking firm of an UNDERWIRITING SYNDICATE organized for the purchase and distribution of a new issue of securities. The AGREEMENT AMONG UNDERWRITERS authorizes the managing underwriter, or syndicate manager, to act as agent for the syndicate in purchasing, carrying, and distributing the issue.

Front 229

MARGIN

Back 229

Amount a customer initially deposits with a broker when borrowing from the broker to buy securities. The minimum is 50% of the purchase or short sale price, in cash or eligible securities, with a minimum of $2000. Thereafter, MINIMUM MAINTENANCE requirements are imposed by the NASD, and by the individual brokerage firm, whose requirement is typically higher.

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MARGIN ACCOUNT

Back 230

Brokerage account allowing customers to buy securities with borrowed money. Margin accounts are governed by REGULATION T, by the NASD, and by individual brokerage house rules. Margin requirements can be met with cash or with eligible securities.

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MARGIN AGREEMENT

Back 231

Form that spells out 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.

Front 232

MARGIN CALL

Back 232

Demand that a customer deposit enough money or securities to bring a margin account up to the MINIMUM MAINTENANCE requirements. If a customer fails to respond, securities in the account may be sold.

Front 233

MARKDOWN

Back 233

Amount subtracted from the selling price, when a customer sells securities to a dealer in the OVER THE COUNTER market. Had the securities been purchased from the dealer, the customer would have paid a markup, or an amount added to the purchase price. The NASD RULES OF CONDUCT established 5% as a reasonable guideline in markups and markdowns.

Front 234

MARKET PRICE

Back 234

Last reported price at which a security was sold on an exchange. For stocks or bonds sold OVER THE COUNTER, the bid and offer prices available at any particular time from those making a market in the stock.

Front 235

MATCHED ORDERS

Back 235

Illegal manipulative practice of offsetting buy and sell orders to create the impression of activity in a security, causing upward price movement that benefits the participants.

Front 236

MATURITY

Back 236

The date at which a debt instrument is due and payable. A bond due to mature on January 1, 2020, will return the bond holder's principal and final interest payment when it reaches maturity on that date.

Front 237

MILL

Back 237

One-tenth of a cent, the unit most often used in expressing property tax rates. For example, if a town's tax rate is 6 mills per dollar of assessed valuation, and the assessed valuation of a piece of property is $100,000, the tax is $600, or 0.06 times $100,000.

Front 238

MINIMUM MAINTENANCE

Back 238

The NYSE and NASD, both require that a margin be maintained equal to 25% of the market value of securities in margin accounts. Brokerage firm requirements are typically 30%. When the market value of margined securities falls below these minimums a MARGIN CALL goes out requesting additional equity. If the customer fails to comply, the broker may sell the margined stock and close the customer out.

Front 239

MONETARY POLICY

Back 239

Set by the FEDERAL RESERVE BOARD. To make the economy grow faster, the Fed can lower the member bank reserve requirement or lower the DISCOUNT RATE. If, the economy is growing too fast and inflation is an increasing problem, the Fed might raise the reserve requirement, or raise the discount rate.

Front 240

MONEY MARKET FUND

Back 240

An open-ended MUTUAL FUND that invests in commercial paper, banker's acceptances, repurchase agreements, government securities, certificates of deposit, and other highly liquid and safe securities, and pays money market rates of interest. The fund's net asset value remains a constant $1 a share. Only the interest rate goes up or down. Such funds usually offer the convenience of check writing privileges.

Front 241

MONEY SUPPLY

Back 241

Total amount of money in the economy, consisting primarily of currency in circulation and deposits in savings and checking accounts. Too much money in relation to the output of goods tends to push interest rates down and push prices and inflation up; too little money tends to push interest rates up, lower prices and output, and cause unemployment.

Front 242

MUNICIPAL REVENUE BOND

Back 242

Bond issued to finance public works such as bridges or tunnels or sewer systems and supported by the revenues of the project. If a municipal revenue bond is issued to build a bridge, the tolls collected from motorists using the bridge are committed for paying off the bond.

Front 243

MUTILATED SECURITY

Back 243

Certificate that cannot be read for the name of the issue or the issuer, or for the detail necessary for identification and transfer, or for the exercise of the holder's rights.

Front 244

MUTUAL FUND CUSTODIAN

Back 244

Commercial bank that provides safekeeping for the securities owned by a mutual fund and may also act as TRANSFER AGENT, making payments to and collecting investments from shareholders

Front 245

NAKED OPTION

Back 245

OPTION for which the seller has no underlying security position. A writer of a naked CALL OPTION, does not own a LONG POSITION in the stock on which the call has been written. The writer of a naked PUT OPTION does not have a SHORT POSITION in the stock on which the put has been written. Naked options are very risky.

Front 246

NASDAQ

Back 246

National Association of Securities Dealers Automated Quotations system, which is owned and operated by the NATIONAL ASSOCIATION OF SECURITIES DEALERS. NASDAQ is a computerized system that provides brokers and dealers with price quotations for securities traded OVER THE COUNTER.

Front 247

NASDAQ COMPOSITE INDEX

Back 247

Market value-weighted index that measures all securities listed on the NASDAQ Stock Market. The index was introduced with a base value of 100. The market value is calculated through the trading day, and is related to the total value of the index.

Front 248

NASDAQ SMALL CAPITALIZATION COMPANIES

Back 248

Separately listed group of companies that have smaller capitalizations and are less actively traded than NASDAQ NATIONAL MARKET SYSTEM stocks, but that meet NASDAQ price and market value listing criteria and have at least two MARKET MAKERS.

Front 249

NATIONAL MARKET SYSTEM

Back 249

System of trading OVER THE COUNTER stocks under the sponsorship of the NASD and NASDAQ. Stocks trading in the National Market System must meet certain criteria for size, profitability, and trading activity. More comprehensive information is available for National Market System stocks than for other stocks traded over the counter.

Front 250

NEGATIVE YIELD CURVE

Back 250

Usually, short-term rates are lower than long-term rates because those who invest their money for longer periods are taking more risk. But if interest rates climb high enough, borrowers become unwilling to lock themselves into high rates for long periods and 33 borrow short-term instead. As a result, yields rise on short-term funds and fall or remain stable on long-term funds.

Front 251

NEGOTIABLE CERTIFICATE OF DEPOSIT

Back 251

Large-dollar-amount, short-term certificate of deposit. Issued by large banks and bought mainly by corporations and institutional investors. Although they can be issued in any denomination from $100,000 up, the typical amount is $1 million.

Front 252

NEGOTIATED UNDERWRITING

Back 252

Underwriting of new securities issue in which the SPREAD between the purchase price paid to the issuer and the public offering price is determined through negotiation rather than competitive bidding. The spread, which represents the compensation to the investment bankers participating in the underwriting (called the syndicate), is negotiated between the issuing company and the MANAGING UNDERWRITER, with the consent of the group.

Front 253

NET ASSET VALUE (NAV)

Back 253

In mutual funds, the value of a fund share, also called the bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares. Load fund ask or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day. (Forward pricing)

Front 254

NET INVESTMENT INCOME PER SHARE

Back 254

Income received by an investment company from dividends and interest on securities investments, less management fees and administrative expenses and divided by the number of outstanding shares.

Front 255

NET WORTH

Back 255

Amount by which assets exceed liabilities. For a corporation, net worth is also known as stockholders' equity or NET ASSETS.

Front 256

NO-LOAD FUND

Back 256

MUTUAL FUND offered by an open-end investment company that imposes no sales charge on its shareholders. Investors buy shares in no-load funds directly from the fund companies, rather than through a BROKER. The price of a no-load fund in a newspaper is accompanied with the designation NL. The net asset value, market price, and offer prices of this type of fund are the same, since there is no sales charge.

Front 257

NOMINAL YIELD

Back 257

Annual dollar amount of income received from a fixed-income security divided by the PAR VALUE of the security and stated as a percentage. A bond that pays $100 a year and has a par value of $1000 has a nominal yield of 10%, also called its coupon rate. Since market prices of fixed-income securities go down when market interest rates go up and vice versa, the current yield, which is determined by the market price and coupon rate, will be higher when the purchase price is below par value and lower when the purchase price is above par value.

Front 258

NONACCREDITED INVESTOR

Back 258

Investor who does not meet the net worth requirements for SEC Regulation D. Under Rules 505 and 506 of Regulation D, an investment can be offered to a maximum of 35 non-accredited investors.

Front 259

NONRATED

Back 259

Bonds that have not been rated by one or more of the major rating agencies such as Standard & Poor's, Moody's Investor Services or Fitch Investor Services. Issues are usually nonrated because they are too small to justify the expense of rating. Nonrated bonds are not necessarily better or worse than rated bonds.

Front 260

NONRECOURSE LOAN

Back 260

Type of loan used by limited partners in a DIRECT PARTICIPATION PROGRAM, whereby the limited partners finance a portion of their participation with a loan secured by their ownership in the underlying venture without further personal liability. They benefit form the LEVERAGE provided by the loan.

Front 261

NORMAL TRADING UNIT

Back 261

Standard size of a trading unit for a particular security; also called a ROUND LOT. Stocks have a normal trading unit of 100 shares, although inactive stocks may trade in 10-share round lots. Any securities traded for less than a round lot is called an ODD LOT trade.

Front 262

NOT HELD

Back 262

Indication (abbreviated NH) on market order to buy or sell securities, indicating that the customer has given the FLOOR BROKER time and price discretion in executing the best possible trade but will not hold the broker responsible if the best deal is not obtained. The SEC no longer allows specialists to handle NH orders.

Front 263

OEX

Back 263

The Standard & Poor's 100 stock index, which comprises stocks for which index options are traded on the Chicago Board Options Exchange.

Front 264

OPEN-END MANAGEMENT COMPANY

Back 264

INVESTMENT COMPANY that sells MUTUAL FUNDS to the public. The term arises from the fact that the firm continually creates new shares on demand. The opposite of an open-end management company is a CLOSED-END MANAGEMENT COMPANY, which issues a limited number of shares, which are then traded on a stock exchange or OTC.

Front 265

OPEN-MARKET OPERATIONS

Back 265

Open-market operations represent one of three basic ways the Federal Reserve implements MONETARY POLICY, the others being changes in the member bank RESERVE REQUIREMENTS and raising or lowering the DISCOUNT RATE charged to banks borrowing from the Fed to maintain reserves.

Front 266

OPTION

Back 266

Securities transaction agreement tied to stocks, or stock indexes. Options are traded on many exchanges. Most call and put options are not exercised. Instead, investors buy and sell options before expiration, trading on the rise and fall of premium prices. Because an option buyer must put up only a small amount of money (the premium) to control a large amount of stock, options trading provides a great deal of LEVERAGE and can prove profitable. Options traders can write either covered options, in which they own the underlying security, or far riskier naked options, for which they do not own the underlying security.

Front 267

OPTION ACCOUNT

Back 267

Account at a brokerage firm that is approved for option positions or trades. The client must be given a copy of "Characteristics and Risks of Standardized Options Contracts," known as the Options Disclosure Document, before the account can be approved. The client must complete an OPTION AGREEMENT in order to open the account.

Front 268

OPTION AGREEMENT

Back 268

Form filled out by a brokerage firm's customer when opening an option account. It details financial information about the customer, who agrees to follow the rules and regulations of options trading.

Front 269

OPTION PRICE

Back 269

Market price at which an option contract is trading at any particular time. The option price is determined by many factors, including its INTRINSIC VALUE, time to expiration, volatility of the underlying stock, interest rates, dividends, and marketplace adjustments for supply and demand.

Front 270

ORIGINAL ISSUE DISCOUNT (OID)

Back 270

Discount from PAR VALUE at the time a bond is issued. The most extreme version of an original issue discount is a ZERO-COUPON BOND, which is originally sold at far below par value and pays no interest until it matures. The Internal Revenue Service assumes a certain rate of appreciation of the bond every year until maturity. No capital gain or loss will be incurred if the bond is sold for that estimated amount. But if the bond is sold for more than the assumed amount, a CAPITAL GAINS TAX is due.

Front 271

OUT OF THE MONEY

Back 271

Term used to describe an OPTION whose STRIKE PRICE for a stock is either higher than the current market value, in the case of a CALL, or lower, in the case of a PUT.

Front 272

OVERLAPPING DEBT

Back 272

Municipal accounting term referring to a municipality's share of the debt of its political subdivisions. Overlapping debt may be greater than the direct debt of a municipality, and both must be taken into account in determining the debt burden carried by taxable real estate within a municipality when evaluating MUNICIPAL BOND investments.

Front 273

OVER THE COUNTER (OTC)

Back 273

Market in which securities transactions are conducted through a telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange. The rules of over-the-counter stock trading are enforced by the NASD.

Front 274

OWNER'S EQUITY

Back 274

PAID-IN CAPITAL, and RETAINED EARNINGS less the LIABILITIES of a corporation. Also called "net worth."

Front 275

PAC BOND

Back 275

Planned amortization class bond, PAC is a TRANCHE class offered by some COLLATERIZED MORTGAGE OBLIGATIONS (CMOs). PAC bonds offer certainty of cash flow except in extreme prepayment situations, and trade at a premium to comparable traditional CMOs.

Front 276

PAID-IN CAPITAL

Back 276

Capital received from investors for stock, as distinguished from capital generated from earnings. The paid-in capital account includes CAPITAL STOCK and the 37 contributions of stockholders, in excess of PAR value received from the sale of capital stock in the primary market.

Front 277

PAR

Back 277

The nominal or FACE VALUE of a security. A bond selling at par is worth the same dollar amount it was issued for. The value at which it will be redeemed at maturity - usually, $1,000 per bond. Par value has no relation to MARKET VALUE. The interest paid on bonds is based on a percentage of a bond's par value-a 10% bond pays 10% of the bond's par value annually. Preferred dividends are normally stated as a percentage of the par value of the preferred stock issue, which is usually $100.

Front 278

PARTICIPATING PREFERRED STOCK

Back 278

PREFERRED STOCK that, in addition to paying a stipulated dividend, gives the holder the right to participate with the common stockholders in additional distributions of earnings.

Front 279

PASSIVE

Back 279

Income or loss from activities in which a taxpayer does not materially participate, such as LIMITED PARTNERSHIPS, as distinguished from income from wages and active trade or business or investment income, such as dividends and interest.

Front 280

PASS-THROUGH SECURITY

Back 280

MORTGAGE-BACKED CERTIFICATE, usually government-guaranteed, where homeowners' principal and interest payments pass from the originating bank or savings and loan through a government agency or investment bank to investors on a monthly basis.

Front 281

PEGGING

Back 281

Stabilizing the price of a security, by intervening in a market. In new stock issues, the managing underwriter is authorized to try to peg the market price and stabilize the market in the issuer's stock by buying shares in the open market.

Front 282

PER CAPITA DEBT

Back 282

Total bonded debt of a municipality, divided by its population.

Front 283

PERIOD-CERTAIN ANNUITY

Back 283

Annuity that guarantees payments to an ANNUITANT for a particular period of time. For example, a 10-year period-certain annuity will guarantee annuity payments for at least 10 years. If the annuitant dies before the 10 years have expired, the payments will continue to the beneficiaries for the remaining term.

Front 284

PLUS TICK

Back 284

Occurs when a security has been traded at a higher price than the previous transaction. A stock price listed as 30+ on the CONSOLIDATED TAPE has had a plus tick from 29 3/4. It is a SEC rule that short sales can be executed only on plus ticks or ZERO PLUS TICKS. Percentage change of the face value of a bond expressed as a point. For example, a change of 1% is a move of one point. For a bond with a $1000 face value, each point is worth 38 $10, and for a bond with a $10,000 face value, each point is $100. Bond yields are quoted in basis points: 100 basis points make up 1% of yield.

Front 285

POSITION LIMIT

Back 285

Maximum number of exchange-listed OPTION contracts that can be owned or controlled by an individual holder, or by a group of holders acting jointly, in the same underlying security on the same side of the market (for example, long calls and short puts are on side of the market).

Front 286

PRIMARY DISTRIBUTION

Back 286

Sale of a new issue of stocks or bonds, as distinguished from a SECONDARY DISTRIBUTION, which involves previously issued stock.

Front 287

PRIMARY MARKET

Back 287

Market for new issues of securities, as distinguished from the SECONDARY MARKET, where previously issued securities are bought and sold. A market is primary if the proceeds of sales go to the issuer of the securities sold.

Front 288

PRIVATE PLACEMENT

Back 288

Sale of stocks, bonds, or other investments, directly to an investor. A private placement does not have to be registered with the SEC if it complies with SEC Regulation D.

Front 289

PRIVATE PURPOSE BOND

Back 289

Category of MUNICIPAL BOND distinguished from PUBLIC PURPOSE BOND because 10% or more of the bond's benefit goes to private activities. Private purpose obligations, which are also called private activity bonds, are subject to the alternative minimum tax.

Front 290

PROCEEDS SALE

Back 290

OVER THE COUNTER securities sale where the PROCEEDS are used to purchase another security. Under the FIVE PERCENT RULE of the NASD, such a trade is considered one transaction and the total combined markup from both trades is subject to the 5% guideline.

Front 291

PROFIT AND LOSS STATEMENT (P & L)

Back 291

Summary of the revenues, costs and expenses of a company over a period of time. Together with the BALANCE SHEET it constitutes a company's financial statements.

Front 292

PROGRESSIVE TAX

Back 292

Income tax system in which those with higher incomes pay taxes at higher rates than those with lower incomes. There are several tax brackets, based in the taxpayer's income, which determine the tax rate that applies to each taxpayer.

Front 293

PROJECT NOTE

Back 293

Short-term debt issue of a municipal agency, usually a housing authority, to finance the construction of public housing. Project notes pay tax-exempt interest, and are guaranteed by the U.S. Department of Housing and Urban Development.

Front 294

PROSPECTUS

Back 294

Written offer to sell securities that an investor needs to make an informed decision. The prospectus contains financial information and a description of a company's business history, officers, operations, and plans for the use of the proceeds from the issue.

Front 295

PRUDENT-MAN RULE

Back 295

Adopted by some states to guide those with responsibility for investing the money of others. Such fiduciaries must act, as a prudent man would be expected to act, with discretion and intelligence, to seek reasonable income, preserve capital, and, avoid speculative investments.

Front 296

PUBLIC HOUSING AUTHORITY BOND

Back 296

Obligation of local public housing agencies, that are secured by the federal government. The proceeds of such bonds are exempt from federal income taxes and may also be exempt from state and local income taxes.

Front 297

PUBLIC PURPOSE BOND

Back 297

Category of MUNICIPAL BOND, which is exempt from federal income taxes as long as it provides no more than 10% benefit to private parties. Purpose bonds include purposes such as roads, libraries, and government buildings.

Front 298

PUT BOND

Back 298

Bond that allows its holder to redeem the issue at specified intervals before maturity and receive full FACE VALUE. In return for this privilege, a bond buyer sacrifices some yield when choosing a put bond over a bond that cannot be redeemed before maturity.

Front 299

PUT OPTION

Back 299

Contract that grants the right to sell at a specified price a specific number of shares by a certain date. The put option buyer gains this right in return for payment of an OPTION PREMIUM. The put option seller grants this right in return for receiving this premium. A put option buyer hopes the stock will drop in price, while the put option seller hopes the stock will remain stable, rise, or drop by an amount less than his profit on the premium.

Front 300

QUICK RATIO

Back 300

Cash, MARKETABLE SECURITIES, and ACCOUNTS RECEIVABLE divided by current liabilities. By excluding inventory, this key LIQUIDITY ratio focuses on the firm's more LIQUID ASSETS. A quick ratio of 1 to 1 or better is usually satisfactory.

Front 301

RANGE

Back 301

High and low price for a security, over a period of time. Newspapers publish the 52- week high and low price range for stocks traded on the New York Stock Exchange, and over-thecounter markets. TECHNICAL ANALYSTS attach importance to trading ranges because they consider it significant if a security breaks out of its trading range.

Front 302

REAL ESTATE INVESTMENT TRUST (REIT)

Back 302

Company that manages a portfolio of real estate to earn profits for shareholders. Patterned after INVESTMENT COMPANIES, REITs make investments on a diverse array of real estate. To avoid taxation at the corporate level, 75% or more of the REIT's income must be from real property and 90% of its net earnings must be distributed to shareholders annually.

Front 303

REALIZED PROFIT

Back 303

Profit resulting from the sale of a security. Capital gains taxes may be due when profits are realized. Such profits differ from a PAPER PROFIT, which has no tax consequences.

Front 304

RECESSION

Back 304

Downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country's GROSS DOMESTIC PRODUCT.

Front 305

RECOURSE LOAN

Back 305

Loan made to a DIRECT PARTICIPATION PROGRAM or LIMITED PARTNERSHIP whereby the lender, in addition to being secured by specific assets, has recourse against the limited partners. Also known as an "at risk" loan.

Front 306

REFUNDING

Back 306

Replacing an old debt with a new one, usually in order to lower the interest cost of the issuer. For instance, a corporation or municipality that has issued 10% bonds may want to refund them by issuing 8% bonds if interest rates have dropped.

Front 307

REGISTRAR

Back 307

The registrar, working with the TRANSFER AGENT, keeps current files of the owners of a bond issue and the stockholders in a corporation, often a commercial bank.

Front 308

REGISTRATION STATEMENT

Back 308

Document detailing the purpose of a proposed public offering of securities as required by the Securities Act of 1933. The statement outlines financial details, a history of the company's operations and management, and other facts to potential buyers.

Front 309

REGRESSIVE TAX

Back 309

A regressive tax is the opposite of a PROGRESSIVE TAX. Tax system that results in a higher tax for the poor than for the rich, in terms of percentage of income. A sales tax is regressive even though the same rate is applied to all sales, because people with lower incomes tend to spend most of their incomes on goods and services.

Front 310

REGULATED INVESTMENT COMPANY

Back 310

MUTUAL FUND eligible under Subchapter M of the Internal Revenue Service to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders to be taxed at the personal level. To qualify as a regulated investment company, the fund must meet such requirements as 90% minimum distribution of interest and dividends received on investments less expenses and 90% distribution of capital gain net income. Shareholders must pay taxes even if they reinvest their distributions.

Front 311

REGULATION T

Back 311

Federal Reserve Board regulation covering the extension of credit to customers by securities brokers, dealers, and members of the national securities exchanges. It establishes INTIAL MARGIN requirements.

Front 312

REINVESTMENT PRIVILEGE

Back 312

Right of a shareholder to reinvest dividends in order to buy more shares in the company or MUTUAL FUND, usually at no additional sales charge.

Front 313

REMIC

Back 313

Acronym for real estate mortgage investment conduit, a pass-through vehicle created to issue multi-class mortgage-backed securities. Issuers have more flexibility than is afforded by the COLLATERALIZED MORTGAGE OBLIGATION (CMO) vehicle. Issuers can separate mortgage pools not only into different maturity classes but into different risk classes as well.

Front 314

REPURCHASE AGREEMENT (REPO)

Back 314

Agreement between a seller and a buyer, usually of U.S. Government securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, at a stated time. Repos, are widely used both as money market investment vehicles and as instruments of Federal Reserve MONETARY POLICY.

Front 315

RESERVE REQUIREMENT

Back 315

FEDERAL RESERVE SYSTEM rule mandating the financial assets that member banks must keep in the form of cash and other liquid assets as a percentage of DEMAND DEPOSITS and TIME DEPOSITS. The higher the reserve requirement, the tighter the money, and the slower the economic growth.

Front 316

RESISTANCE LEVEL

Back 316

Price ceiling at which technical analysts note persistent selling of a security. If XYZ's stock generally trades between a low of $40 and a high of $50 a share, $40 is called the SUPPORT LEVEL and $50 is called the resistance level. Technical analysts think it significant when the stock breaks through the resistance level because that means it usually will go on to new high prices.

Front 317

RESTRICTED ACCOUNT

Back 317

MARGIN ACCOUNT in which the EQUITY is less than the INITIAL MARGIN requirement set by REGULATION T. A customer whose account is restricted must, in accordance with Regulation T's retention requirements, retain in the account 50% of the proceeds of any sales to reduce the debit balance.

Front 318

REVERSE SPLIT

Back 318

Procedure whereby a corporation reduces the number of shares outstanding. The total number of shares will have the same market value immediately after the reverse split as before it, but each share will be worth more. Such splits are usually initiated by companies wanting to raise the price of their outstanding shares because they think the price is too low to attract investors.

Front 319

RISK ARBITRAGE

Back 319

Traders called arbitrageurs attempt to profit from TAKEOVERS by cashing in on the expected rise in the price of the target company's shares and drop in the price of the acquirer's shares. Risk arbitrage differs from market arbitrage, which entails profiting from the differences in the prices of two securities trading on different exchanges.

Front 320

RULES OF CONDUCT

Back 320

Code of ethics established by the Board of Governors of the NASD, a self-regulatory organization comprised of firms dealing in the OVER-THE-COUNTER securities market.

Front 321

SAME-DAY SUBSTITUTION

Back 321

Offsetting transactions in a MARGIN ACCOUNT in the course of one day, resulting in neither a MARGIN CALL nor a credit to the SPECIAL MISCELLANEOUS ACCOUNT.

Front 322

SAVINGS BOND

Back 322

U.S. Series EE bonds, issued at a discount, range from $50 to $10,000; Series HH bonds, which are interest bearing, range from $500 to $10,000. Series EE bonds, if held for five years, pay 85% of the average yield on five-year Treasury securities. Series HH bonds, available only through an exchange of at least $500 in Series E or EE bonds, pay a fixed 4% rate. The interest from savings bonds is exempt from state and local taxes, and no federal tax on EE bonds is due until redemption.

Front 323

SCALE

Back 323

Date for each of the scheduled maturities in a new SERIAL BOND issue, including the number of bonds, the date they mature, the COUPON rate, and the offering price.

Front 324

SECONDARY DISTRIBUTION

Back 324

Public sale of previously issued securities held by large investors, as distinguished from a NEW ISSUE or PRIMARY DISTRIBUTION, where the seller is the issuing corporation.

Front 325

SECONDARY MARKET

Back 325

Exchanges and over-the-counter markets where securities are bought and sold after original issuance. Proceeds of secondary market sales go to the selling investors, not to the companies that originally issued the securities.

Front 326

SECURED BOND

Back 326

Bond backed by the pledge of COLLATERAL. The exact nature of the collateral is spelled out in the INDENTURE. Secured bonds are distinguished from unsecured bonds, called DEBENTURES.

Front 327

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC)

Back 327

Nonprofit corporation designed to protect customers of insolvent broker/dealers. When a brokerage firm fails, SIPC will try to merge it into another brokerage firm. If this fails, SIPC will liquidate the firm's assets and pay off account holders up to an overall maximum of $500,000 per customer, with a limit of $100,000 on cash. SIPC does not protect investors against market risks and does not cover mutual fund accounts.

Front 328

SELF-REGULATORY ORGANIZATION

Back 328

SROs enforce the conduct, and trading practices of the securities industry. The SROs include all the national SECURITIES EXCHANGES as well as the NASD, which represents all the firms operating in the over-the-counter market, and the Municipal Securities Rulemaking Board. Rules made by the MSRB are enforced by the NASD and bank regulatory agencies.

Front 329

SELLER'S OPTION

Back 329

Securities transaction in which the seller, instead of making REGULAR WAY DELIVERY, is given the right to deliver the security to the purchaser on the date the seller's option expires or before.

Front 330

SELLING CONCESSION

Back 330

Discount at which securities in a NEW ISSUE offering are allocated to the members of a SELLING GROUP by the underwriters. Since the selling group cannot sell to the public at a price higher than the PUBLIC OFFERING PRICE, its compensation comes out of the difference between the price paid to the issuer by the underwriters and the public offering price, called the SPREAD.

Front 331

SELLING DIVIDENDS

Back 331

Unethical practice where a customer is induced to buy shares in a mutual fund in order to get the benefit of a dividend scheduled in the near future. Since the dividend is already part of the NET ASSET VALUE of the fund and part of the share price, the customer derives no benefit, especially since dividends are taxable.

Front 332

SELLING GROUP

Back 332

Group of dealers appointed by the syndicate manager of an UNDERWRITING GROUP, as AGENT for the other underwriters, to market a new or secondary issue to the public.

Front 333

SENIOR SECURITY

Back 333

Senior securities are repaid before JUNIOR SECURITIES in the event of LIQUIDATION. Bonds are senior to stock; and all mortgage bonds are senior to debentures, which are unsecured.

Front 334

SERIAL BOND

Back 334

Muni bond issue, with various MATURITY DATES scheduled at regular intervals until the entire issue is retired. Each bond certificate in the series has an indicated REDEMPTION DATE.

Front 335

SERIES OF OPTION

Back 335

Either all CALL OPTIONS or all PUT OPTIONS, on the same underlying security, all of which have the same EXERCISE PRICE and maturity date.

Front 336

SETTLEMENT DATE

Back 336

In a REGULAR WAY DELIVERY of stocks and bonds, the settlement date is three business days after the trade was executed. For listed options and government securities, settlement is required by the next business day.

Front 337

SHAREHOLDER'S EQUITY

Back 337

Total ASSETS minus total LIABILITIES of a corporation. Also called stockholder's equity, or net worth.

Front 338

SHORT INTEREST THEORY

Back 338

Based on the reasoning that even though short selling reflects a belief that prices will decline, the fact that short positions must eventually be covered is a source of upward price pressure.

Front 339

SHORT-TERM GAIN OR LOSS

Back 339

For tax purposes, the profit or loss realized from the sale of securities or other capital assets held for one year or less. Short-term gains are taxable at ordinary income rates.

Front 340

SINKING FUND

Back 340

Money accumulated on a regular basis that is used to redeem debt securities. A bond indenture may specify that payments be made to a sinking fund, thus assuring investors that the issues are safe.

Front 341

SMALL CAP

Back 341

Small capitalization stocks or mutual funds holding such stocks. Small capitalization stocks represent companies that are less well established, but in many cases faster growing than mid-cap stocks or large cap stocks. Since they are less established, small cap stocks are usually more risky than BLUE CHIPS.

Front 342

SOES

Back 342

Acronym for the computerized Small Order Entry (or Execution) System used by NASDAQ, in which small orders bypass brokers and are aggregated and executed against available firm quotes by market makers on the NASDAQ system.

Front 343

SPECIALIST

Back 343

Member of a stock exchange who maintains a fair and orderly market in one or more securities. A specialist executes LIMIT ORDERS on behalf of other exchange members for a portion of the FLOOR BROKER'S commission, and buys and sells for his account to counteract temporary imbalances in supply and demand and prevent wide swings in stock prices.

Front 344

SPECIALIST'S BOOK

Back 344

Record maintained by a SPECIALIST that includes the specialist's own inventory of securities, market orders to sell short, and LIMIT ORDERS and STOP ORDERS that other stock exchange members have placed with the specialist.

Front 345

SPECIAL MISCELLANEOUS ACCOUNT (SMA)

Back 345

Memorandum account of the funds in excess of the REG T MARGIN REQUIREMENT. Such excess funds may arise from the 46 proceeds of sales, appreciation of market values, dividends, or cash or securities put up in response to a MARGIN CALL. May be withdrawn as cash or used to buy more securities.

Front 346

SPECIAL TAX BOND

Back 346

MUNICIPAL REVENUE BOND that will be repaid through excise taxes on such purchases as gasoline, tobacco, and liquor. The bond is not backed by the ordinary taxing power of the municipality issuing it.

Front 347

SPLIT

Back 347

Increase in a corporation's number of outstanding shares of stock without any change in the shareholders' EQUITY or the aggregate MARKET VALUE at the time of the split. Where stock splits require an increase in AUTHORIZED SHARES and/or a change in PAR VALUE of stock, shareholders must approve an amendment of the corporate charter.

Front 348

SPREAD

Back 348

Options, Position consisting of one long call and one short call option

Front 349

SPX

Back 349

Ticker symbol for the S&P's 500 stock index options traded on the Chicago Board Options Exchange. The European-style index options contract is settled in cash, and can be exercised only on the last business day before expiration.

Front 350

STABILIZATION

Back 350

Intervention in the market by a managing underwriter in order to keep the market price form falling below the PUBLIC OFFERING PRICE during the offering period. The underwriter places orders to buy at a specific price, an action called PEGGING that, in any other circumstance, is a violation of laws prohibiting MANIPULATION of prices.

Front 351

STANDARD & POOR'S RATING

Back 351

AA

Front 352

STATUTORY VOTING

Back 352

One-share, one-vote rule that governs voting procedures in most corporations. Shareholders may cast one vote per share. The result of statutory voting is that those who control over 50% of the shares control the company.

Front 353

STOCK DIVIDEND

Back 353

Payment of a corporate dividend in the form of stock rather than cash. The advantage is that the additional stock is not taxed until sold, unlike a cash dividend, which is taxable as income in the year it is received.

Front 354

STOCK OPTION

Back 354

Right to purchase or sell a stock at a specified price within a stated period. OPTIONS offer an opportunity to hedge positions in other securities, to speculate in stocks with relatively little investment, and to capitalize on changes in the MARKET VALUE of options contracts through various options strategies.

Front 355

STOP-LIMIT ORDER

Back 355

Order with instructions to buy or sell at a specified price or better but only after a given stop price has been reached or passed. It is a combination of a STOP ORDER and a LIMIT ORDER. A stop-limit order avoids some of the risks of a stop order, which becomes a MARKET ORDER when the stop price is reached; however, it carries the risk of missing the market altogether, since the specified limit price or better may never occur.

Front 356

STOP ORDER

Back 356

Order to buy or sell at the MARKET PRICE once the security has traded at a specified price called the stop price. A stop order to buy, always at a stop price above the current market price, is usually designed to protect a profit or to limit a loss on a short sale. A stop order to sell, always at a price below the current market price, is usually designed to protect a profit or to limit a loss on a security already purchased at a higher price.

Front 357

STRADDLE

Back 357

Long or short strategy consisting of an equal number of PUT OPTIONS and CALL OPTIONS on the same underlying stock, at the same STRIKE PRICE and expiration date. Purchasers of a long straddle think the stock will either go up or down, but aren't sure which.

Front 358

STREET NAME

Back 358

Phrase describing securities held in the name of the firm instead of a customer. Since the securities are in the firm's custody, transfer of the shares at the time of sale is easier than if the stock were registered in the customer's name and physical certificates had to be transferred.

Front 359

STRIP

Back 359

Brokerage-house practice of separating a bond into its principal and interest, which are then sold separately as ZERO-COUPON SECURITIES. A variation known by the acronym STRIPS (Separate Trading of Registered Interest and Principal of Securities) is a prestripped zero-coupon bond that is a direct obligation of the U.S. Treasury.

Front 360

STUDENT LOAN MARKETING ASSOCIATION (SLMA)

Back 360

Publicly traded stock corporation that guarantees student loans traded in the SECONDARY MARKET. Known as Sallie Mae, it purchases student loans from originating financial institutions and provides financing to state student loan agencies.

Front 361

SUBCHAPTER M

Back 361

Internal Revenue Service regulation dealing with what is commonly called the conduit theory, in which qualifying investment companies and real estate investment trusts avoid double taxation by passing interest and dividend income and capital gains directly through, without taxation, to shareholders, who are taxed as individuals.

Front 362

SUBSCRIPTION RIGHT

Back 362

Privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is offered to the public. Such a right, which normally has a life of 30 days, is freely transferable and entitles the holder to buy the new common stock below the PUBLIC OFFERING PRICE.

Front 363

SUBSCRIPTION WARRANT

Back 363

Type of security, usually issued together with a BOND, that entitles the holder to buy a proportionate amount of common stock at a specified price, usually higher than the market price at the time of issuance, for a period of years. A warrant is usually issued as a SWEETENER, to enhance the marketability of the accompanying fixed income securities. Warrants are freely transferable and are traded on the major exchanges.

Front 364

SWEETENER

Back 364

Feature added to a securities offering to make it more attractive to purchasers. A bond may have the sweetener of convertibility into common stock added, for example.

Front 365

TARGETED AMORTIZATION CLASS (TAC) BONDS

Back 365

Bonds offered as a tranche class of COLLATERALIZED MORTGAGE OBLIGATIONS. TACs are similar to PAC BONDS in that, unlike conventional CMO classes, they are based on a SINKING-FUND schedule. A TAC bond provides more cash flow stability than a regular CMO class but less than a PAC.

Front 366

TAX CREDIT

Back 366

Direct, dollar-for-dollar reduction in tax liability, as distinguished from a tax deduction, which reduces taxes only by the percentage of a taxpayer's TAX BRACKET.

Front 367

TAX DEDUCTION

Back 367

Deductible expense that reduces taxable income for individuals or businesses, such as contributions to qualified pension plans.

Front 368

TAX DEFERRED

Back 368

Term describing an investment whose earnings are free from taxation until the investor takes possession of them. For example, the holder of a traditional INDIVIDUAL RETIREMENT ACCOUNT postpones paying taxes on interest, dividends, or capital appreciation if he waits until after age 59½ to begin distributions.

Front 369

TAX-EQUIVALENT YIELD

Back 369

Pretax yield that a taxable bond would have to pay to equal the tax-free yield of a municipal bond in an investor's tax bracket. To figure out the tax-equivalent yield, an investor must subtract his marginal tax bracket from 100. This figure must then be divided into the yield of the tax-free municipal bond. The result is the yield which a taxable bond would have to pay to give the investor the same dollars after taxes.

Front 370

TAX-EXEMPT

Back 370

This status is granted to municipal bonds, which pay interest that is totally free from federal taxes. Municipal bond interest is also usually tax-exempt to bondholders who are residents of the issuing state. However, other states may impose taxes on interest earned from out-of-state bonds.

Front 371

TAX-EXEMPT SECURITY

Back 371

A MUNICIPAL BOND issued by a state government or by a country, town, or other political district or subdivision. The security is backed by the FULL FAITH AND CREDIT or by anticipated revenues of the issuing authority. Interest income from tax-exempt municipals is free from federal income taxation. Capital gains are taxable, however.

Front 372

TECHNICAL ANALYSIS

Back 372

Research into the demand and supply for securities, based on trading volume and price studies. Technical analysts use charts to identify and project price trends. Unlike FUNDAMENTAL ANALYSIS, technical analysis is not concerned with the financial position of a company.

Front 373

TENANCY IN COMMON

Back 373

Ownership of real or personal property by two or more persons in which ownership at the death of one co-owner is part of the owner's ESTATE, and does not pass to the co-owner(s). 50

Front 374

TENDER OFFER

Back 374

Offer to buy shares of a corporation, usually at a PREMIUM above the shares' market price, for cash, securities, or both, often with the objective of taking control of a company.

Front 375

THIN MARKET

Back 375

Market in which there are few bids to buy and few offers to sell. Prices in thin markets are more volatile than in markets with great LIQUIDITY, since the few trades that take place can affect prices significantly.

Front 376

TIGHT MONEY

Back 376

Economic condition in which credit is hard to secure, usually as the result of Federal Reserve action to restrict the MONEY SUPPLY, by raising interest rates.

Front 377

TIME VALUE

Back 377

That part of a stock option PREMIUM that reflects the time remaining on an option contract before expiration. The premium is composed of this time value and the INTRINSIC VALUE of the option, if any.

Front 378

TOMBSTONE

Back 378

Advertisement placed in newspapers by investment bankers in a PUBLIC OFFERING of securities. It gives basic details about the issue and lists the UNDERWRITING GROUP members involved in the offering. It is not "an offer to sell or a solicitation of an offer to buy," so is exempt from the PROSPECTUS requirements.

Front 379

TRADE DATE

Back 379

Day on which a security trade actually takes place. The SETTLEMENT DATE usually follows the trade date by three business days, but varies depending on the transaction and method of delivery used.

Front 380

TRANCHES

Back 380

Risk maturity dates into which a COLLATERALIZED MORTGAGE OBLIGATION (CMO) are split. For example, the typical CMO has A, B, C, and Z tranches, representing fast pay, medium pay, and slow pay bonds plus a tranch that bears no coupon but receives the cash flow from the collateral remaining after the other tranches are satisfied.

Front 381

TRANSFER AGENT

Back 381

Agent, usually a commercial bank, appointed by a corporation, to maintain records of stock and bond owners, to cancel and issue certificates, and to resolve problems arising from lost, destroyed, or stolen certificates.

Front 382

TREASURIES

Back 382

NEGOTIABLE debt obligations of the U.S. government, secured by its FULL FAITH AND CREDIT and issued at various schedules and maturities. The income from Treasury securities is exempt from state and local, but not federal, taxes.

Front 383

UNCOVERED OPTION

Back 383

A short call position is uncovered if the writer does not have long stock to deliver or does not own another call on the same security with a lower or same strike price, and with a longer or same time of expiration. A "naked" position.

Front 384

UNDERLYING SECURITY

Back 384

Security that must be delivered if a PUT OPTION or CALL OPTION contract is exercised. Stock INDEX OPTIONS, however, are settled in cash, since it is not possible to deliver an index of stocks.

Front 385

UNDERWRITE

Back 385

To assume the risk of buying a NEW ISSUE of securities from the issuing corporation or government entity and reselling them to the public, either directly or through dealers. The UNDERWRITER makes a profit on the difference between the price paid to the issuer and the PUBLIC OFFERING PRICE, called the UNDERWRITING SPREAD.

Front 386

UNDERWRITER

Back 386

INVESTMENT BANKER who agrees to purchase a NEW ISSUE of securities from an issuer and distribute it to investors, making a profit on the UNDERWRITING SPREAD.

Front 387

UNDERWRITING AGREEMENT

Back 387

Agreement between a corporation issuing new securities to be offered to the public and the MANAGING UNDERWRITER as agent for the UNDERWRITING GROUP. It represents the underwriters' commitment to purchase the securities, and it details the PUBLIC OFFERING PRICE, the UNDERWRITING SPREAD, the net proceeds to the issuer, and the SETTLEMENT DATE. The underwriters agree to proceed with the offering as soon as the registration is cleared by the SEC or at a specified date thereafter. The underwriters are authorized to make sales to members of a SELLING GROUP.

Front 388

UNIFORM PRACTICE CODE

Back 388

Rules of the NASD concerned with standards and procedures for the handling of OVER THE COUNTER securities transactions, such as delivery, SETTLEMENT DATE, and EX-DIVIDEND DATE.

Front 389

UNISSUED STOCK

Back 389

Shares of a corporation's stock authorized in its charter but not issued. Unissued stock may be issued by action of the board of directors, although shares needed for unexercised employee STOCK OPTIONS, rights, warrants, or convertible securities must not be issued while such obligations are outstanding. Unissued shares cannot pay dividends and cannot be voted. Not to be confused with TREASURY STOCK, which is issued but not outstanding.

Front 390

UNITED STATES GOVERNMENT SECURITIES

Back 390

Direct GOVERNMENT OBLIGATIONS such as Treasury bills, notes, and bonds and Series EE and Series HH SAVINGS BONDS as distinguished from government-sponsored AGENCY issues.

Front 391

UNIT INVESTMENT TRUST

Back 391

Investment vehicle, that purchases a fixed PORTFOLIO of income-producing securities, such as corporate, municipal, or government bonds. Unit holders receive an undivided interest in both the principal and the income portion of the portfolio in proportion to the amount of capital they invest. The portfolio of securities remains fixed until all the securities mature and unit holder have recovered their principal.

Front 392

VARIABLE ANNUITY

Back 392

Life Insurance ANNUITY contract whose value fluctuates with that of an underlying securities PORTFOLIO. The variable annuity contrasts with a FIXED ANNUITY, whose rate of return is constant.

Front 393

VARIABLE LIFE INSURANCE

Back 393

WHOLE LIFE INSURANCE that allows the cash value of the policy to be invested in stock, bond, or money market portfolios. The policyholder bears the risk of the investment, while the insurance company guarantees a minimum death benefit. Earnings from variable life policies are tax deferred until distribution.

Front 394

VESTING

Back 394

Right an employee acquires by length of service to receive employer-contributed benefits, such as payments from a QUALIFIED PLAN. Under ERISA employees must be vested 100% after three years of service or at 20% a year starting in the third year and becoming 100% vested after six years.

Front 395

VISIBLE SUPPLY

Back 395

Dollar volume of municipal bonds scheduled to be issued over the next 30 days. Municipal bond investment bankers watch the visible supply to determine whether the coming month might provide a good opportunity to float a new bond issue. The visible supply, also known as the 30-day visible supply, is compiled by The Bond Buyer.

Front 396

VOLATILITY

Back 396

Characteristic of a security, or market to rise or fall sharply in price within a short-term period. A measure of the relative volatility of a stock to the overall market is its BETA factor.

Front 397

WASTING ASSET

Back 397

Security with a value that expires at a particular time in the future. An OPTION contract is a wasting asset, because the chances of a favorable move in the underlying stock diminish as the contract approaches expiration, reducing the value of the option.

Front 398

WHEN ISSUED

Back 398

A transaction made conditionally because a security has not yet been issued. NEW ISSUES of stocks and bonds, stocks that have SPLIT, and Treasury securities are all traded on a when issued basis.

Front 399

WILSHIRE 5000 EQUITY INDEX

Back 399

Broadest of all the indexes, the Wilshire Index is market value-weighted and represents the value of all U.S. headquartered equities on the NYSE, AMEX, and NASDAQ National Market system for which quotes are available, more than 6000 stocks in all.

Front 400

WRITER

Back 400

Person who sells PUT OPTION and CALL OPTION contracts, and collects PREMIUM INCOME. The writer of a put option is obligated to buy and the writer of a call option is obligated to sell the UNDERLYING SECURITY at a predetermined price by a particular date if the OPTION is exercised.

Front 401

XYZ YIELD

Back 401

Nominal rate of interest divided by the purchase price, called CURRENT YIELD. For example, a bond selling for $1000 with a 10% coupon offers a 10% current yield. It would offer a 20% yield to an investor who bought it for $500. As a bond's price falls, its yield rises and vice versa.

Front 402

YIELD CURVE

Back 402

Chart plotting the yields of all bonds of the same quality with maturities ranging from the shortest to the longest available. If short-term rates are lower than long-term rates, it is called a POSITIVE YIELD CURVE. If short-term rates are higher, it is called a NEGATIVE OR INVERTED YIELD CURVE.

Front 403

YIELD TO MATURITY (YTM)

Back 403

Measurement of the rate of return an investor will receive if a long-term bond is held to its MATURITY DATE. It takes into account purchase price, REDEMPTION value, time to maturity, and nominal yield. Also called "basis" yield.

Front 404

Z-BOND

Back 404

The fourth TRANCHE of bonds in the structure of a COLLATERALIZED MORTGAGE OBLIGATION (CMO). Combining features of ZERO-COUPON SECURITIES and mortgage PASS-THROUGH SECURITIES, Z bonds receive no coupon payments until the earlier classes have been paid off. Z holders then receive all the remaining cash flow.

Front 405

ZERO-COUPON SECURITY

Back 405

Security that makes no periodic interest payments but is sold at a deep discount from its face value. The buyer of such a bond receives the rate of return by the gradual APRECIATION of the security, which is redeemed at FACE VALUE on a specified maturity date. For tax purposes, the Internal Revenue Service maintains that the holder of a zerocoupon bond owes income tax on the interest that has accrued each year, even though the bondholder does not actually receive the cash until maturity. Because zero-coupon securities bear no interest, they are the most VOLATILE of all fixed-income securities. Since zero-coupon bondholders do not receive interest payments, zeros fall more dramatically than bonds paying out interest on a current basis when interest rates rise. However, when interest rates fall, zero-coupon securities rise more rapidly in value than full-coupon bonds.

Front 406

ZERO-MINUS TICK

Back 406

Sale that takes place at the same price as the previous sale, but at a lower price than the last different price; also called a zero downtick.

Front 407

INVESTMENT ADVISERS ACT

Back 407

Legislation passed by Congress in 1940 that requires all investment advisers to register with the SEC and/or the state. The Act is designed to protect the public from fraud or misrepresentation by investment advisers.

Front 408

INVESTMENT COMPANY ACT OF 1940

Back 408

Legislation passed by Congress requiring registration and regulation of investment companies by the SEC. The Act sets the standards by which mutual funds and investment companies operate.

Front 409

INVESTMENT GRADE

Back 409

Bond with a RATING of BBB or better.

Front 410

GUARANTEED BOND

Back 410

Bond on which the principal and interest are guaranteed by a firm other than the issuer. Guaranteed bonds may arise out of parent-subsidiary relationships where bonds are issued by the subsidiary with the parent's guarantee.

Front 411

GUARDIAN

Back 411

Individual who has the legal right to care for a minor child or to act as an administrator of the assets of a person declared incompetent for mental or physical reasons.

Front 412

HOUSE MAINTENANCE REQUIREMENT

Back 412

Rules of individual broker-dealers in securities with respect to a customer's MARGIN ACCOUNT. House maintenance requirements set levels of EQUITY that must be maintained to avoid a margin call or having collateral sold out. These levels are normally higher than maintenance levels required by the NASD and the NYSE.

Front 413

LETTER OF INTENT

Back 413

Promise by a MUTUAL FUND shareholder to invest a specified sum of money over 13 months for which the shareholder is entitled to lower sales charges.

Front 414

LOAD

Back 414

Sales charge paid by an investor who buys shares in a load MUTUAL FUND. Loads are usually charged when shares are purchased; a charge for redeeming is called a BACK-END LOAD. A fund that does not charge this fee is called a NO-LOAD FUND.

Front 415

LONDON INTERBANK OFFERED RATE (LIBOR)

Back 415

Rate that the most creditworthy international banks dealing in EURODOLLARS charge each other for large loans.

Front 416

LONG COUPON

Back 416

Bond issue's first interest payment covering a longer period than the remaining payments. Most bond schedules call for interest payments at six-month intervals. A long COUPON results when a bond is issued more than six months before the date of the first scheduled payment.

Front 417

LONG-TERM GAIN

Back 417

Gain on the sale of a CAPITAL ASSET where the HOLDING PERIOD was more than 12 months and the profit is subject to the long-term CAPITAL GAINS TAX.

Front 418

MAKING A MARKET

Back 418

To maintain firm bid and offer prices in a given security by standing ready to buy or sell ROUND LOTS at publicly quoted prices. The dealer is called a market maker in the over-the-counter market and a SPECIALIST on the exchange.

Front 419

MARGIN REQUIREMENT

Back 419

REGULATION T of the Federal Reserve Board. Reg. T requires a minimum of $2000 or 50% of the purchase price for eligible securities bought on margin or 50% of the proceeds of short sales. Also called INITIAL MARGIN.

Front 420

MARKET OUT CLAUSE

Back 420

Escape clause sometimes written into FIRM COMMITMENT underwriting agreements which essentially allows the underwriters to be released from their purchase commitment if material adverse developments affect the securities markets.

Front 421

MARK TO THE MARKET

Back 421

Adjusting the value of a security to reflect current market values. MARGIN ACCOUNTS are marked to the market to ensure compliance with maintenance requirements.

Front 422

MIXED ACCOUNT

Back 422

Account in which some securities are owned (long positions) and some borrowed (short positions). Also known as a combined account.

Front 423

MONETARIST

Back 423

Theory that states that the MONEY SUPPLY is the key to the ups and downs in the economy. Monetarists think that the money supply has far more impact on the economy's future course than the level of federal spending.

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MORTGAGE BOND

Back 424

Bonds secured by a mortgage on the issuer's property. Most first mortgage bonds are secured by specific real property and represent secured claims on the general 32 assets of the firm. These bonds have a preferred position relative to unsecured bonds of the issuing corporation.

Front 425

NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD)

Back 425

Nonprofit organization formed to comply with the MALONEY ACT. NASD members include virtually all investment banking houses and firms dealing in the OVER THE COUNTER market.

Front 426

NET REALIZED CAPITAL GAINS PER SHARE

Back 426

Amount of CAPITAL GAINS that an investment company realized on the sale of portfolio securities. Such net gains are distributed annually to shareholders in proportion to their shares in the total portfolio.

Front 427

NET WORKING CAPITAL

Back 427

CURRENT ASSETS minus CURRENT LIABILITIES.

Front 428

NEW ISSUE

Back 428

Stock or bond being offered to the public for the first time. New issues may be initial public offerings or additional stock or bond issues by companies already public and often listed on the exchanges. New PUBLIC OFFERINGS must be registered with the SEC.

Front 429

ODD-LOT THEORY

Back 429

Theory that the ODD LOT investor who trades in less than 100-share quantities is usually wrong and that profits can be made by acting contrary to odd-lot trading patterns.

Front 430

The Standard & Poor's 100 stock index, which comprises stocks for which index options are traded on the Chicago Board Options Exchange.

Back 430

Prices at which different maturities of a SERIAL BOND issue are offered to the public by an underwriter. The offering scale may also be expressed in terms of YIELD TO MATURITY.

Front 431

OFFICIAL NOTICE OF SALE

Back 431

Notice published by a municipality inviting investment bankers to submit competitive bids for an upcoming bond issue. The notice provides the name of a municipal official from whom further details can be obtained. The Bond Buyer regularly carries such notices.

Front 432

OPD

Back 432

Ticker tape symbol designating the first transaction of the day in a security after a DELAYED OPENING.

Front 433

OPTION - CALL Option

Back 433

A CALL OPTION gives its buyer the right to buy 100 shares of the underlying security at a fixed price before a specified date in the future-usually three, six, or nine months. For this right, the call option buyer pays the call option seller, called the writer, a fee called a PREMIUM, which is forfeited if the buyer does not exercise the option before the expiration date. A call buyer therefore speculates that the price of the underlying shares will rise within the specified time period.

Front 434

OPTION - PUT Option

Back 434

The opposite of a call option is a PUT OPTION, which gives its buyer the right to sell a specified number of shares of a stock at a particular price within a specified time period. Most call and put options are not exercised. Instead, investors buy and sell options before expiration, trading on the rise and fall of premium prices. Because an option buyer must put up only a small amount of money (the premium) to control a large amount of stock, options trading provides a great deal of LEVERAGE and can prove profitable. Options traders can write either covered options, in which they own the underlying security, or far riskier naked options, for which they do not own the underlying security.

Front 435

OPTION HOLDER

Back 435

Someone who has bought a call or put OPTION but has not yet exercised or sold it. A call option holder wants the price of the underlying security to rise; a put option holder wants the price of the underlying security to fall. Option holders are "long" (own) the option. Option writers are "short" the option.

Front 436

OPTION PREMIUM

Back 436

Amount per share paid by an OPTION buyer to an option seller for the right to buy (call) or sell (put) the underlying security at a particular price within a specified period.

Front 437

OPTIONS CLEARING CORPORATION (OCC)

Back 437

Corporation that handles options transactions on the stock exchanges and is owned by the exchanges. It issues all options contracts and guarantees that the obligations of both parties to a trade are fulfilled.

Front 438

OPTION SERIES

Back 438

Options of the same class (puts or calls with the same underlying security) that also have the same EXERCISE PRICE and maturity month.

Front 439

OPTION WRITER

Back 439

Person that sells put or call options. A writer of a PUT OPTION contracts to buy 100 shares of stock from the put option buyer by a certain date for a fixed price.

Front 440

OTC BULLETIN BOARD

Back 440

Electronic listing of bid and asked quotations of over-the-counter stocks not meeting the minimum-net worth and other requirements of the NASDAQ stock-listing system.

Front 441

OTC MARGIN STOCK

Back 441

Shares of certain large firms traded OVER THE COUNTER that qualify as margin securities under REGULATION T of the Federal Reserve Board.

Front 442

PERIODIC PAYMENT PLAN

Back 442

Plan to accumulate capital in a mutual fund by making regular investments on a monthly basis. Participants in periodic payment plans enjoy the advantages of DOLLAR COST AVERAGING and diversification.

Front 443

PINK SHEETS

Back 443

Daily publication of the NATIONAL QUOTATION BUREAU that details the BID AND ASKED prices of OVER THE COUNTER (OTC) stocks not carried in daily OTC newspaper listings of NASDAQ.

Front 444

PLACEMENT RATIO

Back 444

Compilation of the bond buyer indicating the percentage of the past week's new MUNICIPAL BOND offerings that have been bought from the underwriters.

Front 445

POSITIVE YIELD CURVE

Back 445

Interest rates are higher on long-term debt securities than on short-term debt securities of the same quality. A positive yield curve exists when 20-year Treasury bonds yield 10% and 3-month Treasury bills yield 7%. An investor who ties up his money for a longer time is taking more risk and is usually compensated by a higher yield.

Front 446

PREEMPTIVE RIGHT

Back 446

Right giving existing stockholders the opportunity to purchase shares of a NEW ISSUE before it is offered to others. Its purpose it to protect shareholders from dilution of value and control when new shares are issued.

Front 447

PREFERRED STOCK

Back 447

Class of STOCK that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights.

Front 448

PREMIUM BOND

Back 448

Bond with a market price above par value.

Front 449

PRESALE ODER

Back 449

Order to purchase part of a new MUNICIPAL BOND issue that is accepted by an underwriting SYNDICATE MANAGER before an announcement of the price or COUPON rate and before the official PUBLIC OFFERING.

Front 450

PRICE/EARNING RATIO (P/E)

Back 450

Price of a stock divided by its earnings per share. Used to determine if a stock is under or overpriced when compared to other stocks in the same industry.

Front 451

PRIME RATE

Back 451

Interest rate that banks charge on commercial loans to their best and most creditworthy customers. The rate is influenced by the Federal Reserve's decision to raise or lower prevailing interest rates for short-term borrowing.

Front 452

PUBLIC OFFERING PRICE

Back 452

Price at which a NEW ISSUE of securities is offered to the public by underwriters.

Front 453

PURCHASE POWER

Back 453

Value of money as measured by the goods and services it can buy. The PURCHASING POWER OF THE DOLLAR can be determined by comparing an index of consumer prices for a given base year to the present.

Front 454

RATE COVENANT

Back 454

Provision in MUNICIPAL REVENUE BOND agreements covering the rate to be charged users of the facility being financed. The rate covenant promises that rates will be adjusted when necessary to cover the cost of maintenance while continuing to provide for the payment of bond interest and principal.

Front 455

REAL RATE OF RETURN

Back 455

RETURN on an investment adjusted for inflation.

Front 456

REDEMPTION FEES

Back 456

Fees charged by a mutual fund on shareholders who redeem fund shares within a short period of time. The intent of the redemption fees is to discourage rapid-fire shifts from one fund to another in an attempt to "time" swings in the stock market.

Front 457

REGISTERED BOND

Back 457

Bond that is recorded in the name of the holder on the books of the issuer or the issuer's REGISTRAR and can be transferred to another owner only when ENDORSED by the registered owner.

Front 458

REGULAR WAY SETTLEMENT

Back 458

Completion of securities transaction on the third full business day following the date of the transaction. Regular way means delivery and settlement the next business day for U.S. government securities.

Front 459

REGULATION A

Back 459

SEC provision for simplified REGISTRATION of small issues of securities. A Regulation A issue requires a shorter form of PROSPECTUS and carries lesser liability for officers and directors for false or misleading statements.

Front 460

REGULATION D

Back 460

SEC rules concerning PRIVATE PLACEMENTS and defining related concepts such as ACCREDITED INVESTOR.

Front 461

REGULATION U

Back 461

Federal Reserve Board limit on the amount of credit a bank may extend a customer for purchasing and carrying MARGIN SECURITIES.

Front 462

RETAINED EARNINGS

Back 462

Net profits kept to accumulate in a business after dividends are paid. Retained earnings plus the total of all the capital accounts represent the NET WORTH of a firm.

Front 463

RISK

Back 463

Chance or possibility of losing or not gaining value. Among the commonly encountered types of risk are these: Inflation risk: Chance that the value of assets or of income will be eroded as inflation shrinks the value of a country's currency. Interest rate risk: Possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates. Liquidity risk: Possibility that an investor will not be able to buy or sell a security quickly enough or in sufficient quantities because buying or selling opportunities are limited. Political risk: Possibility of unfavorable government action. Repayment (credit) risk: Chance that a borrower or trade debtor will not repay an obligation as promised. Risk of principal: Chance that invested capital will drop in value.

Front 464

RISK-FREE RETURN

Back 464

The 3-month Treasury bill is considered a riskless investment because it is a direct obligation of the U.S. government and its term is short enough to minimize the risks of inflation and interest rate changes.

Front 465

RISKLESS TRANSACTION

Back 465

Concept used in evaluating whether dealer MARKUPS and MARKDOWNS in OVER-THE-COUNTER transactions with customers are reasonable. The FIVE PERCENT RULE takes the position that markups (when the customer buys) and markdowns (when the customer sells) should not exceed 5%.

Front 466

SECURITIES ACT OF 1933

Back 466

Requires REGISTRATION of securities prior to public sale and adequate DISCLOSURE of financial and other data in a PROSPECTUS to permit informed analysis by potential investors. It also contains antifraud provisions prohibiting false representations and disclosures.

Front 467

SELLING SHORT

Back 467

Sale of a security not owned by the seller; to take advantage of an anticipated decline in the price or to protect a profit in a LONG POSITION.

Front 468

SELL OUT

Back 468

Action by a broker when a customer fails to pay for securities purchased and the securities received from the selling broker are sold to cover the transaction.

Front 469

SHARES AUTHORIZED

Back 469

Number of shares provided for in the ARTICLES OF INCORPORATION of a company. A corporation cannot legally issue more shares than authorized. The number of authorized shares can be changed only with the approval of the shareholders. The most common reason for increasing authorized shares is to facilitate a stock SPLIT.

Front 470

SHELF REGISTRATION

Back 470

Allows a corporation to comply with REGISTRATION requirements up to two years prior to a PUBLIC OFFERING of securities.

Front 471

SHORT COUPON

Back 471

Bond interest payment covering less than the usual six-month period. A short coupon payment occurs when the original issue date is less than a half year from the first scheduled interest payment date.

Front 472

SHORT-SALE RULE

Back 472

SEC rule requiring that short sales be made only in a rising market; also called PLUS TICK rule. A short sale can be transacted if the last sale was at a higher price than the sale preceding it (called an UPTICK) or if the last sale price is unchanged but higher than the last preceding different sale (called a ZERO-PLUS TICK).

Front 473

SINGLE-PREMIUM DEFERRED ANNUITY (SPDA)

Back 473

An investor makes a lump-sum payment to an insurance company selling the annuity. Earnings are tax deferred and proceeds are taxed only when distributions are taken. The IRS tax penalty for withdrawals before age 59½ is 10%.

Front 474

SPECIALIZED MUTUAL FUND

Back 474

Mutual fund concentrating on one industry. These funds tend to be more volatile than funds holding a diversified portfolio of stocks in many industries. Also called sector funds.

Front 475

SPOT MARKET

Back 475

Commodities market in which goods are sold for cash and delivered immediately. Trades that take place in FUTURES CONTRACTS expiring in the current month are also called spot market trades.

Front 476

Underwriting

Back 476

Difference between the proceeds an issuer of a new security receives and the price paid by the public for the issue. This spread is taken by the underwriting syndicate as payment for its services.

Front 477

SPREAD OPTION

Back 477

SPREAD position involving the purchase of an OPTION at one EXERCISE PRICE and the simultaneous sale of another option on the same underlying security at a different exercise price and/or expiration date.

Front 478

STANDARD & POOR'S INDEX

Back 478

Broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks; commonly known as the Standard & Poor's 500.

Front 479

STANDBY UNDERWRITER

Back 479

Agreement between a corporation and an investment banking firm where the underwriter contracts to purchase any portion of a stock issue offered to current shareholders in a RIGHTS OFFERING that is not subscribed to.

Front 480

STOCK POWER

Back 480

Power of attorney form transferring ownership of a REGISTERED SECURITY from the owner to another party. The stock power gives the owner's permission to the TRANSFER AGENT to transfer ownership of the certificate to a third party.

Front 481

STOPPED STOCK

Back 481

Guarantee by a SPECIALIST that an order placed by a FLOOR BROKER will be executed at the best bid or offer price then in the SPECIALIST'S BOOK unless it can be executed at a better price within a specified period of time.

Front 482

STRONG DOLLAR

Back 482

Dollar that can be exchanged for a large amount of a foreign currency. A strong dollar makes it difficult for American firms to export their goods to foreign countries because it raises the cost to foreigners of purchasing American products.

Front 483

SUBCHAPTER S

Back 483

Section of the Internal Revenue Code giving a corporation that has 35 or fewer shareholders the option of being taxed as if it were a PARTNERSHIP. Such a small corporation can distribute its income directly to shareholders and avoid the corporate income tax.

Front 484

SUBSCRIPTION AGREEMENT

Back 484

Application submitted by an investor seeking to join a limited partnership. All prospective limited partners must be approved by the general partner before they are allowed to become limited partners.

Front 485

SUBSCRIPTION PRICE

Back 485

Price at which existing shareholders of a corporation are entitled to purchase common shares in a RIGHTS OFFERING.

Front 486

SUPPLY-SIDE ECONOMICS

Back 486

Theory of economics contending that drastic reduction in tax rates will stimulate productive investment by corporations and wealthy individuals to the benefit of the entire society.

Front 487

SUPPORT LEVEL

Back 487

Price level at which a security tends to stop falling because there is more demand than supply. Technical analysts identify support levels as prices at which a particular security or market has bottomed in the past.

Front 488

SYSTEMATIC RISK

Back 488

That part of a security's risk that is common to all securities of the same general class and cannot be eliminated by DIVERSIFICATION; also known as market risk. The measure of systematic risk in stocks is the BETA FACTOR.

Front 489

TAKE A POSITION

Back 489

Phrase used when a broker/dealer holds stocks or bonds in inventory. A position may be either long or short.

Front 490

TAX PREFERENCE ITEM

Back 490

Item specified by the tax law that a taxpayer must include when calculating the ALTERNATIVE MINIMUM TAX. Preference items include: the excess of ACCELERATED COST RECOVERY SYSTEM deductions over straight line depreciation and tax-exempt interest on PRIVATE PURPOSE BONDS of municipalities.

Front 491

THIRD MARKET

Back 491

Nonexchange-member broker/dealers and institutional investors trading OVER THE COUNTER in exchange-listed securities.

Front 492

THIRTY-DAY VISIBLE SUPPLY

Back 492

Total dollar volume of new MUNICIPAL BONDS carrying maturities of 13 months or more that are scheduled to reach the market within 30 days as published in the BOND BUYER.

Front 493

THIRTY-DAY WASH SALE RULE

Back 493

Internal Revenue Service rule stating that losses on a sale of stock may not be used as losses for tax purposes if equivalent stock is purchased within 30 days before or 30 days after the date of sale.

Front 494

TOTAL RETURN

Back 494

Annual return on an investment including appreciation and dividends or interest.

Front 495

TREASURY STOCK

Back 495

Stock reacquired by the issuing company and available for RETIREMENT or resale. It is issued but not outstanding. It cannot be voted and it pays or accrues no dividends.

Front 496

TRUST INDENTURE ACT OF 1939

Back 496

Federal law requiring all corporate bonds to be issued under an INDENTURE agreement approved by the SEC and providing for the appointment of a qualified trustee free of conflict of interest with the issuer. The Act provides that indentures contain protective clauses for bondholders.

Front 497

TWENTY BOND INDEX

Back 497

Index tracking the yields on 20 general obligation municipal bonds with 20-year maturities and an average rating equivalent to A1. The index serves as a benchmark for the general level of municipal bond yields.

Front 498

UNIFORM TRANSFERS TO MINORS ACT (UTMA)

Back 498

Law adopted by all 50 states that is similar to the UNIFORM GIFTS TO MINORS ACT (UGMA) but different in that it prohibits the minor from taking control of the assets until age 21.

Front 499

VERTICAL SPREAD

Back 499

OPTION strategy that involves purchasing an option at one STRIKE PRICE while simultaneously selling another option of the same class at the next higher or lower strike price. Both options have the same expiration date.

Front 500

W WASH SALE

Back 500

Purchase and sale of a security either simultaneously or within a short period of time. Wash sales taking place within 30 days of the underlying purchase do not qualify as tax losses under IRS rules

Front 501

WEAK DOLLAR

Back 501

U.S. dollar that has fallen in value against foreign currencies. This means that those holding dollars will get fewer foreign currencies in exchange for their dollars.

Front 502

WILDCAT DRILLING

Back 502

Looking for oil or gas in an unproven area. A wildcat OIL AND GAS LIMITED PARTNERSHIP is structured so that investors take high risks but can reap substantial profits if oil and gas are found.

Front 503

YIELD TO CALL

Back 503

Yield on a bond assuming the bond will be redeemed by the issuer at the first CALL date specified in the INDENTURE agreement. The same calculations are used to calculate yield to call 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.

Front 504

ZERO-PLUS TICK

Back 504

Securities trade that takes place at the same price as the previous transaction but at a higher price than the last different price; also called zero uptick.