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406 Cards in this Set

  • Front
  • Back
METHOD. ACCREDITED INVESTOR 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
ACCRUAL BASIS 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.
ACCRUED INTEREST 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
ADDITIONAL BONDS TEST 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.
AD VALOREM 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.
ADVANCE REFUNDING Sale of new bonds (the refunding issue) in advance
usually by some years
AFFILIATED PERSON 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
EXERCISE PRICE 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
AGGRESSIVE GROWTH MUTUAL FUND 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
AGREEMENT AMONG UNDERWRITERS 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
ALL OR NONE (AON) Buy or sell order marked to signify that no partial transaction is to be executed. The order will not automatically be canceled
however
ALTERNATIVE MINIMUM TAX (AMT) 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.
AMERICAN DEPOSITORY RECEIPT (ADR) 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.
AMORTIZATION 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
ANNUITANT 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.
ANNUITIZE 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
ANNUITY 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
ANNUITY CERTAIN 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
APPRECIATION Increase in the value of an asset such as a stock
bond or real estate. Also known as growth. ARBITRAGE
ARBITRATION 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.
ARTICLES OF INCORPORATION 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.
ASKED PRICE 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
ASSET ALLOCATION Apportioning of investment funds among categories of assets
such as CASH EQUIVALENTS
ASSET ALLOCATION MUTUAL FUND Mutual fund that switches between stocks
bonds
ASSUMED INTEREST RATE 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.
AT RISK 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.
AUCTION MARKET System by which securities are bought and sold through brokers on the securities exchanges
as distinguished from the over-the-counter market
AUTHORIZED SHARES 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.
AUTOMATED ORDER ENTRY SYSTEM 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).
BACK-END LOAD 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
BACKING AWAY Broker-dealer’s failure
as market maker in a given security
BALANCED MUTUAL FUND Fund that buys common stock
preferred stock
BALANCE OF TRADE 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
BALANCE SHEET Financial report
showing the status of a company’s assets
BANKER’S ACCEPTANCE 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
BASIS PRICE 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.
BASIS POINT Smallest measure used in quoting yields on bills
notes
BEAR MARKET 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.
BEST EFFORTS Underwriting agreement whereby investment bankers
acting as agents
BETA 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
BID 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.
BID AND ASKED 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.
BLIND POOL Limited partnership that does not specify the properties the general partner plans to acquire. If
for example
BLOCK Large quantity of stock or large dollar amount of bonds held or traded. As a general guide
10
BLUE CHIP Common stock of nationally known company that has a long record of profit growth and dividend payment and a reputation for quality management
products
BLUE LIST Published by S&P
it mainly contains data on municipal bonds. With its pertinent price
BOND 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
BOND DISCOUNT 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.
BOND RATING Method of evaluating the possibility of default by a bond issuer. S&P’s
Moody’s Investors Service
BOND SWAP 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 swapscreate tax-deductible losses through the sale
while the purchase of a substitute bond effectively preserves the investment.
BOOK-ENTRY SECURITIES 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.
BORROWING POWER OF SECURITIES 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.”
BREAKPOINT SALE In mutual funds
the dollar investment required to make the investor eligible for a lower sales charge.
BROKER Person who acts as an intermediary between a buyer and seller
usually charging a commission. A broker who specializes in stocks
BROKER LOAN RATE 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
BULL SPREAD Option strategy
executed with puts or calls
BUSINESS CYCLE Recurrence of periods of expansion (RECOVERY) and contraction (RECESSION) in economic activity with effects on inflation
growth
BUYING POWER Amount of money available to buy securities
determined by tabulating the cash held in brokerage accounts
BUY STOP ORDER 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.
CALENDAR SPREAD 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.
CALL OPTION 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 PRICE 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
CALL PROTECTION 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.
CAP 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
CAPITAL STRUCTURE Corporation’s financial framework
including LONG-TERM DEBT
CASH ACCOUNT 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
CASH DIVIDEND 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
CHINESE WALL Imaginary barrier between the investment banking
corporate finance
CHURNING 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.
CLOSED-END FUND 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
CLOSING SALE 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.
COLLATERALIZED MORTGAGE OBLIGATION (CMO) 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
COLLATERAL TRUST BOND 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.
COMMERCIAL PAPER Short-term obligations with maturities up to 270 days issued by banks
corporations
COMMON STOCK 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
COMPANION BONDS 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
COMPETITIVE BID Sealed bid
containing price and terms
CONSTANT DOLLARS 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.”
CONSUMER PRICE INDEX (CPI) Measures prices of a fixed basket of goods bought by a typical consumer
including food
CONTRACTUAL PLAN 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
CONVERSION PRICE The dollar value at which convertible bonds
debentures
CONVERTIBLE 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
CORPORATE BOND 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 have a par value of $1
COST BASIS Original price of an asset
used in determining capital gains. It usually is the purchase price
COVERED OPTION 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
COVERED WRITER Seller of covered options. In other words
an owner of stock who sells options against it to collect premium income. For example
CREDIT SPREAD 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.
CUMULATIVE PREFERRED 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
CUMULATIVE VOTING 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.
CURRENT ASSETS Cash
accounts receivable
CURRENT YIELD 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
CUSTODIAL ACCOUNT Account that is created for a minor
usually at a bank
CYCLICAL STOCK Stock that tends to rise quickly when the economy turns up and to fall quickly when the economy turns down. Examples are housing
automobiles
DATED DATE 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.
DATE OF RECORD 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.
DEALER 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
DEBIT SPREAD 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.
DEBT RETIREMENT 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.
DEEP IN/OUT OF THE MONEY 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
DEFAULT RISK 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)
DEFENSIVE SECURITIES 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.
DELIVERY DATE 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.
DEPLETION Accounting method available to companies that extract oil and gas
coal
DEPRECIATION Amortization of fixed assets
such as plant and equipment
DERIVATIVE A contract whose value is based on the performance of an underlying financial asset
index
DESIGNATED ORDER TURNAROUND (DOT) 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.
DEVELOPMENTAL DRILLING PROGRAM 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
DIRECT PARTICIPATION PROGRAM 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.
DISCOUNT RATE Interest rate that the Federal Reserve charges member banks for loans
using government securities or ELIGIBLE PAPER as collateral. 16
DISINTERMEDIATION 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%.
DIVERSIFICATION Spreading of risk by putting assets in several categories of investmentsstocks
bonds
DIVERSIFIED INVESTMENT COMPANY 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.
DIVIDEND PAYOUT RATIO Percentage of earnings paid to shareholders in cash. In general
the higher the payout ratio
DIVIDEND YIELD 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.
DOLLAR PRICE 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.
DO NOT REDUCE (DNR) Instruction on a LIMIT ORDER to buy
or on a STOP ORDER to sell
DOUBLE-BARRELED 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
DOUBLE TAXATION Taxation of earnings at the corporate level
then again as stockholder dividends.
DOWNTICK 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
DUE BILL A statement of money owed. Commonly used to adjust a securities transaction when dividends
interest
EARNINGS PER SHARE 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.
ECONOMIC GROWTH RATE Rate of change in the GROSS DOMESTIC PRODUCT
as expressed in an annual percentage. If adjusted for inflation
EFFECTIVE DATE Date when an offering registered with the SEC may commence
usually 20 days after filing the registration statement.
EQUIPMENT TRUST CERTIFICATE Bond
usually issued by a transportation company such as a railroad or airline
EQUIVALENT TAXABLE YIELD 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.
ESTATE TAX 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
EURODOLLAR U.S. currency held in banks outside the United States
mainly in Europe
EXCESS MARGIN Equity in a brokerage firm’s customer account
expressed in dollars
EXCHANGE PRIVILEGE 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.
EX-DIVIDEND DATE 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.
EXERCISE NOTICE 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.
EXERCISE PRICE 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.
EX-LEGAL 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
EXPENSE RATIO Amount
expressed as a percentage of total assets
EXPLORATORY DRILLING PROGRAM 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
EX-RIGHTS 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
FACE-AMOUNT CERTIFICATE 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
FACE VALUE Value of a bond
or other security as given on the certificate. Corporate bonds are usually issued with $1000 face values
FANNIE MAE (FEDERAL NATIONAL MORTGAGE ASSOCIATION) 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.
FEDERAL AGENCY SECURITY 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.
FEDERAL FUNDS 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.
FEDERAL FUNDS RATE 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
FEDERAL GIFT TAX 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 HOME LOAN MORTGAGE CORPORATION (FHLMC) Publicly chartered agency that buys qualifying residential mortgages from lenders
packages them into new securities backed by those pooled mortgages
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) Publicly owned
government-sponsored corporation chartered to purchase mortgages from lenders and resell them to investors. The agency
FEDERAL OPEN-MARKET COMMITTEE (FOMC) 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.
FEDERAL RESERVE BOARD (FRB) 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
FILL OR KILL (FOK) Order to buy or sell a particular security which
if not executed immediately
FIRM QUOTE 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.
FIRST CALL DATE 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
FIVE PERCENT RULE 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.
FIXED ANNUITY Investment contract sold by an insurance company that guarantees fixed payments
either for life or for a specified period
FLAT 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.
FLOOR BROKER Member of an exchange who is an employee of a member firm and executes orders
as agent
FLOW OF FUNDS 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
FOREIGN CURRENCY OPTIONS Options contracts based on foreign currencies
such as the Japanese yen
FORWARD PRICING 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
FOURTH MARKET 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.
FRACTIONAL SHARE 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
INDIVIDUAL RETIREMENT ACCOUNT (IRA) Personal
TAX-DEFERRED
INFLATION 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
INITIAL MARGIN 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.
INITIAL PUBLIC OFFERING (IPO) 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.
INSIDE INFORMATION 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.
INSIDE MARKET 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.
INSTITUTIONAL INVESTOR Organization that trades large volumes of securities
such as mutual funds
INSURED BONDS 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
INTEREST-RATE OPTIONS Options contract based on an underlying debt security. Options give their buyers the right
but not the obligation
INTEREST-RATE RISK 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
IN THE MONEY 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
INTRINSIC VALUE 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
INVERTED YIELD CURVE 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.
INVESTMENT LETTER 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.
ISSUED AND OUTSTANDING Shares of a corporation
authorized in the corporate charter
ISSUER Legal entity that has the power to issue and distribute a security. Issuers include corporations
municipalities
OINT AND SURVIVOR ANNUITY Annuity that makes payments for the lifetime of two or more annuitants
often a husband and wife. When one of the annuitants dies
JOINTLY AND SEVERALLY 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.
JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP When two or more people maintain a JOINT ACCOUNT with a brokerage firm or a bank
it is normally agreed that
JUNK BOND 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.
KEOGH PLAN 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
KEYNESIAN ECONOMICS 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.
KNOW YOUR CUSTOMER Article 3 of the NASD Rules of Fair Practice: “In recommending to a customer the purchase
sale or exchange of any security
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.
FULL FAITH AND CREDIT The full taxing and borrowing power
plus revenue other than taxes
FULLY DILUTED EARNINGS PER (COMMON) SHARE Figure showing earnings per common share after assuming the exercise of warrants and stock options
and the conversion of convertible bonds and preferred stock.
FUNDAMENTAL ANALYSIS 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
FUND FAMILY Mutual fund company offering funds with many investment objectives. A fund family may offer several types of stock
bond
GENERAL OBLIGATION BOND Municipal bond backed by the FULL FAITH AND CREDIT (which includes the taxing power) of a municipality. A GO bond
as it is known
GENERAL PARTNER Managing partner of a LIMITED PARTNERSHIP
who is responsible for the operations of the partnership and
GINNIE MAE PASS-THROUGH Security
backed by a pool of mortgages and guaranteed by the GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (Ginnie Mae)
GOOD DELIVERY Meaning that a certificate has the necessary endorsements and meets all other requirements (signature guarantee
proper denomination
GOOD-TILL-CANCELED ORDER (GTC) Brokerage customer’s order to buy or sell a security
usually at a particular price
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) Governmentowned corporation
nicknamed Ginnie Mae
GOVERNMENTS Securities issued by the U.S. government
such as Treasury bills
GROSS DOMESTIC PRODUCT (GDP) 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
GROWTH STOCK 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
GUARANTEED INVESTMENT CONTRACT 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
HEAD AND SHOULDERS 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
HEDGING Strategy used to offset investment risk. A stockholder worried about declining stock prices
for instance
HIDDEN LOAD 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
HORIZONTAL SPREAD 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.
HYPOTHECATION 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
IMMEDIATE FAMILY Parents
brothers
INCOME BOND 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.
INCOME MUTUAL FUND 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.
INDENTURE Formal agreement
also called a deed of trust
INDEX FUND 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
INDEX OPTIONS 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.
LAGGING INDICATORS 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
LEADING INDICATORS 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
LEAPS 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.
LEGAL LIST Securities selected by a state agency
usually a banking department
LEGAL OPINION 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
LEVERAGE Debt in relation to equity in a firm’s capital structure. It’s LONG-TERM DEBT
PREFERRED STOCK
LEVEL LOAD Sales charge that does not change over time. In mutual funds
level load shares are called C class shares
LIMITED LIABILITY 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.
LIMITED PARTNERSHIP Organization made up of a GENERAL PARTNER
who manages a project
LIMIT ORDER 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
LIMIT PRICE 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.
LISTED SECURITY 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
LOAN VALUE 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%.
LONG POSITION 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.
LONG-TERM LOSS A CAPITAL LOSS can be used to offset a CAPITAL GAIN plus $3
000 of ORDINARY INCOME.
LOOSE MONEY 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.
MAINTENANCE CALL 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
MALONEY ACT Legislation
which provides for the regulation of the OVER-THECOUNTER market (OTC) by the NASD.
MANAGEMENT FEE A charge against investor assets for managing the portfolio of an openor closed-end MUTUAL FUND. The fee
as disclosed in the PROSPECTUS
MANAGING UNDERWRITER 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
MARGIN 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
MARGIN ACCOUNT Brokerage account allowing customers to buy securities with borrowed money. Margin accounts are governed by REGULATION T
by the NASD
MARGIN AGREEMENT Form that spells out the rules governing a MARGIN ACCOUNT
including the HYPOTHECATION of securities
MARGIN CALL 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.
MARKDOWN 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
MARKET PRICE 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.
MATCHED ORDERS 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.
MATURITY The date at which a debt instrument is due and payable. A bond due to mature on January 1
2020
MILL One-tenth of a cent
the unit most often used in expressing property tax rates. For example
MINIMUM MAINTENANCE 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
MONETARY POLICY 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
MONEY MARKET FUND An open-ended MUTUAL FUND that invests in commercial paper
banker’s acceptances
MONEY SUPPLY 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
MUNICIPAL REVENUE BOND 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.
MUTILATED SECURITY Certificate that cannot be read for the name of the issue or the issuer
or for the detail necessary for identification and transfer
MUTUAL FUND CUSTODIAN 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
NAKED OPTION 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.
NASDAQ 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.
NASDAQ COMPOSITE INDEX 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.
NASDAQ SMALL CAPITALIZATION COMPANIES 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.
NATIONAL MARKET SYSTEM 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
NEGATIVE YIELD CURVE 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
NEGOTIABLE CERTIFICATE OF DEPOSIT 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
NEGOTIATED UNDERWRITING 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)
NET ASSET VALUE (NAV) In mutual funds
the value of a fund share
NET INVESTMENT INCOME PER SHARE 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.
NET WORTH Amount by which assets exceed liabilities. For a corporation
net worth is also known as stockholders’ equity or NET ASSETS.
NO-LOAD FUND 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
NOMINAL YIELD 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
NONACCREDITED INVESTOR 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.
NONRATED 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.
NONRECOURSE LOAN 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.
NORMAL TRADING UNIT 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.
NOT HELD 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.
OEX The Standard & Poor’s 100 stock index
which comprises stocks for which index options are traded on the Chicago Board Options Exchange.
OPEN-END MANAGEMENT COMPANY 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
OPEN-MARKET OPERATIONS 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.
OPTION Securities transaction agreement tied to stocks
or stock indexes. Options are traded on many exchanges. 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
OPTION ACCOUNT 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
OPTION AGREEMENT 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.
OPTION PRICE 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
ORIGINAL ISSUE DISCOUNT (OID) 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
OUT OF THE MONEY 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
OVERLAPPING DEBT 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.
OVER THE COUNTER (OTC) 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.
OWNER’S EQUITY PAID-IN CAPITAL
and RETAINED EARNINGS less the LIABILITIES of a corporation. Also called “net worth.”
PAC BOND 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
PAID-IN CAPITAL 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
PAR 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
PARTICIPATING PREFERRED STOCK PREFERRED STOCK that
in addition to paying a stipulated dividend
PASSIVE Income or loss from activities in which a taxpayer does not materially participate
such as LIMITED PARTNERSHIPS
PASS-THROUGH SECURITY MORTGAGE-BACKED CERTIFICATE
usually government-guaranteed
PEGGING Stabilizing the price of a security
by intervening in a market. In new stock issues
PER CAPITA DEBT Total bonded debt of a municipality
divided by its population.
PERIOD-CERTAIN ANNUITY 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
PLUS TICK 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
POSITION LIMIT 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
PRIMARY DISTRIBUTION Sale of a new issue of stocks or bonds
as distinguished from a SECONDARY DISTRIBUTION
PRIMARY MARKET Market for new issues of securities
as distinguished from the SECONDARY MARKET
PRIVATE PLACEMENT Sale of stocks
bonds
PRIVATE PURPOSE BOND 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
PROCEEDS SALE 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.
PROFIT AND LOSS STATEMENT (P & L) 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.
PROGRESSIVE TAX 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
PROJECT NOTE Short-term debt issue of a municipal agency
usually a housing authority
PROSPECTUS 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
PRUDENT-MAN RULE 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
PUBLIC HOUSING AUTHORITY BOND 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.
PUBLIC PURPOSE BOND 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
PUT BOND 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.
PUT OPTION 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
QUICK RATIO Cash
MARKETABLE SECURITIES
RANGE 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
REAL ESTATE INVESTMENT TRUST (REIT) 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
REALIZED PROFIT 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.
RECESSION Downturn in economic activity
defined by many economists as at least two consecutive quarters of decline in a country’s GROSS DOMESTIC PRODUCT.
RECOURSE LOAN Loan made to a DIRECT PARTICIPATION PROGRAM or LIMITED PARTNERSHIP whereby the lender
in addition to being secured by specific assets
REFUNDING Replacing an old debt with a new one
usually in order to lower the interest cost of the issuer. For instance
REGISTRAR The registrar
working with the TRANSFER AGENT
REGISTRATION STATEMENT 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
REGRESSIVE TAX 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
REGULATED INVESTMENT COMPANY MUTUAL FUND eligible under Subchapter M of the Internal Revenue Service to pass capital gains
dividends
REGULATION T Federal Reserve Board regulation covering the extension of credit to customers by securities brokers
dealers
REINVESTMENT PRIVILEGE 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.
REMIC 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.
REPURCHASE AGREEMENT (REPO) Agreement between a seller and a buyer
usually of U.S. Government securities
RESERVE REQUIREMENT 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
RESISTANCE LEVEL 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.
RESTRICTED ACCOUNT 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
REVERSE SPLIT 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.
RISK ARBITRAGE 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.
RULES OF CONDUCT 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.
SAME-DAY SUBSTITUTION 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.
SAVINGS BOND U.S. Series EE bonds
issued at a discount
SCALE Date for each of the scheduled maturities in a new SERIAL BOND issue
including the number of bonds
SECONDARY DISTRIBUTION Public sale of previously issued securities held by large investors
as distinguished from a NEW ISSUE or PRIMARY DISTRIBUTION
SECONDARY MARKET 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.
SECURED BOND 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.
SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) 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
SELF-REGULATORY ORGANIZATION SROs enforce the conduct
and trading practices of the securities industry. The SROs include all the national SECURITIES EXCHANGES as well as the NASD
SELLER’S OPTION Securities transaction in which the seller
instead of making REGULAR WAY DELIVERY
SELLING CONCESSION 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
SELLING DIVIDENDS 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
SELLING GROUP Group of dealers appointed by the syndicate manager of an UNDERWRITING GROUP
as AGENT for the other underwriters
SENIOR SECURITY 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.
SERIAL BOND 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.
SERIES OF OPTION Either all CALL OPTIONS or all PUT OPTIONS
on the same underlying security
SETTLEMENT DATE 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
SHAREHOLDER’S EQUITY Total ASSETS minus total LIABILITIES of a corporation. Also called stockholder’s equity
or net worth.
SHORT INTEREST THEORY 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.
SHORT-TERM GAIN OR LOSS 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.
SINKING FUND 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.
SMALL CAP Small capitalization stocks or mutual funds holding such stocks. Small capitalization stocks represent companies that are less well established
but in many cases fastergrowing than mid-cap stocks or large cap stocks. Since they are less established
SOES 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.
SPECIALIST 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.
SPECIALIST’S BOOK Record maintained by a SPECIALIST that includes the specialist’s own inventory of securities
market orders to sell short
SPECIAL MISCELLANEOUS ACCOUNT (SMA) 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
SPECIAL TAX BOND MUNICIPAL REVENUE BOND that will be repaid through excise taxes on such purchases as gasoline
tobacco
SPLIT 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.
SPREAD Options
Position consisting of one long call and one short call option
SPX 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.
STABILIZATION 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
STANDARD & POOR’S RATING Rating of stocks and bonds according to risk issued by STANDARD & POOR’S CORPORATION. S&P’s top four debt grades-called INVESTMENT GRADE AAA
AA
STATUTORY VOTING 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.
STOCK DIVIDEND 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
STOCK OPTION 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
STOP-LIMIT ORDER 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
STOP ORDER 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
STRADDLE 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
STREET NAME 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.
STRIP 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.
STUDENT LOAN MARKETING ASSOCIATION (SLMA) 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.
SUBCHAPTER M 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
SUBSCRIPTION RIGHT 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
SUBSCRIPTION WARRANT Type of security
usually issued together with a BOND
SWEETENER 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.
TARGETED AMORTIZATION CLASS (TAC) BONDS Bonds offered as a tranche class of COLLATERALIZED MORTGAGE OBLIGATIONS. TACs are similar to PAC BONDS in that
unlike conventional CMO classes
TAX CREDIT Direct
dollar-for-dollar reduction in tax liability
TAX DEDUCTION Deductible expense that reduces taxable income for individuals or businesses
such as contributions to qualified pension plans.
TAX DEFERRED 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
TAX-EQUIVALENT YIELD 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.
TAX-EXEMPT 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
TAX-EXEMPT SECURITY A MUNICIPAL BOND issued by a state government or by a country
town
TECHNICAL ANALYSIS 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
TENANCY IN COMMON 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
TENDER OFFER Offer to buy shares of a corporation
usually at a PREMIUM above the shares’ market price
THIN MARKET 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.
TIGHT MONEY Economic condition in which credit is hard to secure
usually as the result of Federal Reserve action to restrict the MONEY SUPPLY
TIME VALUE 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.
TOMBSTONE 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.
TRADE DATE 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.
TRANCHES Risk maturity dates into which a COLLATERALIZED MORTGAGE OBLIGATION (CMO) are split. For example
the typical CMO has A
TRANSFER AGENT Agent
usually a commercial bank
TREASURIES 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
UNCOVERED OPTION 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.
UNDERLYING SECURITY Security that must be delivered if a PUT OPTION or CALL OPTION contract is exercised. Stock INDEX OPTIONS
however
UNDERWRITE 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
UNDERWRITER 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.
UNDERWRITING AGREEMENT 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
UNIFORM PRACTICE CODE Rules of the NASD concerned with standards and procedures for the handling of OVER THE COUNTER securities transactions
such as delivery
UNISSUED STOCK 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
UNITED STATES GOVERNMENT SECURITIES Direct GOVERNMENT OBLIGATIONS such as Treasury bills
notes
UNIT INVESTMENT TRUST Investment vehicle
that purchases a fixed PORTFOLIO of income-producing securities
VARIABLE ANNUITY 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.
VARIABLE LIFE INSURANCE WHOLE LIFE INSURANCE that allows the cash value of the policy to be invested in stock
bond
VESTING 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.
VISIBLE SUPPLY 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
VOLATILITY 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.
WASTING ASSET 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
WHEN ISSUED A transaction made conditionally because a security has not yet been issued. NEW ISSUES of stocks and bonds
stocks that have SPLIT
WILSHIRE 5000 EQUITY INDEX 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
WRITER 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.
XYZ YIELD Nominal rate of interest divided by the purchase price
called CURRENT YIELD. For example
YIELD CURVE 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
YIELD TO MATURITY (YTM) 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
Z-BOND 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.
ZERO-COUPON SECURITY 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
ZERO-MINUS TICK 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.