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406 Cards in this Set
- Front
- Back
METHOD. ACCREDITED INVESTOR Under Securities and Exchange Commission Regulation D
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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
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ACCRUAL BASIS Accounting method whereby income and expense items are recognized as they are earned or incurred
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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 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
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the buyer pays the seller the bond’s price plus accrued interest up to
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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
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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 Latin term meaning “according to value” and referring to a way of assessing duties or taxes on goods or property. For example
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ad valorem tax assessment is based on value of real property.
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ADVANCE REFUNDING Sale of new bonds (the refunding issue) in advance
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usually by some years
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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
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directors
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EXERCISE PRICE In stock options trading
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the number of shares in a put or call CONTRACT (normally 100) multiplied by the EXERCISE PRICE. The price of the option
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AGGRESSIVE GROWTH MUTUAL FUND Mutual fund holding stocks of rapidly growing companies. While these companies may be large or small
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they all share histories of and prospects for above average profit growth. Aggressive growth funds are designed solely for capital appreciation
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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
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which is signed by the company issuing the securities and the SYNDICATE MANAGER
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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
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however
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ALTERNATIVE MINIMUM TAX (AMT) Federal tax aimed at ensuring that wealthy individuals and corporations pay at least some income tax. For individuals
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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) 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
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Americans can buy shares in the U.S. in the form of an ADR.
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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
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and for wasting assets (natural resources) it is depletion
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ANNUITANT Individual receiving benefits from an annuity. The annuity owner can choose to annuitize the contract
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meaning that he or she begins to receive regular payment from the annuity.
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ANNUITIZE To begin a series of payments from the capital that has built up in an ANNUITY. The payments may be a fixed amount
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or for a fixed period of time
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ANNUITY Form of contract sold by life insurance companies that guarantees a fixed or variable payment to the annuitant at some future time
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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
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ANNUITY CERTAIN Annuity that pays a specified monthly level of income for a predetermined time period
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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
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APPRECIATION Increase in the value of an asset such as a stock
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bond or real estate. Also known as growth. ARBITRAGE
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ARBITRATION Alternative to suing in court to settle disputes between brokers and their clients and between brokerage firms. Traditionally
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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 Document filed with a U.S. state by the founders of a corporation. After approving the articles
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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 1. Price at which a security is offered for sale on an exchange or in the overthe-counter market. Generally
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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
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ASSET ALLOCATION Apportioning of investment funds among categories of assets
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such as CASH EQUIVALENTS
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ASSET ALLOCATION MUTUAL FUND Mutual fund that switches between stocks
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bonds
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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
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the higher the monthly payout will be.
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AT RISK Also known as “recourse.” For example
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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 System by which securities are bought and sold through brokers on the securities exchanges
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as distinguished from the over-the-counter market
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AUTHORIZED SHARES Maximum number of shares of any class a company may legally create under the terms of its ARTICLES OF INCORPORATION. Normally
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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 Electronic system that expedites the execution of smaller orders by channeling them directly to the specialist on the exchange floor
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bypassing the FLOOR BROKER. The NYSE calls its system DOT (Designated Order Turnaround).
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BACK-END LOAD Sales charge an investor pays when withdrawing money from an investment. Most common in mutual funds and annuities
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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
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BACKING AWAY Broker-dealer’s failure
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as market maker in a given security
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BALANCED MUTUAL FUND Fund that buys common stock
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preferred stock
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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
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foodstuffs
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BALANCE SHEET Financial report
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showing the status of a company’s assets
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BANKER’S ACCEPTANCE Time draft drawn on and accepted by a bank
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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
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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
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the basis is $1000 and the profit is a long-term capital gain.
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BASIS POINT Smallest measure used in quoting yields on bills
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notes
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BEAR MARKET Prolonged period of falling prices. A bear market in stocks is usually brought on by the anticipation of declining economic activity
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and a bear market in bonds is caused by rising interest rates.
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BEST EFFORTS Underwriting agreement whereby investment bankers
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acting as agents
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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
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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
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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
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who performs a similar function on an exchange.
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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
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the two prices constitute a QUOTATION; the difference between the two prices is the SPREAD.
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BLIND POOL Limited partnership that does not specify the properties the general partner plans to acquire. If
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for example
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BLOCK Large quantity of stock or large dollar amount of bonds held or traded. As a general guide
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10
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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
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products
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BLUE LIST Published by S&P
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it mainly contains data on municipal bonds. With its pertinent price
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BOND Any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money
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usually at specific intervals
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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
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the difference is termed a bond premium.
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BOND RATING Method of evaluating the possibility of default by a bond issuer. S&P’s
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Moody’s Investors Service
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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
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while the purchase of a substitute bond effectively preserves the investment.
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BOOK-ENTRY SECURITIES Securities that are issued without a certificate. Purchases and sales of some municipal bonds
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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 Amount of money that customers can invest in securities on MARGIN
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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 In mutual funds
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the dollar investment required to make the investor eligible for a lower sales charge.
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BROKER Person who acts as an intermediary between a buyer and seller
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usually charging a commission. A broker who specializes in stocks
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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
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the term REHYPOTHECATION is used synonymously with broker loan borrowing. Because broker loans are callable on 24-hour notice
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BULL SPREAD Option strategy
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executed with puts or calls
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BUSINESS CYCLE Recurrence of periods of expansion (RECOVERY) and contraction (RECESSION) in economic activity with effects on inflation
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growth
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BUYING POWER Amount of money available to buy securities
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determined by tabulating the cash held in brokerage accounts
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BUY STOP ORDER BUY ORDER marked to be held until the market price rises to the STOP PRICE
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then to be entered as a MARKET ORDER to buy at the best available price.
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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)
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it is a DIAGONAL SPREAD. Investors gain or lose as the difference in price narrows or widens.
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CALL OPTION Right to buy 100 shares of particular stock or stock index at a predetermined price before a preset deadline
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in exchange for a premium. For buyers who think a stock will go up dramatically
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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
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the call price is usually higher than the par value of the security
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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
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because without it the bond could be CALLED AWAY at any time specified in the indenture.
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CAP Short for CAPITALIZATION
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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
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CAPITAL STRUCTURE Corporation’s financial framework
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including LONG-TERM DEBT
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CASH ACCOUNT Brokerage firm account whose transactions are settled on a cash basis. It is distinguished from a MARGIN ACCOUNT
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for which the broker extends credit. Some brokerage customers have both cash and margin accounts. By law
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CASH DIVIDEND Cash payment to a corporation’s shareholders
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distributed from current earning or accumulated profits and taxable as income. Cash dividends are distinguished from STOCK DIVIDENDS
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CHINESE WALL Imaginary barrier between the investment banking
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corporate finance
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CHURNING Excessive trading of a client’s account. Churning increases the broker’s commissions
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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 Type of fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds
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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
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CLOSING SALE Sale of an option having the same features (i.e.
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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) Mortgage-backed bond that separates mortgage pools into different maturity classes
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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
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COLLATERAL TRUST BOND Corporate debt security backed by other securities
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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 Short-term obligations with maturities up to 270 days issued by banks
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corporations
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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
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if declared. In the event that a corporation is liquidated
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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
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the principal on companion bonds will be prepaid more slowly. Companion bonds absorb most of the prepayment risk inherent in a CMO
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COMPETITIVE BID Sealed bid
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containing price and terms
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CONSTANT DOLLARS Dollars of a base year
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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) Measures prices of a fixed basket of goods bought by a typical consumer
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including food
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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
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a selling organization operating on behalf of the fund’s underwriter. The plan company must be registered with the Securities and Exchange Commission
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CONVERSION PRICE The dollar value at which convertible bonds
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debentures
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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
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together with greater appreciation potential than regular bonds offer. From the issuer’s standpoint
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CORPORATE BOND Debt instrument issued by a private corporation
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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
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COST BASIS Original price of an asset
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used in determining capital gains. It usually is the purchase price
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COVERED OPTION Option contract backed by the shares underlying the option. For instance
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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
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COVERED WRITER Seller of covered options. In other words
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an owner of stock who sells options against it to collect premium income. For example
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CREDIT SPREAD Difference in the value of two options
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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 Preferred stock whose dividends are omitted because of insufficient earnings or for any other reason
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accumulate until paid out. They have precedence over common dividends
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CUMULATIVE VOTING Voting method that improves minority shareholders’ chances of naming representatives on the board of directors. In regular or statutory voting
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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 Cash
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accounts receivable
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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
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a 10% (coupon rate) bond with a face (or par) value of $1
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CUSTODIAL ACCOUNT Account that is created for a minor
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usually at a bank
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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
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automobiles
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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
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the buyer is reimbursed.
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DATE OF RECORD Date on which a shareholder must officially own shares in order to be entitled to a dividend. For example
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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 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
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a customer receives securities from the firm’s inventory; the confirmation must disclose this. When specialists trade for their own account
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DEBIT SPREAD Difference in the value of two options
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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 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
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meaning different portions of an issue are retired at different times.
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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
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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
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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
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and Standard & Poor’s. The higher the rating (AAA or Aaa is highest)
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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
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defensive securities tend to decline less than the overall market.
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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
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though there may be a purchase-price adjustment to compensate for DELAYED DELIVERY.
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DEPLETION Accounting method available to companies that extract oil and gas
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coal
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DEPRECIATION Amortization of fixed assets
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such as plant and equipment
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DERIVATIVE A contract whose value is based on the performance of an underlying financial asset
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index
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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
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thus bypassing the FLOOR BROKER. A related system called Super DOT routes LIMIT ORDERS.
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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
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which is considerably less risky than an EXPLORATORY DRILLING PROGRAM or WILDCAT DRILLING
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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
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joint ventures or Sub “S” corporations.
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DISCOUNT RATE Interest rate that the Federal Reserve charges member banks for loans
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using government securities or ELIGIBLE PAPER as collateral. 16
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DISINTERMEDIATION Movement of funds from low-yielding accounts at traditional banking institutions to higher-yielding investments in the general market. For example
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withdrawal of funds from a passbook savings account paying 3% to buy a Treasury bill paying 7%.
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DIVERSIFICATION Spreading of risk by putting assets in several categories of investmentsstocks
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bonds
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DIVERSIFIED INVESTMENT COMPANY Mutual fund or unit investment trust that invests in a wide range of securities. Under the Investment Company Act of 1940
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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.
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DIVIDEND PAYOUT RATIO Percentage of earnings paid to shareholders in cash. In general
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the higher the payout ratio
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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
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a stock paying a $1 dividend per year that sells for $10 a share has a 10% dividend yield.
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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
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which is 97½% of $1000.
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DO NOT REDUCE (DNR) Instruction on a LIMIT ORDER to buy
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or on a STOP ORDER to sell
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DOUBLE-BARRELED Municipal revenue bond whose principal and interest are guaranteed by a larger municipal entity. For example
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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
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DOUBLE TAXATION Taxation of earnings at the corporate level
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then again as stockholder dividends.
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DOWNTICK Sale of a security at a price below that of the preceding sale. If a stock has been trading at $15 a share
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for instance
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DUE BILL A statement of money owed. Commonly used to adjust a securities transaction when dividends
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interest
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EARNINGS PER SHARE Portion of a company’s profit allocated to each outstanding share of common stock. For instance
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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.
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ECONOMIC GROWTH RATE Rate of change in the GROSS DOMESTIC PRODUCT
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as expressed in an annual percentage. If adjusted for inflation
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EFFECTIVE DATE Date when an offering registered with the SEC may commence
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usually 20 days after filing the registration statement.
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EQUIPMENT TRUST CERTIFICATE Bond
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usually issued by a transportation company such as a railroad or airline
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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
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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.
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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
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there is no estate tax on transfers of 18 property between spouses. An exclusion which began at $250
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EURODOLLAR U.S. currency held in banks outside the United States
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mainly in Europe
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EXCESS MARGIN Equity in a brokerage firm’s customer account
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expressed in dollars
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EXCHANGE PRIVILEGE Right of a shareholder to switch from one mutual fund to another within one fund family
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often at no additional charge. Exchanges may be taxable.
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EX-DIVIDEND DATE Date on which a stock goes EX-DIVIDEND
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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.
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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
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which ensures that stock is delivered as agreed upon.
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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
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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.
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EX-LEGAL Municipal bond that does not have the legal opinion of a bond counsel printed on it
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as most municipal bonds do. When such bonds are traded
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EXPENSE RATIO Amount
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expressed as a percentage of total assets
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EXPLORATORY DRILLING PROGRAM Search for an undiscovered reservoir of oil or gas
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a very risky undertaking. Exploratory wells are called wildcat (in an unproven area). Exploratory drilling programs are usually syndicated
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EX-RIGHTS Without the RIGHT to buy a company’s stock at a discount from the prevailing market price
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which was distributed until a particular date. Typically
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FACE-AMOUNT CERTIFICATE Debt security issued by face-amount certificate companies
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one of three categories of mutual funds defined by the INVESTMENT COMPANY ACT OF 1940. The holder makes periodic payments to the issuer
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FACE VALUE Value of a bond
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or other security as given on the certificate. Corporate bonds are usually issued with $1000 face values
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FANNIE MAE (FEDERAL NATIONAL MORTGAGE ASSOCIATION) Publicly owned
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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.
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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
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such securities are sponsored by the government and have high safety ratings.
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FEDERAL FUNDS Funds deposited by commercial banks at Federal Reserve Banks
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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.
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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
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since it is set daily by the market
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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
|
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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
|
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PRIVATE PLACEMENT Sale of stocks
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bonds
|
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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
|
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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.
|
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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.
|
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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
|
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PROJECT NOTE Short-term debt issue of a municipal agency
|
usually a housing authority
|
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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
|
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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
|
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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.
|
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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
|
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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.
|
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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
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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
|
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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.
|