Definitions Flashcards
Regulation A Offering
An issue of securities offered to the public when the total amount of the offering is $5,000,000 or less in a 12-month period. The Securities Act of 1933 exempts such an issue from registration requirements.
Regulation D Offering/Private Placement
Securities offered under the Securities Act of 1933 Private Placement Exemption - Regulation D. This regulation contains SEC Rule 506, which provides an exemption from the full registration requirements for offers and sales with certain specified restrictions.
Regulation G
A Federal Reserve System regulation which applies to credit extension on registered securities by other than brokers, dealers, and banks. This Regulation includes finance companies and individuals.
Regulation Q
A Federal Reserve System regulation which regulated the interest that can be paid on savings accounts and Certificates of Deposit and prohibited interest payments on checking account balances. It was repealed with the release of Dodd-Frank.
Regulation T
A regulation of the Federal Reserve System that is concerned with the extension and maintenance of credit on securities. It includes requirements with regard to special cash accounts and margin accounts.
Regulation U
Federal Reserve Regulation which covers the amount of credit a bank can extend to a customer to purchase or carry margin securities.
Accretion
The process of increasing the basis of a security issued at a discount and maturing at face value (typically used with zero-coupon bonds).
Accrued Interest
Represents interest that has accrued from the last interest payment date up to the sale of the bond. The buyer of the bond pays accrued interest to the seller.
Accumulation Unit
An accounting measure used to determine a variable annuity contract owner’s interest in the separate account of securities. Accumulation units are converted into annuity units when the accumulation period ends and the annuity period begins.
Additional Bond Test
Before bonds of an additional issue having the same claim or lien on pledged revenues can be issued, an earnings test must be performed and satisfied.
Administrator
The designated person in a state who administers the securities regulations of the state and administers the Uniform Securities Act.
Advertising
The term “advertising” refers to material designed for use through a mass medium. A Broker-Dealer using advertising material cannot control who receives it as it may be transmitted by radio, television, or newspaper.
Affidavit of Domicile
Document that attests to the residence of a deceased person. In certain states, to transfer securities in a joint tenancy on the death of a tenant, an Affidavit of Domicile, Death Certificate, and Inheritance Tax Waiver must be completed.
Agent
Any individual other than a broker/dealer who represents a broker/dealer or issuer in effecting or attempting to effect purchases or sales of securities. An agent acts on behalf of a customer and charges a commission on a securities transaction.
All or None Order (AON)
This is an order to buy or sell securities which must be executed in its entirety or not at all. An “all or none order” does not have to be executed immediately.
Alpha
Statistical measurement that describes the expected return of a particular security relating to the security itself rather than market conditions.
Alternative Minimum Tax (AMT)
A Federal Income Tax designed to prevent taxpayers from escaping taxes by investing in Tax Preference Items.
Alternative Order
This order has either of two alternatives: For example, a customer places an order to either: Buy 1000 XYZ at 40 stop GTC, or Buy 1000 XYZ at 35 GTC. The execution of either order causes cancellation of the other order. If there is a partial execution, for example, 600 shares of XYZ are purchased at 35, the remaining open order becomes: Buy 400 XYZ at 40 stop GTC, or Buy 400 XYZ at 35 GTC.
American Depositary Receipts (ADRs)
Represents receipts for shares in foreign corporations. By purchasing ADR’s, American investors receive dividends in American dollars through the bank that holds the shares.
Amortization
An accounting procedure or process in which the premium of a bond is written off over its remaining life. Municipal bond premiums may be amortized by an investor. Amortization of a municipal or corporate bond decreases the cost basis of the bond. If the same amount is amortized each year, it is referred to as “straight-line amortization”.
And Interest (Plus Interest)
When a security trades “and interest”, interest is added to the purchase price. When an investor buys a bond, the investor pays the purchase price plus accrued interest.
Annuity
A contract sold by a life insurance company that guarantees a fixed or variable payment to the investor (annuitant) at a future date in time, generally retirement.
Annuity Units
An accounting measure used to determine the amount of each payment to the annuitant. The annuity unit fluctuates according to the value of the securities kept in a separate account. Annuity units exist after annuitization, whereas accumulation units exist before annuitization.
Arbitrage
Buying securities in one marketplace and selling them in another to take advantage of a price disparity. For example, buying 100 shares of ABC at 25 on the NYSE and immediately selling 100 shares of ABC at 25.25 in the OTC market.
Arbitration
A legally binding method of handling disputes which does not involve the court system. Arbitration is less costly and more efficient than regular litigation.
Asset Allocation Principles
“Asset Allocation” refers to how a client’s portfolio is invested. A certain percentage of the client’s assets are invested in varying asset classes such as equity securities, debt securities, and other investments. A client’s asset allocation will be determined by the agent or adviser and will depend heavily on the client’s investment objectives and risk tolerance.
At-the-Money
Describes a situation where the market price of the underlying security and the strike price of the option are the same. For example, assume a customer buys 1 ABC July 40 call. If the underlying security, ABC, is selling at $40 per share, then the option is selling at-the money.
Authorized
Represents the maximum number of shares a company may legally create for issuance. These terms are included in the Articles of Incorporation.
Balance of Payments
Refers to money flowing into and out of the U.S. If a Balance of Payments deficit exists, the deficit would increase due to the following: 1. An increase in U.S. investments abroad. 2. U.S. loans to other countries. 3. U.S. tourists spending abroad. 4. A raising of interest and dividends owned by foreigners. A U.S. Balance of Payments deficit would improve or lessen with: 1. New foreign investments in the U.S. 2. Commodity exports. 3. Spending by foreign tourists in the U.S. 4. Increase in interest and dividends earned on foreign investments.
Bank Guarantee Letter
Issued by an Options Clearing Corporation (OCC) approved bank. The Letter states that a particular customer has funds equal to the aggregate exercise of a put option which has been sold. The Bank agrees to deliver the funds to the broker/dealer if the option is exercised against the customer.
Bank Secrecy Act
Federal anti-money laundering and counter-terrorism statue.
Banker’s Acceptance
A money market instrument designed primarily to enable businessmen to finance foreign trade. It is a draft or bill exchange that becomes a money market instrument when payment is guaranteed by a bank. Banker’s Acceptance are normally issued on a discount basis and mature within nine months.
Basic Balance Sheet Equation
Assets = Liabilities + Stockholder’s Equity. All of the assets of a corporation equal to the claims against them. Assets are anything of value owned by a corporation. Liabilities are claims of creditors against the assets. Stockholder’s Equity represents the claims of owners against the assets.
Basis Point
Represents 1/100 of one percent in terms of yield. Assume Bond A has a yield of 6.75% and Bond B has a yield of 6.50%; the difference in the two yields is 25 basis points.
Bearish Call Spread
An investor purchases the call with a higher strike price and sells the call with a lower strike price. Assume a customer puts on the following bearish call spread: Long 1 ABC July 60 call at 1, Short 1 ABC July 50 call at 7
Best Efforts Underwriting
The underwriting group acts as agent in attempting to distribute a new issue to the public.
Beta
A statistical measure used to assess the volatility of a particular security to the market as a whole. Stocks with a beta of 1.0 are expected to fluctuate more than the general market, while those with a beta of less than 1.0 are expected to fluctuate less than the general market.
Bid Form
Underwriters bidding on a new issue of municipal securities during a competitive underwriting submit this form and the interest rate proposed for the issue. The issuer normally grants the issue to the underwriting syndicate with the lowest net interest cost.
Bid Wanted
For inactively traded securities, a Bid Wanted (BW) indication may be placed in the Pink Sheets by a dealer. For example, a quotation for XYZ may be indicated as follows: XYZ BW - 14 This means the dealer is indicating an interest to sell shares at $14, but is seeking a bid from another dealer.
Blue Chip Stock
Stock issued by a nationally known company that has a good reputation for quality of management, products, and services. Blue Chip Stocks are expected to pay dividends in good times and in bad times. They will generally maintain about a 50% Dividend Payout Ratio.
Blue List
It is a daily publication which lists municipal bonds being offered by dealers. It contains information such as the name of the issuer, par value, interest rate, maturity date, price or yield, and the dealer offering the bond.
Blue Sky Laws
State securities laws are referred to as “blue sky laws.” The purpose of these laws is to protect against fraudulent transactions with a particular state.
Board of Directors
Elected by stockholders of a corporation to manage the entity. The Board of Directors appoints the management of the corporation.
Bond Buyer
The name of an organization that publishes the Daily Bond Buyer and Weekly Bond Buyer. Any significant new issue of a municipal bond will be advertised in the Daily Bond Buyer through a Notice of Sale.
Book Entry
A security issue which is not available to a purchaser in physical form. The owner of a book entry security has a book entry advice of confirmation as proof of ownership. Book entry securities transfer by journal entry.
Breakeven - Options
The point at which the buyer or seller of an option will not realize a gain or loss.
Breakpoint
Refers to the minimum dollar amount of mutual fund shares purchased that will give the customer a volume discount. For example, a customer who invests $20,000 pays a sales charge of 8% on mutual fund while a customer who invests less than $20,000 would pay a sales charge of 8 1/2%.
Broker
A broker acts in an agency capacity bringing a buyer and seller together in a securities transaction for compensation via commission.
Broker Loan Rate
The interest rate that banks charge broker/dealers who borrow money using customers’ securities as collateral. This is also referred to as the “Call Loan Rate”.
Broker/Dealer
Any person engaged in the business of effecting or attempting to effect transactions in securities for the accounts of others or for his/her own account.
Bullish Call Spread
Buying a call with a lower strike price and selling a call with a higher strike price. For example, assume a customer engages in the following: Sell 1 ABC July 30 call @ 1, and Buy 1 ABC July 20 call @ 5
Business Cycle
Refers to increases and decreases in economic activity over a period of time. The Business Cycle has four major phases: Peak - Recession - Trough - Recovery.
Business Enterprises
The main forms of business enterprises are sole proprietorship, partnerships, and corporations. Owners of sole proprietorships and general partners in a partnership have unlimited personal liability for the debts of the business enterprise. Stockholders in a corporation have limited liability and can only lose the amount of their investment in the corporation.
Calendar Spread
An option spread in which the strike prices are the same and the expiration months are different. Assume a customer puts on the following spread position: Sell 1 ABC April 40 call @ 5, and Buy 1 ABC July 40 call @ 8. This is a calendar spread since the strike prices are the same and the expiration months are different.
Call Protection
A fixed time period during which a bond may not be called by the issuer. It is valuable to an investor when interest rates are falling since the issuer cannot call the bond away from the investor. An investor interested in call protection would not purchase a premium bond callable at par.
Capital Gain Distribution
A distribution made by an investment company from long-term capital gains realized by its portfolio.
Capital Gain or Loss
Realized on the sales of a capital asset such as a security. A capital gain is realized when the sales proceeds from a capital asset exceed the cost basis. A capital loss is realized when the sales proceeds are less than the cost basis.
Capital Market
Markets where long-term debt and equity instruments are traded. Capital Markets consist of stock exchanges and the over-the-counter market. Capital Market instruments include items such as equities (common and preferred stock), corporate, municipal and U.S. Government bonds and mortgages.
Cash Account
A securities account in which the customer pays for a purchase of securities in full. The entire risk of the market value of the securities is placed on the customer.
Cash Assets Ratio
Cash Assets Ratio = Cash and Equivalents / Current Liabilities.
Cash Flow
The Cash Flow for a corporation is defined as Net Income plus Depreciation or Net Loss plus Depreciation.
Cash Transaction
A securities trade where trade date and settlement date are the same day. A customer who engages in a cash transaction normally receives a less favorable price than he would receive on a regular way transaction.
Cash Value
(Also called: Cash Value Build Up and Surrender Cash Value): This is the potential amount of money that could go to the policy owner. There is generally no minimum guaranteed value.
Cease and Desist Order
A cease and desist order or letter is a demand by a judge or regulator that a specific person or entity immediately halt some specific activity, presumed to be an illegal or unethical practice, and discontinue such activity until further notice or instruction is given through legal means.
Certificate of Limited Partnership
Filed with the state and describes the operation of the Limited Partnership. It states the name of the General Partner and the names of all Limited Partners. The General Partner is responsible for the debts of the Limited Partnership, while the Limited Partners can only lose the amount of their investment in the Limited Partnership.
Civil Liability
To have a legal obligation under the body of laws of a state or nation dealing with the rights of private citizens.
Class
Refers to options of the same type on the same underlying security. A put and call would not be in the same class.
Closed-End Fund
Type of investment company that has a fixed number of shares outstanding. They are traded over-the-counter or listed on a national securities exchange.
Collateralized Mortgage Obligation (CMO)
A Collateralized Mortgage Obligation (CMO) is a mortgage-backed bond secured by a pool of mortgage loans. CMO’s separate mortgage pools into different maturity classes called “tranches”. The tranches generally pay fixed rates of interest at regular intervals and may mature in two, five, ten, or twenty years. Most CMO’s carry a AAA rating and interest payments to investors are subject to Federal, State, and Local taxes. An investor seeking a short-term investment may purchase a two-year tranche, while a long-term investor may purchase a 20-year tranche.
Collectibles
Items such as diamonds, paintings, rugs, antique coins, or precious stones. Individual Retirement Account (IRA) funds may NOT be used to invest in collectibles.
Combination Primary and Secondary Offering
A securities offering whereby part of the shares have already been issued and are being sold by unissued shares of the corporation and part of the shares are from officers and directors.
Commercial Paper
Commercial paper represents an unsecured promissory note of a corporation. The notes are normally issued at a discount and redeemed at face value. These notes are not guaranteed by the FDIC and may be sold directly by the issuer.
Common Stock
Represents fractional ownership in a corporation. Owners of common stock have certain rights, including the right to vote, the right to receive declared dividends, and the right to sell their shares.
Conduit Tax Treatment
With conduit or pass-through tax treatment, gains and losses are passed through an entity and onto the investors in the entity, avoiding taxation at the entity level. Entities like c-corporations pay taxes as an entity and shareholders are also responsible for taxes on dividends and capital gains/losses (Double Taxation). With conduit tax treatment, taxation at the entity level is avoided and investors bear the tax burden of gains and losses.
Confirmation
A record sent to a customer documenting the details of a trade. A confirmation must be sent out to a customer on a securities transaction by the next business day after trade date.
Consolidated Tape
A computerized system that displays the stock symbol, latest price, and volume on securities traded on the floor of the stock exchange.
Constant Dollar Investment Plan (Dollar Cost Averaging)
Defined as investing a fixed amount of dollars at set intervals, such as monthly, regardless of the prices of securities purchased in the account. For example, buying $250 per month of Mutual Fund A in an account, regardless of share price of Mutual Fund A.
Consumer Price Index
Published monthly by the U.S. Government, it measures the average change in prices for selected goods and services in selected U.S. cities.
Coordination
Refers to registration of a security at the state level by a concurrent registration filing with the SEC. When the SEC or Federal registration becomes effective, the state registration becomes effective as well.
Corporate Bond
A corporate bond is a debt instrument (company is borrowing money from investors) which generally has a fixed rate of interest which is paid semi-annually. Par or principal value is $1000. Since corporate bonds pay a fixed rate of interest semi-annually they are also referred to as a fixed income security.
Corporate By-Laws (Resolution)
Corporate By-Laws, which can be amended by the Board of Directors, authorize a corporation to open a cash or margin account with a broker/dealer. A Corporate Resolution allows certain employees to act on behalf of the corporation.
Cost Basis - Stock
The cost basis of stock purchased by a customer is the market value of the security plus any commissions paid. If the customer’s sales proceeds exceed his cost basis, a capital gain is realized.
Covered Call Option
A situation where a customer owns securities and sells a call option contract against the securities. In equity options, an investor who owns 100 shares of stock and sells a call would be “covered”.
Credit Agreement
Describes to a margin customer how interest is computed in the account. A broker/dealer may have the customer sign the Credit Agreement to demonstrate that he understands how credit will be extended in the account.
Current Ratio
Current Assets divided by Current Liabilities. It measures the liquidity position of a corporation.
Current Yield
For a bond, this is defined as the Annual Interest Paid divided by the Market Price of the bond. For a stock, it is defined as the Annual Dividend Paid divided by the Market Price of the stock. It represents the actual income rate of return to the investor.
Cyclical Stock
A stock that is susceptible to fluctuation related to various different cycles. The most common cycle would be the business cycle, with the stock increasing in value as the business cycle expands and the stock decreasing in value as the business cycle contracts.
