Definitions Flashcards
1
Q
Regulation A Offering
A
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.
2
Q
Regulation D Offering/Private Placement
A
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.
3
Q
Regulation G
A
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.
4
Q
Regulation Q
A
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 It was repealed with the release of Dodd-Frank.
5
Q
Regulation T
A
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.
6
Q
Regulation U
A
Federal Reserve Regulation which covers the amount of credit a bank can extend to a customer to purchase or carry margin securities.
7
Q
Accretion
A
The process of increasing the basis of a security issued at a discount and maturing at face value (typically used with zero-coupon bonds).
8
Q
Accrued Interest
A
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.
9
Q
Accumulation Unit
A
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.
10
Q
Additional Bond Test
A
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.
11
Q
Administrator
A
The designated person in a state who administers the securities regulations of the state and administers the Uniform Securities Act.
12
Q
Advertising
A
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.
13
Q
Affidavit of Domicile
A
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.
14
Q
Agent
A
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.
15
Q
All or None Order (AON)
A
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.
16
Q
Alpha
A
Statistical measurement that describes the expected return of a particular security relating to the security itself rather than market conditions.
17
Q
Alternative Minimum Tax (AMT)
A
A Federal Income Tax designed to prevent taxpayers from escaping taxes by investing in Tax Preference Items.
18
Q
Alternative Order
A
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.
19
Q
American Depositary Receipts (ADRs)
A
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.
20
Q
Amortization
A
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”.
21
Q
And Interest (Plus Interest)
A
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.
22
Q
Annuity
A
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.
23
Q
Annuity Units
A
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.
24
Q
Arbitrage
A
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.
25
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.
26
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.
27
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.
28
Authorized
Represents the maximum number of shares a company may legally create for issuance. These terms are included in the Articles of Incorporation.
29
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.
30
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.
31
Bank Secrecy Act
Federal anti-money laundering and counter-terrorism statue.
32
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.
33
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.
34
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.
35
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
36
Best Efforts Underwriting
The underwriting group acts as agent in attempting to distribute a new issue to the public.
37
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.
38
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.
39
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.
40
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.
41
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.
42
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.
43
Board of Directors
Elected by stockholders of a corporation to manage the entity. The Board of Directors appoints the management of the corporation.
44
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.
45
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.
46
Breakeven - Options
The point at which the buyer or seller of an option will not realize a gain or loss.
47
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%.
48
Broker
A broker acts in an agency capacity bringing a buyer and seller together in a securities transaction for compensation via commission.
49
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".
50
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.
51
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
52
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.
53
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.
54
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.
55
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.
56
Capital Gain Distribution
A distribution made by an investment company from long-term capital gains realized by its portfolio.
57
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.
58
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.
59
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.
60
Cash Assets Ratio
Cash Assets Ratio = Cash and Equivalents / Current Liabilities.
61
Cash Flow
The Cash Flow for a corporation is defined as Net Income plus Depreciation or Net Loss plus Depreciation.
62
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.
63
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.
64
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.
65
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.
66
Civil Liability
To have a legal obligation under the body of laws of a state or nation dealing with the rights of private citizens.
67
Class
Refers to options of the same type on the same underlying security. A put and call would not be in the same class.
68
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.
69
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.
70
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.
71
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.
72
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.
73
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.
74
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.
75
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.
76
Consolidated Tape
A computerized system that displays the stock symbol, latest price, and volume on securities traded on the floor of the stock exchange.
77
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.
78
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.
79
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.
80
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.
81
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.
82
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.
83
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”.
84
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.
85
Current Ratio
Current Assets divided by Current Liabilities. It measures the liquidity position of a corporation.
86
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.
87
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.
88
Dark Pools
Electronic trading platforms rule by large investment banks and hedge funds for institutional investors to trade stock privately and anonymously off the floor of an exchange to obtain price improvement if a large block of stock is being traded.
89
Dealer
A dealer in a securities transaction acts as a principal, buying and selling into and out of their own account and charging mark-ups and mark-downs on transactions.
90
Debenture
Debt obligation of a corporation backed only by the full faith and credit of the corporation itself and not by any specific asset of the corporation.
91
Deep Discount
A bond trading at a substantial discount from par value.
92
Defensive Stock
A stock that normally declines less than the average security in a market decline. Defensive stocks are not subject to the business cycle to the extent that a capital goods company or cyclical company would be. Defensive stocks include shares of public utilities, food companies, tobacco companies, and clothing manufacturers.
93
Depletion
An accounting treatment which allows an investor in an oil and gas program to reduce taxable income based on the amount of oil or gas extracted from land. Depletion allowances are the major advantage allowed to investors in an oil and gas program.
94
Derivative
A derivative is a security that derives its value from another security, such as a stock or a bond. An option contract is a derivative since it derives its value from the underlying security on which it is based. Derivatives can be used by corporations to hedge against changes in interest rates, foreign currencies, exchange rates and commodity prices. Mutual funds and institutional investors, such as pension funds, use derivatives to hedge against declines in their investment portfolios. Some derivatives are straightforward, such as options on securities, stock index options, and Collateralized Mortgage Obligations (CMO's). Other derivatives can be complex, such as interest rate swaps and equity linked bank deposits. Some mutual funds may invest in derivatives and shareholders should be aware of the risks involved.
95
Designated Market Maker (Specialist)
An exchange member who is given the responsibility to maintain a fair and orderly market in any security in which he is the registered Designated Market Maker (specialist).
96
Direct Participation Program
Normally formed as a Limited Partnership in which investors directly participate in the gains and losses of the business. Net income or net losses generated by the DPP are allocated to the Limited Partners.
97
Discount Rate
The interest rate that the Federal Reserve charges member banks who borrow funds from it. The Federal Reserve would lower the Discount Rate to stimulate the economy and raise the Discount Rate to slow down the economy.
98
Earned Income
Under Federal Tax laws, earned income refers to income from wages and salaries for a taxpayer. Unearned income refers to income received by a taxpayer from sources such as dividends, interest, and rent. Passive income or passive losses are derived from activities in which the taxpayer does not materially participate.
99
Earnings Per Share (EPS)
Refers to a corporation's Net Income Available to Common Stockholders divided by its common shares outstanding.
100
Economic Indicators
The three main types of economic indicators are leading, coincident and lagging. Leading indicators typically indicate future changes in the economy, coincident indicators typically coincide with changes to the economy, and lagging indicators usually lag behind economic changes.
101
Enjoin / Injunction
An injunction is a form of judicial order that legally prohibits a particular activity or legally compels a person to perform or continue to perform a particular activity. Most often used in the prohibitive context in financial regulation, an injunction would be sought through the court system to legally prevent a person from continuing illegal or unethical practices. The verb would be used to describe someone who was enjoined by the injunction.
102
Equipment Leasing Programs
A type of DPP that purchases equipment and leases it to corporations. Limited partners receive income from lease payments and are allowed depreciation deductions on the equipment.
103
Equity
For stock, equity refers to the amount of ownership that a stockholder has in relation to a corporation. In margin accounts, equity refers to the amount of the account owned by the customer. It is computed by subtracting the debit balance (borrowed funds) from the market value of the securities.
104
ERISA - Employee Retirement Income Security Act
ERISA was designed to protect private sector employees from imprudent investment decisions of their employers or unions.
105
Escrow Receipt
Issued by an Options Clearing Corporation (OCC) approved bank. The Escrow Receipt states that the bank is holding a certain amount of shares on behalf of a customer. The bank agrees to deliver the shares to the brokerage firm if a call option is exercised against the customer.
106
Eurodollar Bonds
A bond that pays interest and principal in American dollars. Eurodollar Bonds are offered outside of the United States and the issuer normally pays a lower interest rate. Eurodollar Bonds may be issued by an American, European, Japanese, or Australian corporation.
107
Eurodollars
American dollars held in banks outside the United States. Investors may transfer funds to European banks from the U.S. to receive a higher interest rate.
108
Exchange Rate
The price at which one country's currency can be used to purchase another country's currency.
109
Exchange Traded Funds (ETF)
These are funds that have a portfolio of securities that mirrors a specific index or industry sector. These securities trade like common stock.
110
Exchange Traded Notes (ETN)
Are debt instruments issued by banks. The bank promises to repay the principal amount less investor fees at final maturity and the performance of the ETN is linked to a specific index strategy of investing.
111
Exempt Securities
Securities that do not have to be registered under the Securities Act of 1933 in order to be sold to the public. Examples of exempt securities include U.S. Government Securities, Federal Agency Issues, and Municipal Securities.
112
Face Amount Certificate Company
One type of investment company which issues debt certificates at a discount. Holders will receive face value at maturity.
113
Federal Agency Issues
Debt Securities issued by agencies of the U.S. Government or government-sponsored corporations. Federal Agency issues normally trade at a higher yield than U.S. Government Obligations, such as Treasury Bills, Notes, or Bonds.
114
Federal Covered Adviser
A Federal Covered Adviser generally includes advisers who manage assets of $100 million (Formally $25 million) or more or who advise registered investment companies.
115
Federal Covered Security
Any security covered under federal law. This would include securities that are exempt, excluded, or specifically addressed in federal law. Federal covered securities typically do not have to register at the state level.
116
Federal Home Loan Mortgage Corporation (Freddie Mac, FHLMC)
Freddie Mac is a publicly chartered agency that buys conventional residential mortgages from financial institutions and issues securities backed by the pooled mortgages. Investors who own a Freddie Mac security receive a share of the interest and principal payments made by the homeowners. Therefore, Freddie Mac buys residential mortgages and packages the mortgages into securities backed by the mortgages that have been pooled together. Freddie Mac provides guarantees on the mortgages and then resells the mortgage-backed security in the market place. Income received by investors on securities issued by Freddie Mac is subject to Federal, State and Local taxation.
117
Federal Open Market Committee (FOMC)
A branch of the Federal Reserve Bank (FRB) responsible for monetary policy. This committee makes decisions on changes to the discount rate, change bank reserve requirements, and modification to the buying/selling activities that occur in Open Market Operations. Open Market Operations involve the purchase and sale of Treasury Securities in an attempt to modify the amount of money in the system (buy to push money into the economy, sell to pull money out of the system).
118
Federal Reserve System
The central banking system in the U.S. consisting of 12 Federal Reserve Banks throughout the country.
119
Fiduciary
A person or institution vested with legal rights and powers to be exercised for the benefit of another person. A fiduciary such as an investment adviser representative is required to put the best interests of clients ahead of their own interests.
120
Fill or Kill Order
An order to buy or sell securities whereby the order must be filled immediately in its entirety or not at all.
121
FinCen
Financial Crimes Enforcement Network is a bureau of the US department of the Treasury. Their mission is to safeguard the financial system form illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
122
Firm Commitment
A type of underwriting where the investment banker buys the shares from the issuing corporation and offers them to the public. The fee received by the syndicate is called the "spread".
123
Firm Quote
Defined as a market in which at least 100 shares will be executed. For example, a market maker responds to a quote by stating "15 - 15.50". The market maker will sell at least 100 shares at 15.50 or buy at least 100 shares at 15.
124
Fiscal Policy
Refers to the spending and taxing policies of the U.S. Government and is controlled by Congress. To stimulate the economy by using Fiscal Policy, government spending would be increased and Federal taxes would be decreased.
125
Floor Broker
A stock exchange member who works on the floor of an exchange such as the NYSE and executes orders for other members on an agency basis.
126
FNMA - Fannie Mae
Government-sponsored, publicly-owned corporation which purchases mortgages from institutions and resells them to public investors. Shares in "Fannie Mae" are traded on the NYSE. The stock is interest rate sensitive, usually increasing in price on declining interest rates and decreasing in price on rising interest rates.
127
Fourth Market
The Fourth Market is the name given to secondary market trades that take place directly between institutions. For example, an insurance company buys various corporate securities directly from a mutual fund. This is a fourth market trade and does not involve a broker-dealer, thus reducing commissions.
128
Fraud
Fraud includes common law deceit as well as violations of federal and state statutes and normally involves intentional misrepresentations or omissions.
129
Free Riding and Withholding
The failure of an underwriter to make a bona fide public distribution on a hot issue. The underwriter may hold back shares for later sale at higher prices instead of the offering price. This is a violation of securities regulations.
130
Functional Allocation Sharing Arrangement
In this type of sharing arrangement, the general partner bears all of the capital or tangible costs of drilling oil wells, which must be capitalized for tax purposes. The limited partners bear the intangible costs, which can be deducted as they occur.
131
Fundamental Analysis
A method of security analysis that concentrates on a particular company's financial statements, earnings, management, and strategic position in its industry. A fundamental analyst attempts to determine under-valued securities based on these factors.
132
Funded Debt
Technically defined as bonds, notes, or bank loans with one year or more remaining to maturity. The term "funded debt" is used in relation to corporate debt and not U.S. Government or municipal debt. The corporate debt issue is likely to have a sinking fund provision relating to the retirement of the bond issue.
133
General Partner
Manages a limited partnership and is responsible for the debts of the limited partnership. In an oil and gas program, the general partner will decide which properties to lease and where to drill. In a real estate limited partnership, the general partner will select the properties to buy and will manage the properties.
134
Government National Mortgage Association (Ginnie Mae, GNMA)
U.S. Government Agency that guarantees principal and interest payments on certain mortgage-backed securities, including securities based off of FHA, VA, and other mortgages. Ginnie Mae securities are the only mortgage-backed securities that are guaranteed by the U.S. Government.
135
Gross Domestic Product (GDP)
The United States Gross Domestic Product refers to the total value of all goods and services produced in the country on an annual basis. In order to properly compare GDP figures from one year to the next year, the figures must be in constant dollars. "Constant dollar" means that the numbers have been adjusted for the effects of inflation.
136
Growth Stock
A stock whose earnings are expected to grow faster than the earnings of an average company. A growth stock normally pays very little in dividends (low dividend payout ratio) and earns a high rate of return.
137
Guaranteed
This term refers the guarantee of payment of principal, interest, or dividends. For example, a parent company may guarantee payments of principal and interest on a subsidiary’s bond issuance.
138
Head and Shoulders Formation
A chart pattern used by technical analysts to predict future price movements. A Head and Shoulders Top Formation is a bearish formation usually indicating a downturn in prices. A Head and Shoulders Bottom Formation is a bullish chart pattern indicating a price upturn.
139
Hedge Fund
A Hedge Fund is an alternative investment vehicle where accredited investors can pool money and invest with higher levels of risk than other products such as mutual funds. Hedge funds are not a type of investment company. Hedge fund managers can sell short, borrow for leverage, and engage in derivative trading.
140
High Frequency Trading (HFT)
HFT are proprietary trading firms that use high speed systems to monitor market data and submit large numbers of orders to the markets.
141
Hot Issue
A new securities issue that trades at an immediate premium over its public offering price.
142
Immediate or Cancel Order
An order that must be filled immediately, however a partial execution is allowed.
143
Indenture
Legal document that protects the rights of the bondholders. The indenture is a formal agreement between the issuer of the bonds and the bondholder.
144
Inertial Inflation
the tendency of an inflation rate to remain constant or consistent unless there is a demand shock or a supply shock.
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Injunction / Enjoin
An injunction is a form of judicial order that legally prohibits a particular activity or legally compels a person to perform or continue to perform a particular activity. Most often used in the prohibitive context in financial regulation, an injunction would be sought through the court system to legally prevent a person from continuing illegal or unethical practices. The verb would be used to describe someone who was enjoined by the injunction.
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Inside Market
Represents the highest bid and lowest ask price available in a security.
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Insider
The term "insider" in the securities business refers to a person with access to inside information (material non-public information). An insider is normally by definition an officer, director, or principal stockholder. A principal stockholder is a person who owns 10% or more of an equity security of the corporation. Insiders are prohibited from short-term swings in their own company's stock. A short-term swing is a profit made by an insider on his own company's stock, held six months or less. An insider is also prohibited from selling his own company's stock short or short-against-the-box.
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Insider Trading
A prohibited practice in the securities industry in which an individual trades on material non-public information.
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Instinet
A trading system in which large blocks of securities can be traded directly by institutional investors, such as banks, insurance companies, and pension funds. For example, a mutual fund may buy securities directly from a life insurance company's portfolio. Trading through the Instinet System is referred to as "trading in the fourth market".
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Insurance Premium
The amount an investor pays for an insurance policy. (For example, an investor pays $100 per month for a policy). For insurance products the premiums are generally paid with after tax dollars and are not tax-deductible.
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Insured Municipal Bonds
Municipal bonds where the interest and/or principal payments are insured by an agency such as MBIA, AMBAC, FGIC or Bond Investor's Guarantee (BIG). Insured municipal bonds normally carry a AAA rating.
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Intangible Drilling Costs
Oil and gas program costs that are deductible but have no salvage value. Examples include labor, supplies, fuel, and repairs. These costs represent the major portion of the first year’s deductions.
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Inter-Bank Market for Foreign Currencies
The secondary market for foreign currency transactions between large commercial banks in major financial centers around the world.
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Intra-State Offering
A securities offering by an issuer in which the entire issue is sold exclusively in one state.
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Intrinsic Value
The “In-the-Money” amount of an option contract. For a call option, it is the amount by which the market price of the underlying security exceeds the strike price. For a put option, it is the amount by which the market price of the underlying security falls below the strike price. If an option contract is out-of-the-money, it has no intrinsic value.
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Investment Adviser Representative (IAR)
An individual who is employed by or associated with a state-registered investment adviser. The term also refers to an individual who has a place of business in the state and is employed by or associated with a federal covered adviser.
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Investment Advisers Act of 1940
Federal law requiring investment adviser to register with the SEC.
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Investment Company Act of 1940
The Federal Securities Act which regulates the operations of investment companies. The Act classified investment companies into three categories: a. Face Amount Certificate Company b. Unit Investment Trust c. Management Company. The Management Company Act of 1940 regulates investment companies concerning: a. Capitalization b. Membership on the Board of Directors c. Trading with affiliated persons or underwrites d. Information required on a Registration Statement and prospectus e. Borrowing by investment companies f. Sales charges g. Redemption of shares h. Custodial protection of assets i. Contractual requirements with an investment adviser.
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Issuer
Any person who issues or proposes to issue any security.
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Jurisdiction
Jurisdiction is the scope of authority of a particular regulator or legal system. In order for a regulator or for laws, rules, and regulations to have effect on a person or industry, the regulator, laws, rules, or regulations must have jurisdiction over the person or industry specified. Jurisdiction can be referenced at the Federal Level, State Level, Local Levels, and even in the context of an SRO such as FINRA, which has jurisdiction over members.
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Keynesian Theory
Economic theory that advocates active manipulation of government taxation and spending to control the business cycle.
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Letter of Credit
Normally issued by a bank which guarantees the payment of a customer's debt up to a certain amount for a certain period of time.
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London Inter-Bank Offered Rate (LIBOR)
It is the interest rate that international banks, dealing in Eurodollars, charge for large loans.
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Managing Underwriter
Also referred to as the syndicate manager. The managing underwriter is the lead underwriter in the underwriting syndicate formed to purchase and distribute securities of an issuer. The managing underwriter acts as agent for the syndicate.
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Monetary Policy
In the US, monetary policy is set by the Federal Reserve Board, which attempts to control growth of the economy and inflation through adjustments to money supply via interest rate changes and bank reserve requirements.
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Municipal Bonds
Tax exempt bonds issued by state and local governments such as states, cities, towns, counties, and school districts.
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Mutual Fund Comparison
Investors interested in mutual funds should compare funds based on investment objectives, investment policies, and quality of management (track record). The mutual fund's risk factors should be reviewed. Other factors an investor should consider include sales charges, reinvestment programs, minimum purchase requirements, conversion privileges, withdrawal privileges, Expense Ratios, and the taxability of fund distributions.
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NASD Mark-Up (Mark-Down) Policy
NASD Rules of Fair Practice state that 5% is a reasonable guideline in mark-ups and mark-downs but that many factors must be considered to determine if such a mark-up or mark-down is reasonable.
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No-Load Fund
Investment Companies that do not have a sales charge. Investors generally do not purchase these funds through a broker/dealer, but directly through a fund company
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Nominal Yield
The percentage found by dividing the annual dollar income paid by a fixed-income security by the security's par value.
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Not Held Order
Gives discretion to the floor broker as to time and price. Floor broker uses his best judgment concerning the proper time to bid or offer stock. Designated market makers cannot accept a not held order.
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Notice Filing or Notification
A form of registration at the State Level. A registrant that was previously registered with the SEC can perform a notice filing at the State Level to sell securities in that State. The registrant simply files the required SEC documentation with the Administrator of the State and does not have to register by qualification at the State Level.
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Notice of Sale
New issues of municipal bonds must usually be sold by a competitive bidding method. An "Official Notice of Sale" is published in a local newspaper and other publications by the municipality inviting bids to be made by investment bankers. A notice of sale is normally available from the issuer, underwriter or approving attorney.
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NYSE Maintenance Requirement
The NYSE requires that margin (or customer equity) in an account must be maintained at a minimum of 25% of the current market value of securities in a customer margin account. If the market value of securities in the margin account drops below 25%, a maintenance call will result. Maintenance calls require the account holder to deposit additional equity (cash equal to the call or fully paid securities with a loan value equal to the call). If a customer fails to meet a maintenance call, a portion or all of their account can be liquidated to satisfy the call.
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NYSE Nine Bond Rule
The NYSE requires that orders for nine bonds or less be sent to the floor of the exchange to attempt to get customers the best price, since bond markets tend to have low trading volumes.
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Odd Lot Theory
The theory that the market can be forecast by watching for periods when odd-lot trading changes from a balance of buying to a balance of selling and vice-versa. The theory is that small investors are usually wrong in their buying and/or selling decisions. If odd lot buying in a rising market is heavy, this would indicate technical weakness and probably a market reversal. An increase in odd lot selling in a falling market would indicate technical strength and a market revival.
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Official Statement
For municipal bonds, it is similar to a prospectus. The legal opinion is included in the information.
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Oil and Gas Programs
Limited Partnerships, often Direct Participation Programs (DPPs) established to locate, extract, and market oil and natural gas. Limited Partners buy units in the partnership and do not assume any liability other than the cost of the units purchased and any other agreed-upon obligations. General Partners normally have unlimited liability.
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Open-End Fund (Open-End Investment Company)
Investment companies that do not have a fixed number of shares (an open-end capitalization structure). Price is determined by the per share net asset value of the fund's portfolio. Shares are purchased directly or indirectly from the issuing investment company and are redeemable back to the issuing investment company. All sales must be accompanied by a prospectus. There is no active secondary market for open-end fund shares.
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Ordinary Income
Ordinary income is a classification of certain types of income for tax purposes. Types of ordinary income include compensation from employment, dividends from stocks, and interest payments from bonds. Ordinary income is a different classification than capital gains/losses.
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Packaged Securities
The term "Packaged Securities" refers to investment companies, variable annuities, and real estate investment trusts, where an investor's risk is reduced through diversification. Packaged Securities offer investors professional management, periodic statements, tax information, and diversification of financial risk. Packaged Securities are attractive to investors who do not want to select and manage their own portfolio.
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Painting the Tape
An illegal practice where an investor or investors enter buy and sell orders in the same security with the sole purpose of creating an appearance of activity in order to drive the price of the security upward.
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Parity Price
At parity means the same. Parity in securities is typically applied in the context of convertible securities. When a convertible security’s market value is equal to the sum of shares received if a conversion takes place, the two are said to be at parity. When the two are not equal, there is a disparity in price.
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Passive Income or Loss
Income or loss from a "Passive Activity" which is defined as the conduct of trade or business in which the taxpayer does not materially participate. An example would be gains or losses realized from investment in a limited partnership, where limited partners do not participate in management of day-to-day activities.
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Penny Stock Rules
An SEC anti-fraud rule that applies to non-NASDAQ OTC securities selling at less than $5 per share. Before a registered representative can sell a security subject to the Rule to a new customer, the broker/dealer must obtain suitability information from the customer and make disclosure requirements to the customer. Mutual funds are exempt from this rule.
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Preorganization Subscription
A transaction used by struggling companies to acquire additional capital. This type of transaction is exempt and can not be sold/marketed to more than 10 subscribers/investors.
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Pre-Refunding
The refunding of an existing bond issue prior to a nearby call date or maturity date. A new bond is issued and the proceeds are invested in securities and held in escrow to pay off the previous bond issue.
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Principal Stockholders
Every person who is directly or indirectly the beneficial owner of more than 10% of any class of equity security, other than exempt securities, registered on a national securities exchange. They are classified as "insiders".
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Private Placement
An investment banker sells securities directly to one or a few large investors. The investment banker acts as a middle man, bringing buyer and seller together. A transaction which results from an offer to no more than 10 people in the state during any 12-month period. This type of transaction is exempt from registration.
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Program Trading
Program trading represents trades based on signals from computer programs, usually entered directly from the trader’s computer into the market’s computer system and executed automatically.
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Prospectus
Summarizes the information contained in the registration statement. Must contain all of the material facts in the registration statement, but in shorter form. It must be given to every person solicited to purchase a new issue and to every person who purchases or indicates interest in purchasing such securities. The purpose is to provide information so investors may analyze the investment merits of the security.
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Real Interest Rate
This is found by subtracting the inflation rate from the current interest rate. The real interest rate indicates if investors in interest-bearing securities will receive interest that will equal or exceed the decline in the value of the dollar caused by inflation.
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Red Herring
A preliminary prospectus given to prospective investors during the 20-day waiting period between the filing date of the registration statement and the effective date. It does not contain information such as the public offering price or underwriter's spread.
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Registration Statement
Any security may be registered with the SEC by filing a registration statement. This statement must be signed by the principal executive officer, the principal financial officer, and a majority of the board of directors. It must include all pertinent information concerning the new issue.
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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.
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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.
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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.
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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.
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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.
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Regulation U
Federal Reserve Regulation which covers the amount of credit a bank can extend to a customer to purchase or carry margin securities.
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Rights of Accumulation
This agreement permits reduced sales charges on future purchases of investment company shares, after the investor has reached a new "breakpoints" (dollar amount at which sales charges decline). Breakpoints can be reached through investment and growth of existing investments in a fund.
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SEC Rule 15c3-3 - Customer Protection Rule
Requires the physical segregation of customers' fully paid and excess margin securities, as well as the maintenance of cash reserves. Also requires a broker/dealer to buy in a customer if the customer does not deliver a security, subject of a long sale, within 10 business days after the settlement date.
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Secondary Distribution
The redistribution of shares previously outstanding. Proceeds of the sale are received by the selling stockholders, not the issuing corporation. (This differs from a primary distribution where the issuer receives proceeds.)
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Secondary Market
Trades of securities in which no beneficial interest passes back to the issuer. Customer to customer trades that take place on exchanges and in the OTC markets.
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Securities & Exchange Act of 1934
Extended Federal regulation to all phases of trading in existing securities. Objective is to prevent unfair and inequitable practices and to bring trading on securities exchanges and in over-the-counter market under Federal control. The 1934 Act is primarily focused on the secondary market and those involved.
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Securities Act of 1933
Sometimes referred to as the "Truth in Securities" Act. Basic purpose to make certain the new securities offered to the public are fully and clearly described in the registration statement and prospectus. The 1933 Act is primarily focused on the primary market.
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Self-Regulatory Organization (SRO)
The Maloney Act (1938) amended the 1934 Act by adding Section 15A. This section provided for the regulation of the over-the-counter market by national securities associations registered with the SEC. The NYSE, FINRA, and the MSRB are Self-Regulatory Organizations.
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Stabilization of an Offering
The managing underwriter of a securities offering is permitted to make bids at or below the public offering price in the secondary market while the offering of securities is taking place. This allows the managing underwriter to stabilize the price in the secondary market to better distribute the offering.
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Standby Underwriting
A Stand-By Underwriting takes place when the underwriter agrees to purchase and distribute any part of an issue that is not sold during the course of a Rights Offering, where new securities are offered to existing shareholders through the distribution of rights.
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Straddle
A straddle is a combination involving a put and a call option for the same security, with the same expiration date and at the same strike price. If both options are purchased, it is a "long" straddle, while if both are sold, it is a "short" straddle.
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Subchapter S Corporation
A type of corporation that avoids taxation at the corporate level because it meets certain requirements established by the IRS. One main limitation is the number of shareholders, which must number at or below 100. By meeting requirements, taxes are only levied at the shareholder level, similar to the manner in which partnerships are taxed.
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Tombstone Ad
Tombstone Ad are used to publicize new issues of securities. They identify the security, state the price, and indicate by whom orders will be executed and from whom an offering prospectus may be obtained.
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Telephone Consumer Protection Act
The purpose of this 1991 Federal Act is to protect residential telephone customers from receiving unwanted telephone solicitations. Telephone solicitations may be placed by brokers only between 8:00 am to 9:00 pm local time of the called party. The caller must provide the called party with his identity and a telephone number or address at which the caller may be contacted. If the person called indicates they do not want to be called in the future, the broker/dealer must place his name on a DO NOT CALL LIST. The DO NOT CALL LIST must be maintained permanently by the broker/dealer.
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Underwriting Spread
It is the difference between the public offering price and the proceeds to the issuer in a securities offering. For example, if the public offering price is $15 and the proceeds to the issuer are $13.80, the underwriting spread is $1.20.
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Unregistered Stock
Stock that has never been registered under the 1933 Act. In order to sell these shares legally, they must either be registered or sold under Rule 144.
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Wash Sale
Selling a security at a loss and within a period, beginning 30 days before the sale and ending 30 days after the sale, purchase of the same or substantially the same security. Wash Sales losses done within the 30-day period are disallowed for tax purposes.
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Wasting Asset
A security that will expire in the future and thus loses value over time. Options are wasting assets since they will eventually be worthless. An oil well is also a wasting asset since it will eventually go dry.
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When, As and If Issued Contract (W.I.)
Trading takes place in the security even though it has not yet been issued. For example, a stock trading at $80 a share, goes through a 2:1 split. Trading will begin in shares at $40 when issued.
