Definitions A-O Flashcards
(489 cards)
1
Q
Define: aggressive investment strategy
A
A method of portfolio allocation and management aimed at achieving maximum return. Aggressive investors place a high percentage of their investable assets in equity securities and a far lower percentage in safer debt securities and cash equivalents, and they pursue aggressive policies including margin trading, arbitrage, and option trading. See balanced investment strategy; defensive investment strategy.
2
Q
Define: algorithmic trading
A
Computerized trading using proprietary algorithms. There are two types of algorithmic trading. Execution trading is when an order (often a large order) is executed via an algorithmic trade. The program is designed to get the best possible price. It may split the order into smaller pieces and execute at different times. The second type of algorithmic trading is not executing a set order but looking for small trading opportunities in the market. It is estimated that more than 50% of stock trading volume in the United States is currently being driven by algorithmic trading. Also known as high-frequency trading.
3
Q
Define: all or none order (AON)
A
An order that instructs the Boor broker to execute the entire order in one transaction; if the order cannot be executed in its entirety, it is allowed to expire.
4
Q
Define: alpha
A
alpha The risk-adjusted returns that a portfolio manager generates in excess of the risk-adjusted returns expected by the capital asset pricing model (CAPM). Suppose an index return is 10%; the risk-free rate is 3%, the portfolio beta is 1.5, and the actual return is 25%. According to the CAPM, the portfolio should be expected to return 1.5 times the index after netting out the risk-free rate. This is because the portfolio is 1.5 times riskier than the market. If we take the index return after subtracting the 3% risk-free rate, we get 7%. Multiply that times 1.5 and the measured portfolio should have returned 10.5% for taking extra risk. It actually returned 22% over the risk-free rate giving us an alpha of 11.5.
5
Q
Define: Alternative minimum tax (AMT)
A
alternative minimum tax (AMT) An alternative tax computation that adds certain tax preference items back into adjusted gross income. If the AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are paid. See tax preference item.
6
Q
Define: American depository receipt (ADR)
A
American depositary receipt (ADR) A negotiable certificate representing a given number of shares in a foreign corporation. It is issued by a domestic bank. ADRs are bought and sold in the American securities markets, and are traded in English and U.S. dollars. Syn. American depositary share (ADS).
7
Q
Define: Anti-dilutive covenant
A
anti-dilutive covenant A protective clause found in most convertible issues (preferred stock or debentures) that adjusts the conversion rate for stock splits and/or stock dividends. This ensures that the holder of the convertible will not suffer a dilution in value.
8
Q
Define: appreciation
A
appreciation The increase in an asset’s value.
9
Q
Define: arbitrage
A
arbitrage A legal strategy that generates a guaranteed profit from a transaction. A common form of arbitrage is the simultaneous purchase and sale of the same security in different markets at different prices to lock in a profit. This is not considered market manipulation.
10
Q
Define: arithmetic mean
A
arithmetic mean The average of a set of numbers, such as annual returns on an investment.
11
Q
Define: ask
A
An indication by a trader or a dealer of a willingness to sell a security or a commodity; the price at which an investor can buy from a broker-dealer. Syn. offer. See bid; public offering price; quotation.
12
Q
Define: assessable stock
A
A stock that is issued below its par or stated value. The issuer and/or creditors have the right to assess the shareholder for the deficiency. All stock issued today is nonassessable.
13
Q
Define: asset
A
(1) Anything that an individual or a corporation owns. (2) A balance sheet item expressing what a corporation owns.
14
Q
Define: asset class allocation
A
Dividing an investment portfolio among different asset categories, such as stocks, bonds, cash, and tangible assets such as real estate and precious metals and other commodities. Syn. asset allocation.
15
Q
Define: auction market
A
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an auction market. Syn. double auction market.
16
Q
Define: audited financial statement
A
A financial statement of a program, a corporation, or an issuer (including the profit and loss statement, cash Bow and source and application of revenues statement, and balance sheet) that has been examined and verified by an independent certified public accountant.
17
Q
Define: average basis
A
An accounting method used when an investor has made multiple purchases at different prices of the same security; the method averages the purchase prices to calculate an investor’s cost basis in shares being liquidated. The difference between the average cost basis and the selling price determines the investor’s tax liability. See first in, first out; last in, first out.
18
Q
Define: back-end load
A
A commission or sales fee that is charged when mutual fund shares or variable annuity contracts are redeemed. It declines annually, decreasing to zero over an extended holding period-up to eight years- as described in the prospectus. Syn. contingent-deferred sales load.
19
Q
Define: balanced fund
A
A mutual fund whose stated investment policy is to have at all times some portion of its investment assets in bonds and preferred stock, as well as in common stock, in an attempt to provide both growth and income. See mutual fund.
20
Q
Define: balanced investment strategy
A
A method of portfolio allocation and management aimed at balancing risk and return. A balanced portfolio may combine stocks, bonds, packaged products such as investment companies, DPPs, or REITs, and cash equivalents.
21
Q
Define: balance of payments
A
An international accounting record of all transactions made by one particular country with others during a certain period; it compares the amount of foreign currency the country has taken in with the amount of its own currency it has paid our. See balance of trade.
22
Q
Define: balance of trade
A
The largest component of a country’s balance of payments; it concerns the export and import of merchandise (not services). Debit items include imports, foreign aid, domestic spending abroad, and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy, and foreign investments in the domestic economy. See balance of payments.
23
Q
Define: balance sheet
A
A report of a corporation’s financial condition at a specific time.
24
Q
Define: balance sheet equation
A
A formula stating that a corporation’s assets equal the sum of its liabilities plus shareholders’ equity.
25
Define: bank holding company
A holding company whose primary asset is a commercial bank. See holding company.
26
Define: basis
Another term for yield to maturity (e.g., this bond is selling at a 5.78 basis).
27
Define: basis point
A measure of a bond's yield, equal to 1/100 of 1 o/o of yield. A bond whose yield increases from 5.00% to 5.50% is said to increase by 50 basis points. See point.
28
Define: bear
An investor who acts on the belief that a security or the market is falling or will fall. See bull.
29
Define: bear market
A market in which prices of a certain group of securities are falling or are expected to fall. See bull market.
30
Define: benchmark portfolio
A model portfolio of a large number of assets, such as the S&P 500, against which the performance of a fund or portfolio is measured.
31
Define: beta
A means of measuring the co-movement of the return of a security or a portfolio of securities to the return on the overall market. A beta of 1 indicates that the security's returns will be expected to move in tandem with the market. A beta greater than 1 indicates that the security's returns will be expected to exceed those of the market. A beta less than 1 means returns will be expected to be lower than those of the market. Syn. beta coefficient.
32
Define: bid
An indication by an investor, a trader, or a dealer of a willingness to buy a security; the price at which an investor can sell to a broker-dealer. See offer; public offering price; quotation.
33
Define: Black-Scholes
One of the most popular options pricing models. Appears frequently on the exam as an incorrect choice.
34
Define: block trade
A large trading order, defined as an order that consists of 10,000 or more shares of a given stock or at a total market value of $200,000 or more. Syn. block sale.
35
Define: blue-sky laws
The nickname for state regulations governing the securities industry. The term was coined in 1911 by a Kansas Supreme Court justice who wanted regulation to protect against "speculative schemes that have no more basis than so many feet of blue sky."
36
Define: board of directors
Individuals elected by stockholders to establish corporate management policies. A board of directors decides, among other issues, if and when dividends will be paid to stockholders.
37
Define: bona fide
From the Latin "good faith," something that is
38
Define: call
(1) An option contract giving the owner the right to buy a specified amount of an underlying security at a specified price within a specified time. (2) The act of exercising a call option. See put.
39
Define: callable bond
A type of bond issued with a provision allowing the issuer to redeem the bond before maturity at a predetermined price.
40
Define: callable preferred stock
A type of preferred stock issued with a provision allowing the corporation to call in the stock at a certain price and retire it. See call price; preferred stock.
41
Define: call buyer
An investor who pays a premium for an option contract and receives, for a specified time, the right to buy the underlying security at a specified price. See call writer; put.
42
Define: call date
The date, specified in the prospectus of every callable security, after which the security's issuer has the option to redeem the issue at par or at par plus a premium.
43
Define: call feature
See call provision.
44
Define: call protection
A provision in a bond indenture stating that the issue is noncallable for a certain period (e.g., 5 years or 10 years) after the original issue date. See call provision.
45
Define: call provision
The written agreement between an issuer and its bondholders or preferred stockholders giving the issuer the option to redeem its senior securities at a specified price before maturity and under certain conditions. Syn. call feature.
46
Define: call risk
The potential for a bond to be called before maturity, leaving the investor without the bond's current income. Because this is more likely to occur during times of falling interest rates, the investor may not be able to reinvest his principal at a comparable rate of return.
47
Define: call writer
An investor who receives a premium and takes on, for a specified time, the obligation to sell the underlying security at a specified price at the call buyer's discretion. See call buyer; put.
48
Define: capital appreciation
An increase in an asset's market price.
49
Define: capital asset
All tangible property, including securities, real estate, and other property, held for the long term.
50
Define: capital asset pricing model (CAPM)
A securities market investment theory that attempts to derive the expected return on an asset on the basis of the asset's systematic risk.
51
Define: capital gain
The profit realized when a capital asset is sold for a higher price than the purchase price. See capital loss; long-term gain.
52
Define: capitalization
The sum of a corporation's long-term debt, stock, and surpluses. Syn. invested capital. See capital structure.
53
Define: capitalization ratio
A measure of an issuer's financial status that calculates the value of its bonds, preferred stock, or common stock as a percentage of its total capitalization.
54
Define: capital loss
The loss incurred when a capital asset is sold for a price lower than the purchase price. See capital gain; long-term loss.
55
Define: capital market
The segment of the securities market that deals in instruments with more than one year to maturity-that is, long-term debt and equity securities. In contrast, the money market is the raising of short-term capital such as Treasury bills and commercial paper.
56
Define: capital stock
All of a corporation's outstanding preferred stock and common stock, listed at par value.
57
Define: capital structure
The composition of long-term funds (equity and debt) a corporation has as a source for financing. See capitalization.
58
Define: capital surplus
The money a corporation receives in excess of the stated value of stock at the time of first sale. Syn. paid-in capital; paid-in surplus. See par.
59
Define: capping
An illegal form of market manipulation that attempts to keep the price of a subject security from rising. It is used by those with a short position. See pegging.
60
Define: cash account
An account in which the customer is required by the SEC's Regulation T to pay in full for securities purchased not later than two days after the standard payment period set by industry practice codes. Syn. special cash account.
61
Define: cash dividend
Money paid to a corporation's stockholders out of the corporation's current earnings or accumulated profits. The board of directors must declare all dividends.
62
Define: cash equivalent
A security that can be readily converted into cash. Examples include Treasury bills, certificates of deposit, and money market instruments and funds.
63
Define: cash flow
The money received by a business minus the money paid our. Cash flow is also equal to net income plus depreciation or depletion.
64
Define: CBOE
See Chicago Board Options Exchange.
65
Define: CD
See negotiable certificate of deposit.
66
Define: cease and desist order
Used by the Administrator when it appears that a registered person has or is about to commit a violation. May be issued with or without a prior hearing.
67
Define: certificate of deposit (CD)
A traditional CD pays a fixed interest rate over a specific period of time. When that term ends, you can withdraw your money or roll it into another CD. These are insured up to $250,000 by the FDIC and are considered the best method of preservation of capital. See negotiable certificate of deposit.
68
Define: chartist
A securities analyst who uses charts and graphs of the past price movements of a security to predict its future movements. Syn. technician. See technical analysis.
69
Define: Chicago Board Options Exchange (CBOE)
The self-regulatory organization with jurisdiction over all writing and trading of standardized options and related contracts listed on that exchange. Also, the first national securities exchange for the trading of listed options.
70
Define: Chicago Stock Exchange
Registered stock exchange located in Chicago's downtown "loop." Referred to with the initials CHX.
71
Define: Chinese Wall
A descriptive name for the division within a brokerage firm that prevents insider information from passing from corporate advisers to investment traders, who could make use of the information to reap illicit profits. The preferred term today is information barriers. See Insider Trading and Securities Fraud Enforcement Act of 1988.
72
Define: churning
Excessive trading in a customer's account by an agent who ignores the customer's interests and seeks only to increase commissions; violates NASAA's policies on unethical business practices. Syn. overtrading.
73
Define: CHX
See Chicago Stock Exchange.
74
Define: Class A share
A class of mutual fund share issued with a front-end sales load. A mutual fund offers different classes of shares to allow investors to choose the type of sales charge they will pay. Related item(s): Class B share; Class C share; front-end load.
75
Define: Class B share
A class of mutual fund share issued with a back-end load. A mutual fund offers different classes of shares to allow investors to choose the type of sales charge they will pay. Related item(s): back-end load; Class A share; Class C share.
76
Define: Class C share
A class of mutual fund share issued with a level Load. A mutual fund offers different classes of shares to allow investors to choose the type of sales charge they will pay. Related item(s): back-end load; Class A share; Class B share.
77
Define: closed-end investment company
An investment company that issues a fixed number of shares in an actively managed portfolio of securities. The shares may be of several classes; they are traded in the secondary marketplace, either on a stock exchange or over the counter. The market price of the shares is determined by supply and demand and not by net asset value. Syn. publicly traded fund; closed-end management company. See mutual fund.
78
Define: closing purchase
An options transaction in which the seller buys back an option in the same series; the two transactions effectively cancel each other out and the position is Liquidated. See opening purchase.
79
Define: CMO
See collateralized mortgage obligation.
80
Define: coincident indicator
A measurable economic factor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy. Examples include nonagricultural employment, personal income, and industrial production. See lagging indicator; leading indicator.
81
Define: collateral
Certain assets set aside and pledged to a lender for the duration of a Loan. If the borrower fails to meet obligations to pay principal or interest, the lender has claim to the assets.
82
Define: collateralized mortgage obligation (CMO)
A mortgage-backed corporate security. These issues attempt to return interest and principal at a predetermined rate.
83
Define: collateral trust bond
A secured bond backed by stocks or bonds of another issuer. The collateral is held by a trustee for safekeeping. Syn. collateral trust certificate.
84
Define: collateral trust certificate
See collateral trust bond.
85
Define: combination privilege
A benefit offered by a mutual fund whereby the investor may qualify for a sales charge breakpoint by combining separate investments in two or more mutual funds under the same management.
86
Define: commercial paper
An unsecured, short-term promissory note issued by a corporation for financing accounts receivable and inventories. It is usually issued at a discount reflecting prevailing market interest rates. Maturities range up to nine months.
87
Define: commingling
The combining by a brokerage firm of one customer's securities with another customer's securities and pledging them as joint collateral for a bank loan; unless authorized by the customers, this violates SEC Rule 15c2-1.
88
Define: commission
A service charge an agent assesses in return for arranging a security's purchase or sale. A commission must be fair and reasonable, considering all the relevant factors of the transaction. Syn. sales charge. See markup.
89
Define: common stock
A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. See equity; preferred stock.
90
Define: complex trust
A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries.
91
Define: conduit theory
A means for an investment company to avoid taxation on net investment income distributed
92
Define: to shareholders.
If a mutual fund acts as a conduit for the distribution of net investment income, it may qualify as a regulated investment company and be taxed only on the income the fund retains. Syn. pipeline theory.
93
Define: confirmation
A printed document that states the trade date, settlement date, and money due from or owed to a customer. It is sent or given to the customer on or before the settlement date.
94
Define: constant dollar plan
A formula method of investing that attempts to maintain a fixed dollar, rather than ratio, amount in a specific asset class. Periodically, the account is reviewed and the specified asset class is either sold or purchased in order to get to the fixed dollar level.
95
Define: constant ratio plan
A formula method of investing that contemplates maintaining a fixed ratio, rather than dollar amount, between specific asset classes in the portfolio. Periodically, the account is reviewed and the specified asset class is either sold or purchased in order to get to the fixed ratio level.
96
Define: Consumer Price Index (CPI)
A measure of price changes in a «market basket" of consumer goods and services used to identify periods of inflation or deflation.
97
Define: consumption
A term used by economists to refer to the purchase by household units of newly produced goods and services.
98
Define: contraction
A period of general economic decline, one of the business cycle's four stages. See business cycle.
99
Define: contributory plan
A retirement plan to which both the employee and the employer make contributions. See noncontributory plan.
100
Define: control person
(1) A director or an officer of an issuer. (2) A stockholder who owns more than 10% of any class of a corporation's outstanding securities. (3) Spouse or other immediate family of any of the previous. Under the Investment Company Act of 1940, a control person owns more than 25% of the voting securities and, under the Investment Advisers Act of 1940, it is 25% or more. See insider.
101
Define: control security
Any security owned by a director or an officer of the issuer or by a stockholder who owns more than 10% of any class of a corporation's outstanding securities. Who owns a security, not the security itself, determines whether it is a control security.
102
Define: conversion parity
Two securities, one of which can be converted into the other, of equal dollar value. A convertible security holder can calculate parity to help decide whether converting would lead to gain or loss.
103
Define: conversion price
The dollar amount of a convertible security's par value that is exchangeable for one share of common stock.
104
Define: conversion privilege
A feature the issuer adds to a security that allows the holder to change the security into shares of common stock. This makes the security attractive to investors and, therefore, more marketable. See convertible bond; convertible preferred stock.
105
Define: conversion rate
See conversion ratio.
106
Define: conversion ratio
The number of shares of common stock per par value amount that the holder would receive for converting a convertible bond or preferred share. Syn. conversion rate.
107
Define: convertible bond
A debt security, usually in the form of a debenture, that can be exchanged for equity securities of the issuing corporation at specified prices or rates. See debenture.
108
Define: convertible preferred stock
An equity security that can be exchanged for common stock at specified prices or rates. Dividends may be cumulative or noncumulative. See cumulative preferred stock; noncumulative preferred stock; preferred stock.
109
Define: convexity
The most accurate way of indicating a debt security's sensitivity to changes in interest rates.
110
Define: cooling-off period
The period (a minimum of 20 days) between a registration statement's filing date with the SEC and the registration's effective date. In practice, the period varies in length.
111
Define: corporate account
An account held in a corporation's name. The corporate agreement, signed when the account is opened, specifies which officers are authorized to trade in the account. In addition to standard margin account documents, a corporation must provide a copy of its charter and bylaws authorizing a margin account.
112
Define: corporate bond
A debt security issued by a corporation. A corporate bond typically has a par value of $1,000, its interest is taxable, and it has a term maturity.
113
Define: corporation
The most common form of business organization, in which the organization's total worth is divided into shares of stock, each share representing a unit of ownership. A corporation is characterized by a continuous life span and its owners' limited liability.
114
Define: correlation
The extent to which two or more securities or portfolios move together. The correlation coefficient is a number that ranges from -1 to + 1. A perfect correlation would have a coefficient of+ 1, whereas two securities that move in total opposite directions would have a -1. A coefficient of 0 would reflect a totally random correlation between the two securities.
115
Define: cost basis
The price paid for an asset, including any commissions or fees, used to calculate capital gains or losses when the asset is sold.
116
Define: coupon yield
See nominal yield.
117
Define: covered call writer
An investor who sells a call option while owning the underlying security or some other asset that guarantees the ability to deliver if the call is exercised.
118
Define: covered security
See federal covered security.
119
Define: CPI
See Consumer Price Index.
120
Define: credit risk
The degree of probability that the issuer of a debt security will default in the payment of either principal or interest. Securities issued by the U.S. government are considered to have virtually no credit risk. Note: credit risk only refers to debt securities--common stock has no credit risk because there is no debt obligation to the owner. Syn. default risk; financial risk.
121
Define: credit spread
(1) A position established when the premium received for the option sold exceeds the premium paid for the option bought. See debit spread (2) The difference in yields between two securities. See yield spread.
122
Define: cumulative preferred stock
An equity security that offers the holder any unpaid dividends in arrears. These dividends accumulate and must be paid to the cumulative preferred stockholder before any dividends can be paid to the common stockholders. See noncumulative preferred stock; preferred stock.
123
Define: current assets
Cash and other assets that are expected to be converted into cash within the next 12 months. Examples include such liquid items as cash and equivalents, accounts receivable, inventory, and prepaid expenses.
124
Define: current liabilities
A corporation's debt obligations due for payment within the next 12 months. Examples include accounts payable, accrued wages payable, and current long-term debt.
125
Define: current market value (CMV)
The worth of the securities in an account. The market value of listed securities is based on the closing prices on the previous business day. Syn. long market value. See market value.
126
Define: current ratio
A measure of a corporation's liquidity; that is, its ability to transfer assets into cash to meet current short-term obligations. It is calculated by dividing total current assets by total current liabilities. Syn. working capital ratio.
127
Define: current yield
The annual rate of return on a security, calculated by dividing the interest or dividends paid by the security's current market price. See bond yield.
128
Define: custodial account
An account in which a custodian enters trades on behalf of the beneficial owner, often a minor. See custodian.
129
Define: custodian
An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another. Mutual funds have custodian banks responsible for safeguarding certificates and performing clerical duties.
130
Define: custody
Maintaining physical possession of a customer's assets. State-registered investment advisers must notify the Administrator if they intend to cake custody, assuming the state law permits such.
131
Define: customer
Any person who opens a trading account with a broker-dealer. A customer may be classified in terms of account ownership, trading authorization, payment method, or types of securities traded.
132
Define: customer statement
A document showing a customer's trading activity, positions, and account balance. The SEC requires that customer statements be sent quarterly, but customers generally receive them monthly.
133
Define: cyclical industry
A fundamental analysis term for an industry that is sensitive to the business cycle and price changes. Most cyclical industries produce durable goods, raw materials, and heavy equipment.
134
Define: dark pool
This term refers to an alternative trading system (ATS) where a supply of shares exists that is not displayed for all to see. Dark pools are akin to members-only trading platforms for those desiring to execute larger trades without their interest being made known through an open book. A dark pool provides anonymity to investors and sensitivity of share prices to movement when any sizable demand appears.
135
Define: day order
An order that is valid only until the close of trading on the day it is entered; if it is not executed by the close of trading, it is canceled.
136
Define: dealer
(1) An individual or a firm engaged in the business of buying and selling securities for its own account, either directly or through a broker. (2) The role of a firm when it acts as a principal and charges the customer a markup or markdown. Syn. principal. See broker; broker-dealer.
137
Define: debenture
A debt obligation backed by the issuing corporation's general credit. Syn. unsecured bond.
138
Define: debit spread
A position established when the premium paid for the option bought exceeds the premium received for the option sold. See credit spread.
139
Define: debt security
A security representing an investor's loan to an issuer, such as a corporation, a municipality, the federal government, or a federal agency. In return for the loan, the issuer promises to repay the debt on a specified date and to pay interest. See equity security.
140
Define: debt-to-equity ratio
The ratio of total long-term debt to total stockholders' equity; it is used to measure leverage.
141
Define: decumulation
Disposal of something accumulated. Investors spend much of their working years accumulating for retirement; taking the funds out is decumulation.
142
Define: default
The failure to pay interest or principal promptly when due.
143
Define: default risk
See credit risk.
144
Define: defensive industry
A fundamental analysis term for an industry that is relatively unaffected by the business cycle. Most defensive industries produce nondurable goods for which demand remains steady throughout the business cycle; examples include the food industry and utilities.
145
Define: defensive investment strategy
A method of portfolio allocation and management aimed at minimizing the risk of losing principal. Defensive investors place a high percentage of their investable assets in bonds, cash equivalents, and stocks chat are less volatile than average.
146
Define: deferred annuity
An annuity contract chat delays payment of income, installments, or a lump sum until the investor elects to receive it.
147
Define: deferred compensation plan
A nonqualified retirement plan whereby the employee defers receiving current compensation in favor of a larger payout at retirement (or in the case of disability or death).
148
Define: deficiency letter
The SEC's notification of additions or corrections chat a prospective issuer must make to a registration statement before the SEC will clear the offering for distribution.
149
Define: defined benefit plan
A qualified retirement plan chat specifies the total amount of money chat the employee will receive at retirement.
150
Define: defined contribution plan
A qualified retirement plan chat specifies the amount of money that the employer will contribute annually to the plan.
151
Define: deflation
A persistent and measurable fall in the general level of prices. See inflation.
152
Define: delta
One of the four Greeks used by options analysts. An option's delta is the rate of change of the price of the option with respect to its underlying security's price. The delta of an option ranges in value from O to 1 for calls (O to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price.
153
Define: demand
A consumer's desire and willingness to pay for a good or service. See supply.
154
Define: demand deposit
Demand deposit (DDA) refers to a type of account held at banks and financial institutions that may be withdrawn at any time by the customer. The majority of such demand deposit accounts are checking accounts, although many now include savings accounts in the definition as well.
155
Define: demutualization
Demutualization is the process through which a member-owned company becomes shareholder-owned. Historically, this has usually been done by mutual life insurance companies (think MetLife and Prudential), but, in recent years has been done by other member-owned entities such as the New York Stock Exchange.
156
Define: depreciation
(1) A tax deduction chat compensates a business for the cost of certain tangible assets. (2) A decrease in the value of a particular currency relative to other currencies.
157
Define: depreciation expense
A bookkeeping entry of a noncash expense charged against earnings to recover the cost of an asset over its useful life.
158
Define: depression
A prolonged period of general economic decline.
159
Define: derivative
An investment vehicle, the value of which is based on another security's value. Futures contracts, forward contracts, and options are among the most common
160
Define: types of derivatives.
Institutional investors generally use derivatives to increase overall portfolio return or to hedge portfolio risk.
161
Define: designated market maker (DMM)
See specialist.
162
Define: dilution
A reduction in earnings per share of common stock. Dilution occurs through the issuance of additional shares of common stock and the conversion of convertible securities. See anti-dilutive covenant.
163
Define: directed brokerage
The ability of an investment adviser or a client to determine broker-dealers to be used in the execution of transactions in their advisory accounts. See soft dollar compensation.
164
Define: direct participation program (DPP)
A business organized so as to pass all income, gains, losses, and tax benefits to its owners, the investors; the business is usually structured as a limited partnership. Examples include oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, and S corporation offerings.
165
Define: discount
The difference between the lower price paid for a security and the security's face amount at issue.
166
Define: discount bond
A bond that sells at a lower price than its face value. See par.
167
Define: discount rate
The interest rate charged by the 12 Federal Reserve Banks for short-term loans made to member banks.
168
Define: discounted cash flow
Discounted cash Bow (DCF) is a model or method of valuation in which future cash Bows are discounted back co a present value using the time-value of money. An investment's worth is equal to the present value of all projected future cash Bows.
169
Define: discretion
The authority given to someone other than an account's beneficial owner to make investment decisions for the account concerning the security, the number of shares or units, and whether to buy or sell. The authority to decide only timing or price does not constitute discretion. See limited power of attorney.
170
Define: discretionary account
An account in which the customer has given the agent authority to enter transactions at the representative's discretion.
171
Define: disgorge(ment)
In legal usage, the forced giving up of profits made through illegal activity, most commonly insider trading.
172
Define: disposable income (DI)
The sum that people divide between spending and personal savings. See personal income.
173
Define: distributable net income (DNI)
Taxable income from a trust that determines the amount of income that may be taxable to beneficiaries.
174
Define: diversification
A risk management technique that mixes a wide variety of investments within a portfolio, thus minimizing the impact of any one security on overall portfolio performance.
175
Define: diversified common stock fund
A mutual fund that invests its assets in a wide range of common stocks. The fund's objectives may be growth, income, or a combination of both. See growth fund; mutual fund.
176
Define: dividend
A distribution of a corporation's earnings. Dividends may be in the form of cash, stock, or property. The board of directors must declare all dividends. See cash dividend; dividend yield; stock dividend.
177
Define: dividend discount model
The simplest model for valuing equity is the dividend discount model-the value of a stock is the present value of expected dividends on it. Syn, DDM.
178
Define: dividend exclusion rule
An IRS provision that permits a corporation to exclude from its taxable income 70% of dividends received from domestic preferred and common stocks. The Tax Reform Act of 1986 repealed the dividend exclusion for individual investors.
179
Define: dividend growth model
A valuation method which cakes into consideration dividend per share and its expected growth. This model assumes that dividends grow at the same rate forever. Therefore, it is most commonly used to value companies belonging to for mature and stable industries, having steady dividend growth. It will show a higher valuation than the DOM. Syn. DGM.
180
Define: dividend payout ratio
A measure of a corporation's policy of paying cash dividends, calculated by dividing the dividends paid on common stock by the net income available for common stockholders. The ratio is the complement of the retained earnings ratio.
181
Define: dividends per share
The dollar amount of cash dividends paid on each common share during one year.
182
Define: dividend reinvestment plan
Frequently referred to as a DRIP, the plan allows shareholders the option of having cash dividends automatically reinvested in shares of the issuer's stock, frequently at a discounted price and/or without commissions. In most plans, additional investments are permitted.
183
Define: dividend yield
The annual rate of return on a common or preferred stock investment. The yield is calculated by dividing the annual dividend by the stock's purchase price. See current yield; dividend.
184
Define: DNI
See distributable net income.
185
Define: Dodd-Frank Bill
The general term by which the Wall Street Reform and Consumer Protection Act of 2010 is known. Considered to be the most significant legislation impacting the securities industry since the 1930s.
186
Define: dollar cost averaging
A system of buying mutual fund shares in fixed dollar amounts at regular fixed intervals, regardless of the share's price. The investor purchases more shares when prices are low and fewer shares when prices are high, thus lowering the average cost per share over time.
187
Define: donor
A person who makes a gift of money or securities to another. Once the gift is donated, the donor gives up all rights to it. Gifts of securities to minors under the Uniform Gift to Minors Act provide tax advantages to the donor. See Uniform Gift to Minors Act.
188
Define: Dow Jones averages
The most widely quoted and oldest measures of change in stock prices. Each of the four averages is based on the prices of a limited number of stocks in a particular category. See average; Dow Jones Industrial Average.
189
Define: Dow Jones Composite Average (DJCA)
A market indicator composed of the 65 stocks that make up the Dow Jones Industrial, Transportation, and Utilities Averages. See average; Dow Jones Industrial Average; Dow Jones Transportation Average; Dow Jones Utilities Average.
190
Define: Dow Jones Industrial Average (DJIA)
The most widely used market indicator, composed of 30 large, actively traded issues of industrial stocks.
191
Define: Dow Jones Transportation Average (DJTA)
A market indicator composed of 20 transportation stocks. See average; Dow Jones Composite Average; Dow Jones Industrial Average; Dow Jones Utilities Average.
192
Define: Dow Jones Utilities Average (DJUA)
A market indicator composed of 15 utilities stocks. See average; Dow Jones Composite Average; Dow Jones Industrial Average; Dow Jones Transportation Average.
193
Define: DRIP
See dividend reinvestment plan.
194
Define: durable power of attorney
A document giving either full or limited authority to a third party that survives the mental or physical incompetence (but not death) of the grantor. See full power of attorney; limited power of attorney.
195
Define: duration
Duration is an approximate measure of a bond's price sensitivity to changes in interest rates. Duration can be used to compare bonds with different issue and maturity dates, coupon rates, and yields to maturity. The duration of a bond is expressed as a number of years from its purchase date.
196
Define: EAFE
The EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, but not the U.S. or Canada.
197
Define: earned income
Income derived from active participation in a trade or business, including wages, salary, tips, commissions, and bonuses. Also included is alimony received. One must have earned income in order to make contributions to an IRA. See portfolio income; unearned income.
198
Define: earned surplus
See retained earnings.
199
Define: earnings momentum
A term used to describe that earnings are growing at an increasing rate. That is, if they grew at a rate of 10% in the first quarter, 11 % in the second quarter and 14% in the most recent quarter, this shows earnings increasing at an accelerating rate. That is positive earnings momentum. Used by those following a growth style of portfolio management.
200
Define: earnings multiplier
Another term for the price-to-earning (PE) ratio. The earnings multiplier is the price of the stock divided by its earnings per share.
201
Define: earnings per share (EPS)
A corporation's net income available for common stock divided by its number of shares of common stock outstanding.
202
Define: economically targeted investing (ETI)
A form of impact investing in investments selected for the economic benefits they create apart from their investment return to the employee benefit plan.
203
Define: effective date
The date the registration of an issue of securities becomes effective, allowing the underwriters to sell the newly issued securities to the public and confirm sales to investors who have given indications of interest.
204
Define: effective tax rate
The overall rate paid on a taxpayer's total taxable income. It will always be less than the marginal tax rate. See marginal tax rate.
205
Define: efficient market theory
A theory based on the premise that the stock market processes information efficiently. The theory postulates that, as new information becomes known, it is reflected immediately in the price of a stock and therefore stock prices represent fair prices. There are three forms of this theory: weak, semi strong, and strong, depending upon the amount of information available. Syn. Efficient market hypothesis.
206
Define: employee stock options
A form of employee compensation where the employing corporation makes available the opportunity for employees to acquire the issuer's stock. There are two forms: nonqualified (NSOs) and incentive (ISOs).
207
Define: enjoined
This term includes being subject co a mandatory injunction, prohibitory injunction, preliminary injunction, or a temporary restraining order issued by a court of competent jurisdiction.
208
Define: entangled
A social media term meaning that a securities firm has participated in the development of content on a third-party site to which it publishes links.
209
Define: environmental, social, and governance {ESG)
A form of impact investing. It is a set of standards for a company's operations that socially conscious investors use to screen investments.
210
Define: equity
Common and preferred stockholders' ownership interests in a corporation. See common stock; preferred stock.
211
Define: equity financing
Raising money for working capital or for capital expenditures by selling common or preferred stock to individual or institutional investors. In return for the money paid, the investors receive ownership interests in the corporation. See debt financing.
212
Define: equity security
A security representing ownership in a corporation or another enterprise. Examples of equity securities include: common and preferred stock; interests in a limited partnership or joint venture; securities that carry the right to be traded for equity securities, such as convertible bonds, rights, and warrants; and put and call options on equity securities.
213
Define: Eurobond
A long-term debt instrument of a government or corporation that is denominated in the currency of the issuer's country but is issued and sold in a different country.
214
Define: Eurodollar
U.S. currency held in banks outside the United States.
215
Define: exchange-listed security
A security that has met certain requirements and has been admitted to full trading privileges on a stock exchange. The NYSE and regional exchanges set listing requirements for volume of shares outstanding, corporate earnings, and other characteristics.
216
Define: exchange privilege
A feature offered by a mutual fund allowing an individual to transfer an investment in one fund to another fund under the same sponsor without incurring an additional sales charge. Syn. conversion privilege.
217
Define: exchange traded fund
An investment company originally designed to track a specific index chat is traded on a stock exchange. Rather than basing the price on NAV, the ETF's market price is constantly changing as does the price of any other listed stock. ETFs may be purchased on margin and sold short. Although most ETFs still track indexes, there are a number of ETFs that are actively managed. Syn. ETF.
218
Define: executor, (f. executrix)
A person given fiduciary authorization to manage the affairs of a decedent's estate. An executor's authority is established by the decedent's last will.
219
Define: exempt reporting adviser
ERAs are advisers that are exempt from registration relying on either the venture capital fund adviser or the private fund adviser exemption. Although exempt from registration, an ERA is subject to certain reporting, recordkeeping, and other obligations.
220
Define: exempt security
A security exempt from the registration requirements (although not from the antifraud requirements) of the Securities Act of 1933 or the Uniform Securities Act. Examples include U.S. government securities and municipal securities.
221
Define: exempt transaction
A transaction that does not trigger a state's registration and advertising requirements under the Uniform Securities Act. Examples of exempt transactions include: non-issuer transactions in outstanding securities (normal market trading); transactions with financial institutions; unsolicited transactions; and private placement transactions. No transaction is exempt from the Uniform Securities Act's antifraud provisions
222
Define: exercise price
The cost per share at which an option or a warrant holder may buy or sell the underlying security. Syn. strike price.
223
Define: expansion
A period of increased business activity throughout an economy; one of the four stages of the business cycle. Syn. recovery. See business cycle.
224
Define: expansionary policy
A monetary policy that increases the money supply, usually with the intention of lowering interest rates and combating deflation.
225
Define: expense ratio
A ratio for comparing a mutual fund's efficiency by dividing the fund's expenses by its net assets.
226
Define: face value
See par.
227
Define: Fannie Mae
See Federal National Mortgage Association.
228
Define: Farm Credit Administration (FCA)
The government agency that coordinates the activities of the banks in the Farm Credit System. See Farm Credit System.
229
Define: Farm Credit System (FCS)
An organization of 37 privately owned banks that provide credit services to farmers and mortgages on farm property. Included in the system are the Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives. See Federal Intermediate Credit Bank.
230
Define: federal covered adviser
As defined by the NSMIA of 1996, either an investment adviser registered with the SEC or excluded from the definition of investment adviser by the Investment Advisers Act of 1940. Under Dodd-Frank, these advisers registering with the SEC must generally meet a threshold of $100 million or more in assets under management.
231
Define: Federal covered security
Under the NSMIA of 1996, a new definition was created: covered security, generally referred to as federal covered security on the exam. State securities registration requirements were preempted with respect to covered securities, other than the ability to require notice filing, particularly in the case of registered investment companies. The most tested federal covered securities include those listed on the major U.S. exchanges and Nasdaq as well as investment companies registered with the SEC and securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 (private placements).
232
Define: Federal Deposit Insurance Corporation {FDIC)
The government agency that provides deposit insurance for member banks and prevents bank and thrift failures.
233
Define: federal funds
The reserves of banks and certain other institutions greater than the reserve requirements or excess reserves. These funds are available immediately.
234
Define: federal funds rate
The interest rate charged by one institution lending federal funds to another.
235
Define: Federal Home Loan Bank {FHLB)
A government-regulated organization that operates a credit reserve system for the nation's savings and loan institutions.
236
Define: Federal Home Loan Mortgage Corporation {FHLMC)
A publicly traded corporation that promotes the nationwide secondary market in mortgages by issuing mortgage-backed pass-through debt certificates. Syn. Freddie Mac.
237
Define: Federal Intermediate Credit Bank {FICB)
One of 12 banks that provide short-term financing to farmers as part of the Farm Credit System.
238
Define: Federal National Mortgage Association {FNMA)
A publicly held corporation that purchases conventional mortgages and mortgages from government agencies, including the Federal Housing Administration, Department of Veterans Affairs, and Farmers Home Administration. Syn. Fannie Mae.
239
Define: Federal Open Market Committee {FOMC)
A committee that makes decisions concerning the Fed's operations to control the money supply.
240
Define: Federal Reserve Board {FRB)
A seven-member group that directs the operations of the Federal Reserve System. The President appoints board members, subject to Congressional approval.
241
Define: Federal Reserve System
The central bank system of the United States. Its primary responsibility is to regulate the flow of money and credit. The system includes 12 regional banks, 24 branch banks, and hundreds of national and state banks. Syn. Fed.
242
Define: fiduciary
A person legally appointed and authorized to hold assets in trust for another person and manage those assets for that person's benefit.
243
Define: filing date
The day on which an issuer submits to the SEC the registration statement for a new securities issue.
244
Define: fill-or-kill order {FOK)
An order that instructs the floor broker to fill the entire order immediately; if the entire order cannot be executed immediately, it is canceled.
245
Define: final prospectus
The legal document that states a new issue security's price, delivery date, and underwriting spread, as well as other material information. It must be given to every investor who purchases a new issue of registered securities. Syn. prospectus.
246
Define: final order
A term used in both state and federal law to refer to a decision rendered by a regulatory body. The final order may result in a suspension, revocation, or denial of registration. It is analogous to the judge passing sentence in a trial.
247
Define: Financial Industry Regulatory Authority {FINRA)
Organized in July 2007 as a joint effort of NASD and the NYSE to harmonize regulation in the securities industry.
248
Define: financial risk
See credit risk.
249
Define: FINRA
The acronym for the Financial Industry Regulatory Authority, the result of the cooperative effort of NASD and the NYSE to harmonize regulation in the securities industry.
250
Define: firm quote
The actual price at which a trading unit of a security (such as 100 shares of stock or five bonds) may be bought or sold. All quotes are firm quotes unless otherwise indicated.
251
Define: first in, first out (FIFO)
An accounting method used to assess a company's inventory, in which it is assumed that the first goods acquired are the first to be sold. The same method is used by the IRS to determine cost basis for tax purposes. See average basis; last in, first out.
252
Define: fiscal policy
The federal tax and spending policies set by Congress or the President. These policies affect tax rates, interest rates, and government spending in an effort to control the economy. See monetary policy.
253
Define: fiscal year
The term used to describe an accounting year that ends other than December 31st (calendar year accounting). See calendar year.
254
Define: fixed annuity
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until
255
Define: the annuitant dies.
The insurance company guarantees both earnings and principal. Syn. fixed dollar annuity; guaranteed dollar annuity.
256
Define: fixed asset
A tangible, physical property used in the course of a corporation's everyday operations, including buildings, equipment, and land.
257
Define: flat yield curve
A chart showing the yields of bonds with short maturities as equal to the yields of bonds with long maturities. Syn. even yield curve. See inverted yield curve; normal yield curve; yield curve.
258
Define: flow-through
A term that describes the way income, deductions, and credits resulting from the activities of a business are applied to individual taxes and expenses as though each incurred the income and deductions directly. See limited partnership.
259
Define: FNMA
See Federal National Mortgage Association.
260
Define: FOK
See fill-or-kill order.
261
Define: FOMC
See Federal Open Market Committee.
262
Define: foreign currency
Money issued by a country other than the one in which the investor resides. Options and futures contracts on numerous foreign currencies are traded on U.S. exchanges.
263
Define: foreign exchange rate
The price of one country's currency in terms of another currency. Syn. exchange rate.
264
Define: Form 706
The IRS form used for the computation of estate tax. It must be 6led within nine months of death unless an extension has been obtained.
265
Define: Form 709
The United States Gift (and Generation-Skipping Transfer) Tax Return is filed on Form 709.
266
Define: Form 1040
The IRS form used to file individual income tax. Schedule C of the Form I 040 is used to report business income for sole proprietorships.
267
Define: Form 1041
The IRS form used by estates and trusts to report their income for tax purposes.
268
Define: Form 1065
The information return filed by a partnership or LLC. Because income and losses flow through to owners, the entity pays no tax.
269
Define: Form 1120 and 1120S
The tax returns filed by corporations. The "S" is for an S corporation.
270
Define: Form D
The SEC form required to be filed when engaging in a Regulation D private placement.
271
Define: forward contract
A forward contract is a direct commitment between one buyer and one sel1er for a specific commodity. Because forward contracts are direct obligations between a specific buyer and seller (unlike futures and options, they are not standardized), they are not easily transferred and are considered illiquid.
272
Define: forward pricing
The valuation process for mutual fund shares, whereby an order to purchase or redeem shares is executed at the price determined by the portfolio valuation calculated after the order is received. Portfolio valuations occur at least once per business day.
273
Define: fractional share
A portion of a whole share of stock. Mutual fund shares are frequently issued in fractional amounts. Fractional shares used to be generated when corporations declared stock dividends, merged, or voted to split stock, but today it is more common for corporations to issue the cash equivalent of fractional shares.
274
Define: fraud
The deliberate concealment, misrepresentation, or omission of material information or the truth, so as to deceive or manipulate another party for unlawful or unfair gain.
275
Define: FRB
See Federal Reserve Board.
276
Define: Freddie Mac
See Federal Home Loan Mortgage Corporation.
277
Define: front-end load
A mutual fund commission or sales fee that is charged at the time shares are purchased. The load is added to the share's net asset value when calculating the public offering price.
278
Define: front running
The prohibited practice of entering an order for the benefit of a firm or a securities professional before entering customer orders.
279
Define: Full Disclosure Act
See Securities Act of 1933.
280
Define: full power of attorney
A written authorization for someone other than an account's beneficial owner to make deposits and withdrawals and to execute trades in the account. See limited power of attorney; durable power of attorney.
281
Define: full trading authorization
An authorization, usually provided by a full power of attorney, for someone other than the customer to have full trading privileges in an account. See limited trading authorization.
282
Define: fundamental analysis
A method of evaluating securities by attempting to measure the intrinsic value of a particular stock. Fundamental analysts study the overall economy, industry conditions, and the financial condition and management of particular companies. See technical analysis.
283
Define: futures
Futures contracts are exchange-traded obligations for a specific commodity. A buyer goes long, or establishes a long position, and is obligated to take delivery of the commodity on the future date specified. A seller goes short, or establishes a short position, and is obligated to deliver the commodity on the specified future date. If the seller does not own the commodity, his potential loss is unlimited because he has promised delivery and must pay any price to acquire the commodity to deliver. Futures may be highly leveraged.
284
Define: future value
The amount to which a current deposit will grow at a given rate of compound interest to a specific date in the future.
285
Define: GAAP
The acronym for generally accepted accounting principles, the standard method used in the United States by professional accountants.
286
Define: gamma
One of the four Greeks used by options analysts. An option's gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price.
287
Define: CDP
See gross domestic product.
288
Define: general obligation bond (CO)
A municipal debt issue backed by the full faith, credit, and taxing power of the issuer for payment of interest and principal. Syn. full faith and credit bond. See revenue bond.
289
Define: general partnership (GP)
An association of two or more entities formed to conduct a business jointly. The partnership does not require documents for formation, and the general partners are jointly and severally liable for the partnership's liabilities. See limited partnership.
290
Define: generation skipping trust
A form of bypass trust that is designed to have assets pass to grandchildren (or great-grandchildren) in order to "skip" a generation of estate tax.
291
Define: geometric mean
A type of average that indicates the central tendency of a set of numbers that, instead of finding the sum as with the arithmetic mean, takes the product of the numbers and divides that by the nth root (where n is the count of numbers). It will always be lower than the arithmetic mean [unless all of the numbers are the same (e.g., 6, 6, and 6)].
292
Define: good-tit-canceled order (CTC)
An order that is left on the specialist's book until it is either executed or canceled. Syn. open order.
293
Define: goodwill
An intangible asset that represents the value that a firm's business reputation adds to its perceived value. It is not included in net worth for purposes of computing book value per share.
294
Define: Government National Mortgage Association (CNMA)
A wholly government-owned corporation that issues pass-through mortgage debt certificates backed by the full faith and credit of the U.S. government. Syn. Ginnie Mae.
295
Define: grantor
An individual or organization that gives assets to a beneficiary by transferring fiduciary duty to a third-party trustee that will maintain the assets for the benefit of the beneficiaries. Syn. settlor, trustor.
296
Define: grantor trust
A trust that requires that the grantor be taxed on income produced by trust property if trust income is distributed to the grantor or to the grantor's spouse; trust income discharges a legal obligation of the grantor or grantor's family; and the grantor retains power to revoke or amend the trust.
297
Define: gross domestic product (CDP)
The market value of all final goods and services produced within a country in a given period of time. GDP= consumption+ investment+ government spending + (exports - imports) investment. To account for inflation, GDP is based on a constant dollar, currently the value in 2005.
298
Define: gross income
All income of a taxpayer, from whatever source derived.
299
Define: gross margin
Gross margin is the operating profit of a business prior to interest and taxes. It is computed by subtracting the cost of goods sold (COGS) from the company's sales (or revenues). Gross margin is frequently expressed as a percentage, called the margin of profit. The calculation is the gross margin divided by the sales (revenues). For example, a company has sales of $5 million and COGS of $3.5 million resulting in a gross margin of $1.5 million and a margin of profit of 30% ($1.5 million / $5 million).
300
Define: gross revenues
All money received by a business from its operations. the term typically does not include interest income or income from the sale, refinancing, or other disposition of properties.
301
Define: growth fund
A diversified common stock fund that has capital appreciation as its primary goal. It invests in companies chat reinvest most of their earnings for expansion, research, or development. See diversified common stock fund; mutual fund.
302
Define: growth industry
An industry that is growing faster than the economy as a whole as a result of technological changes, new products, or changing consumer tastes.
303
Define: growth stock
A common stock that is believed to offer significant potential for capital gains. It often pays low dividends and sells at a high price-earnings ratio.
304
Define: growth style investing
A management style that attempts to find stocks with positive earnings momentum. these stocks typically sell at the upper end of their 52-week price range, have high P/E ratios and lower than average dividend payout ratios. See value style investing.
305
Define: guaranteed security
Under the Uniform Securities Act, the term guaranteed means guaranteed by a third party as to payment of principal, interest, or dividends, but not capital gains.
306
Define: guardian
A court-appointed fiduciary who manages the assets of a minor or an incompetent for that person's benefit. See fiduciary.
307
Define: head and shoulders
On a technical analyst's trading chart, a pattern that has three peaks resembling a head and two shoulders. the stock price moves up to its first peak (the left shoulder), drops back, then moves to a higher peak (the top of the head), drops again but recovers to another, lower peak (the right shoulder). A head and shoulders top typically forms after a substantial rise and indicates a market reversal. A head and shoulders bottom (an inverted head and shoulders) indicates a market advance.
308
Define: hedge
An investment made to reduce the risk of adverse price movements in a security. Normally, a hedge consists of a protecting position in a related security. See long hedge; selling a hedge; short hedge.
309
Define: hedge clause
Any legend, clause, or other provision that is likely to lead an investor to believe that he has in any way waived any right of action he may have.
310
Define: hedge fund
A fund that can use one or more alternative investment strategies, including hedging against market downturns, investing in asset classes such as currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives, and arbitrage. These funds tend to have very high minimum investment requirements.
311
Define: high net worth individual
An individual with at least $1 million managed by the IA or whose net worth the firm reasonably believes exceeds $2 million. the net worth of an individual may include assets held jointly with that individual's spouse. Performance-based fees may be charged to these clients.
312
Define: High-yield bond
A bond with a less than investment grade rating, characterized by a return commensurate with the higher risk. Syn. junk bond holder the owner of a security. See long.
313
Define: holding company
A company organized to invest in and manage other corporations. Control can occur through the ownership of 50% or more of the voting rights or through the exercise of a dominant influence. It is sometimes referred to as the parent organization.
314
Define: holding period
A time period signifying how long the owner possesses a security. It starts the day after a purchase and ends on the day of the sale.
315
Define: home state
If an investment adviser is registered with a state Administrator (state-registered adviser), the firm's home state is the state where it maintains its principal office and place of business.
316
Define: HR-10 plan
See Keogh plan.
317
Define: hypothecation
Pledging to a broker-dealer securities bought on margin as collateral for the margin loan. See rehypothecation.
318
Define: immediate annuity
An annuity contract that provides for monthly payments to begin immediately after deposit of the invested funds. Payments usually commence within 30 to 60 days. See deferred annuity.
319
Define: immediate-or-cancel order (IRC)
An order that instructs the floor broker to execute it immediately, in full or in part. Any portion of the order that remains unexecuted is canceled.
320
Define: impersonal investment advice
Investment advisory services that do not purport to meet the objectives or needs of specific individuals or accounts.
321
Define: incentive stock option
A type of employee stock option. As long as stock purchased through exercise of an ISO is held at least two years after the date of grant and one year after the date of exercise, any profits are reported as long-term capital gains. If these time limits are broached, the ISO is taxed like an NSO. See nonqualified stock option.
322
Define: income fund
A mutual fund that seeks to provide stable current income by investing in securities that pay interest or dividends. See mutual fund.
323
Define: income statement
The summary of a corporation's revenues and expenses for a specific fiscal period.
324
Define: indenture
The agreement between a lender and a borrower that details specific terms of the bond issuance. The indenture specifies the legal obligations of the bond issuer and rights of the bondholders. It is sometimes called the deed of trust.
325
Define: index
See security market index.
326
Define: index fund
Investors who wish to invest passively can invest in an index fund, which seeks to replicate the performance of a security market index. There are index mutual funds and index exchange-traded funds. See security market index.
327
Define: indication of interest
An investor's expression of conditional interest in buying an upcoming securities issue after the investor has reviewed a preliminary prospectus. An indication of interest is not a commitment to buy.
328
Define: individual retirement account (IRA)
A retirement investing tool for employed individuals that allows an annual contribution of 100% of earned income up to a maximum of $5,500 ($6,500 for those 50 and older).
329
Define: industrial development bond (IDB)
A debt security issued by a municipal authority, which uses the proceeds to finance the construction or purchase of facilities to be leased or purchased by a private company. The bonds are backed by the credit of the private company, which is ultimately responsible for principal and interest payments. Syn. industrial revenue bond.
330
Define: industrial revenue bond (IRB)
See industrial development bond.
331
Define: industry fund
See sector fund.
332
Define: inflation
A persistent and measurable increase in the general level of prices. See deflation.
333
Define: inflation risk
See purchasing power risk.
334
Define: initial public offering (IPO)
A corporation's first sale of common stock to the public. See new issue market; public offering.
335
Define: information barriers
Policies and procedures created to prevent misuse of material nonpublic information (MNPI) are commonly referred to as information barriers. Formerly referred to as Chinese Walls.
336
Define: inside information
Material information that has not been disseminated to or is not readily available to the general public.
337
Define: inside market
When viewing the quotes of all of the market makers in a security, the inside market, or inside quote, is the best (highest) bid and the best (lowest) offer (or ask).
338
Define: insider
Any person who possesses or has access to material nonpublic information about a corporation. Insiders include directors, officers, and stockholders who own more than 10% of any class of equity security of a corporation.
339
Define: Insider Trading Act
See Insider Trading and Securities Fraud Enforcement Act of 1988.
340
Define: Insider Trading and Securities Fraud Enforcement Act of 1988
Legislation that defines what constitutes the illicit use of nonpublic information in making securities trades and the liabilities and penalties that apply. Syn. Insider Trading Act. See Chinese Wall; insider.
341
Define: institutional account
An account held for the benefit of others. Examples of institutional accounts include banks, trusts, pension and profit-sharing plans, mutual funds, and insurance companies.
342
Define: institutional investor
A person or an organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treatment and lower commissions. An institutional order can be of any size. Institutional investors are covered by fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.
343
Define: intangible asset
A property owned that is not physical, such as a formula, a copyright, or goodwill. See goodwill.
344
Define: interactive content
Social media content that can be added to by anyone with access to the link. A chat room is an example.
345
Define: interest
The charge for the privilege of borrowing money, usually expressed as an annual percentage rate.
346
Define: interest rate risk
The risk associated with investments relating to the sensitivity of price or value to fluctuation in the current level of interest rates; also, the risk that involves the competitive cost of money. This term is generally associated with bond prices, but it applies co all investments. In bonds, prices carry interest risk because if bond prices rise, outstanding bonds will not remain competitive unless their yields and prices adjust to reflect the current market. Internal rate of return The discount rate that sets the net present value of an investment equal to zero. Syn. IRR
347
Define: internal rate of return
The discount rate that sets the net present value of an investment equal to zero. Syn. IRR
348
Define: Internal Revenue Code (IRC)
The legislation that defines tax liabilities and deductions for U.S. taxpayers.
349
Define: Internal Revenue Service (IRS)
The U.S. government agency responsible for collecting most federal taxes and for administering tax rules and regulations.
350
Define: interstate offering
An issue of securities registered with the SEC sold to residents of states other than the state in which the issuer does business.
351
Define: intestate
Dying without a legal will. Usually the probate court will appoint an administrator to handle the deceased's estate. For purposes of the Uniform Securities Act, transactions by this administrator (a fiduciary) are considered exempt transactions.
352
Define: in-the-money
The term used to describe an option that has intrinsic value, such as a call option when the stock is selling above the exercise price or a put option when the stock is selling below the exercise price. See at-the-money; intrinsic value; out-of-the-money.
353
Define: intrastate offering
An issue of securities exempt from SEC registration, available to companies that do business in one state and sell their securities only co residents of that same state. See Rule 147.
354
Define: intrinsic value
The potential profit to be made from exercising an option. A call option is said to have intrinsic value when the underlying stock is trading above the exercise price. See time value.
355
Define: inverted yield curve
A chart showing long-term debt instruments that have lower yields than short-term debt instruments. Syn. negative yield curve. See flat yield curve; normal yield curve.
356
Define: investment adviser
(1) Any person who makes investment recommendations in return for a flat fee or a percentage of assets managed. (2) For an investment company, the individual who bears the day-co-day responsibility of investing the cash and securities held in the fund's portfolio in accordance with objectives stated in the fund's prospectus.
357
Define: investment adviser representative (IAR)
Any partner, officer, director, or other individual employed by or associated with an investment adviser whose job function involves the rendering of advice, solicitation for clients, or supervision of chose who do.
358
Define: Investment Advisers Act of 1940
Legislation governing who must register with the SEC as an investment adviser. See investment adviser.
359
Define: investment banker
An institution in the business of raising capital for corporations and municipalities. An investment banker may not accept deposits or make commercial loans. Syn. investment bank.
360
Define: investment banking business
A broker, dealer, or municipal or government securities dealer that underwrites or distributes new issues of securities as a dealer or chat buys and sells securities for the accounts of others as a broker. Syn. investment securities business.
361
Define: investment company
A company engaged in the business of pooling investors' money and trading in securities for them. Examples include face-amount certificate companies, unit investment trusts, and management companies.
362
Define: Investment Company Act Amendments of 1970
Amendments to the Investment Company Act of 1940 requiring, in particular, that sales charges relate to the services a fund provides its shareholders. See Investment Company Act of 1940.
363
Define: Investment Company Act of 1940
Congressional legislation regulating companies that invest and reinvest in securities. The act requires an investment company engaged in interstate commerce to register with the SEC.
364
Define: investment constraints
Limitations or restrictions chat are specific to the adviser's client. Investment constraints include, among others, liquidity needs, time horizon, and personal ethical choices (no tobacco or alcohol stocks).
365
Define: investment-grade security
A security co which the rating services (e.g., Standard & Poor's and Moody's) have assigned a rating of BBB/Baa or above.
366
Define: investment objective
Any goal a client hopes to achieve through investing. Examples include current income, capital growth, and preservation of capital.
367
Define: investment policy statement
Used by those administering employee benefit plans to set out the objectives, policies, investment selections, and monitoring procedures for the plan. May also be used by investment advisers to determine policies to be followed with their clients.
368
Define: investor
The purchaser of an asset or security with the intent of profiting from the transaction.
369
Define: IRA rollover
The reinvestment of assets that an individual receives as a distribution from a qualified tax-deferred retirement plan into an individual retirement account within 60 days of receiving the distribution. The individual may reinvest either the entire sum or a portion of the sum, although any portion not reinvested is taxed as ordinary income. See also individual retirement account; IRA transfer.
370
Define: IRA transfer
The direct reinvestment of retirement assets from one qualified tax-deferred retirement plan to an individual retirement account. The account owner never takes possession of the assets but directs that they be transferred directly from the existing plan custodian to the new plan custodian. See also individual retirement account; IRA rollover.
371
Define: IRR
See internal rate of return
372
Define: irrevocable trust
A trust that cannot be altered or canceled by the grantor at any time.
373
Define: issuer
The entity, such as a corporation or municipality, that offers or proposes to offer its securities for sale.
374
Define: joint account
An account in which two or more individuals possess some form of control over the account and may transact business in the account. The account must be designated as either joint tenants in common or joint tenants with right of survivorship. See tenants in common; joint tenants with right of survivorship.
375
Define: joint life with last survivor
An annuity payout option that covers two or more people, with annuity payments continuing as long as one of the annuitants remains alive.
376
Define: joint tenants with right of survivorship (JTWROS)
A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account passes to the surviving tenant(s). Used almost exclusively by husbands and wives. See tenants in common.
377
Define: junk bond
See high-yield bond.
378
Define: Keogh plan
A qualified tax-deferred retirement plan for persons who are self-employed and unincorporated or who earn extra income through personal services aside from their regular employment. Syn. HR-10 plan. See individual retirement account.
379
Define: Keynesian economics
The theory that active government intervention in the marketplace is the best method of ensuring economic growth and stability.
380
Define: lagging indicator
A measurable economic factor that changes after the economy has started to follow a particular pattern or trend. Lagging indicators are believed to confirm long-term trends. Examples include average duration of unemployment, corporate profits, and labor cost per unit of output. See coincident indicator; leading indicator.
381
Define: large-cap
Stocks with a market capitalization of $10 billion or more.
382
Define: last in, first out (LIFO)
An accounting method used to assess a corporation's inventory in which it is assumed that the last goods acquired are the first to be sold. The method is used to determine cost basis for tax purposes; the IRS designates last in, first out as the order in which sales or withdrawals from an investment are made. It is the system used for random withdrawals from a nonqualified annuity where the earnings are taxed first before receiving back a return of original principal. See average basis; first in, first out.
383
Define: leading indicator
A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are believed to predict changes in the economy. Examples include new orders for durable goods, slowdowns in deliveries by vendors, and numbers of building permits issued. See coincident indicator; lagging indicator.
384
Define: legal list
The selection of securities a state agency (usually a state banking or insurance commission) determines to be appropriate investments for fiduciary accounts such as mutual savings banks, pension funds, and insurance companies. This is used in states that do not have the prudent investor rule.
385
Define: legislative risk
Tue potential for an investor to be adversely affected by changes in investment or tax laws.
386
Define: letter of intent (LOI)
A signed agreement allowing an investor to buy mutual fund shares at a lower overall sales charge based on the total dollar amount of the intended investment. A letter of intent is valid only if the investor completes the terms of the agreement within 13 months of signing the agreement. A letter of intent may be backdated 90 days. Syn. statement of intention.
387
Define: level load
A mutual fund sales fee charged annually and based on the net asset value of a share. See back-end load; Class C share; front-end load.
388
Define: leverage
Using borrowed capital to increase investment return. Syn. trading on the equity.
389
Define: liability
A legal obligation to pay a debt owed. Current liabilities are debts payable within 12 months. Long-term liabilities are debts payable over a period of more than 12 months.
390
Define: LIBOR
LIBOR is a benchmark interest rate based on the rates at which banks lend unsecured funds to each other on the London interbank market. Published daily, the rate was previously administered by the British Bankers' Association (BBA). But in the aftermath of a scandal in 2012, Britain's primary financial regulator, the Financial Conduct Authority (FCA), shifted supervision of LIBOR to a new entity, the ICE Benchmark Administration, an independent subsidiary of the private exchange operator Intercontinental Exchange, or ICE.
391
Define: limited liability
An investor's right to limit potential losses to no more than the amount invested. Equity shareholders, such as corporate stockholders and limited partners, have limited liability.
392
Define: limited liability company (LLC)
A hybrid between a partnership and a corporation in that it combines the pass-through treatment of a partnership with the limited liability accorded to corporate shareholders.
393
Define: limited partnership (LP)
An association of two or more partners formed to conduct a business jointly and in which one or more of the partners is liable only to the extent of the amount of money they have invested. Limited partners do not receive dividends but enjoy direct Bow-through of income and expenses. See Bow-through; general partnership.
394
Define: limited power of attorney
A written authorization for someone other than an account's beneficial owner to make certain investment decisions regarding transactions in the account. See discretion; full power of attorney; durable power of attorney.
395
Define: limited trading authorization
An authorization, usually provided by a limited power of attorney, for someone other than the customer to have trading privileges in an account. These privileges are limited to purchases and sales; withdrawal of assets is not authorized. See full trading authorization.
396
Define: limit order
An order that instructs the broker-dealer to buy a specified security below a certain price or to sell a specified security above a certain price. These orders are entered either for the day or good-til-canceled (GTC). See stop limit order; stop order.
397
Define: liquidation priority
In the case of a corporation's liquidation, the order that is strictly followed for paying off creditors and stockholders: (1) secured claims like mortgage bonds, equipment trust certificates, and collateral trust bonds; (2) unpaid wages; (3) taxes; (4) unsecured liabilities (debentures) and general creditors; (5) subordinated debt; (6) preferred stockholders; and (7) common stockholders.
398
Define: liquidity
The ease with which an asset can be converted to cash at its fair market value .. A large number of buyers and sellers and a high volume of trading activity provide high liquidity.
399
Define: liquidity risk
The potential that an investor might not be able to sell an investment when desired without adverse price disruption. Syn. marketability risk.
400
Define: listed option
An option contract that can be bought and sold on a national securities exchange in a continuous secondary market. Listed options carry standardized strike prices and expiration dates. Syn. standardized option.
401
Define: listed security
A stock, a bond, or another security that satisfies certain minimum requirements and is traded on a regional or national securities exchange such as the New York Stock Exchange. See over the counter.
402
Define: living trust
A trust created during the lifetime of the grantor; also known as an inter vivos trust.
403
Define: long
The term used to describe the owning of a security, contract, or commodity. For example, a common stock owner is said to have a long position in the stock. See short.
404
Define: longevity annuity
A deferred income annuity that generally does not begin payout until the age of 85. If a QLAC (qualified longevity annuity contract), it is exempt from RMDs for up to 15 years in a qualified retirement plans.
405
Define: Long-term Equity Anticipation Securities
LEAPS options have the same characteristics as standard options, but with expiration dates up to three years in the future.
406
Define: long-term gain
The profit earned on the sale of a capital asset that has been owned for more than 12 months. See capital gain; capital loss; long-term loss.
407
Define: long-term loss
The loss realized on the sale of a capital asset that has been owned for more than 12 months. See capital gain; capital loss; long-term gain.
408
Define: loss carryover
A capital loss incurred in one tax year that is carried over to the next year or later years for use as a capital loss deduction. See capital loss.
409
Define: make a market
To stand ready to buy or sell a particular security as a dealer for its own account. A market maker accepts the risk of holding the position in the security. See market maker.
410
Define: Maloney Act
An amendment enacted in 1938 to broaden Section 15 of the Securities Exchange Act of 1934. Named for its sponsor, the late Sen. Francis Maloney of Connecticut, the amendment provided for the creation of a self-regulatory organization for the specific purpose of supervising the over-the-counter securities market. See National Association of Securities Dealers, Inc.
411
Define: management company
An investment company that trades various types of securities in a portfolio in accordance with specific objectives stated in the prospectus. See closed-end management company; diversified management company; mutual fund; non-diversified management company.
412
Define: margin
The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account. See equity; initial margin requirement; Regulation T.
413
Define: marginal tax rate
The race of taxation on any additional taxable income received. It is sometimes referred to as the tax on the "next" dollar or the "last" dollar of income. See effective tax rate.
414
Define: margin of profit ratio
A measure of a corporation's relative profitability. It is calculated by dividing the operating profit by the net sales. Syn. operating profit ratio; profit margin.
415
Define: marital trust
A trust that seeks to pass property to a survivor spouse while taking advantage of the marital deduction; also known as an A trust.
416
Define: market capitalization
The number of outstanding shares multiplied by the current market price. Classed as large-cap, mid-cap, small-cap, and micro-cap.
417
Define: market maker
A dealer willing co accept the risk of holding a particular security in its own account to facilitate trading in that security. See make a market.
418
Define: market order
An order to be executed immediately at the best available price. A market order is the only order that guarantees execution. Syn. unrestricted order.
419
Define: market risk
The potential for an investor to experience losses owing to day-to-day fluctuations in the prices at which securities can be bought or sold. See systematic risk.
420
Define: market value
The price at which investors buy or sell a share of common stock or a bond at a given time. Market value is determined by buyers' and sellers' interaction. See current market value.
421
Define: markup
The difference between the lowest current offering price among dealers and the higher price a dealer charges a customer.
422
Define: matched orders
Simultaneously entering identical (or nearly identical) buy and sell orders for a security to create the appearance of active trading in that security. This violates the antifraud provisions of the Securities Exchange Act of 1934 and the USA.
423
Define: material information
Any face chat could affect an investor's decision to trade a security.
424
Define: maturity date
The dace on which a bond's principal is repaid to the investor and interest payments cease. See par; principal.
425
Define: mean
When referring to a series of values, such as portfolio returns, the average. A measure of central tendency known as the arithmetic mean. Could also refer to the geometric mean.
426
Define: median
When viewing a series of values, such as portfolio returns, the number that has as many occurrences above as below. A measure of central tendency.
427
Define: mid-cap
Stocks with a market capitalization of $2 billion to $10 billion.
428
Define: mode
When viewing a series of values, the one that occurs the most frequently. A measure of central tendency.
429
Define: modern portfolio theory (MPT)
A method of choosing investments that focuses on the importance of the relationships among all of the investments in a portfolio rather than the individual merits of each investment. The method allows investors to quantify and control the amount of risk they accept and return they achieve.
430
Define: monetarist theory
An economic theory holding that the money supply is the major determinant of price levels and that therefore a well-controlled money supply will have the most beneficial impact on the economy.
431
Define: monetary policy
The Federal Reserve Board's actions that determine the size and rate of the money supply's growth, which in turn affect interest rates. See fiscal policy.
432
Define: money market
The securities market chat deals in high quality, short-term debt. Money market instruments are very liquid forms of debt that mature in one year or less. Treasury bills, commercial paper, and jumbo CDs are examples of money market instruments.
433
Define: money market fund
A mutual fund that invests in short-term debt instruments. The fund's objective is to earn interest while maintaining a stable net asset value of $1 per share. Always sold with no load, the fund may also offer check-writing privileges and a low initial minimum investment. See mutual fund.
434
Define: Monte Carlo simulation
A statistical method co determine the return profile of a security or portfolio chat recreates potential outcomes by generating random values on the basis of the risk and return characteristics of the securities themselves.
435
Define: Moody's Investors Service
One of the best known investment racing agencies in the United States. A subsidiary of Dun & Bradstreet, Moody's rates bonds, commercial paper, preferred and common stocks, and municipal short-term issues. See bond rating; Standard & Poor's Corporation.
436
Define: mortgage bond
A debt obligation secured by a property pledge. It represents a lien or mortgage against the issuing corporation's properties and real estate assets.
437
Define: moving average chart
A tool used by technical analyses to track the price movements of a commodity. le plots average daily settlement prices over a defined period of time (for example, over three days for a three-day moving average).
438
Define: MRD
Minimum required distribution. See required minimum distribution.
439
Define: municipal bond
A debt security issued by a state, a municipality, or another subdivision (such as a school, a park, a sanitation, or another local taxing district) to finance its capital expenditures. Such expenditures might include the construction of highways, public works, or school buildings. Syn. municipal security.
440
Define: municipal bond fund
A mutual fund that invests in municipal bonds and operates either as a unit investment trust or as an open-end fund. The fund's objective is to maximize federally tax-exempt income. See mutual fund; unit investment trust.
441
Define: municipal note
A short-term municipal security issued in anticipation of funds from another source.
442
Define: Municipal Securities Rulemaking Board (MSRB)
A self-regulatory organization that regulates the issuance and trading of municipal securities. The Board functions under the Securities and Exchange Commission's supervision; it has no enforcement powers. See Securities Amendments Ace of 1975.
443
Define: mutual fund
An investment company that continuously offers new equity shares in an actively managed portfolio of securities. All shareholders participate in the fund's gains or losses. The shares are redeemable on any business day at the nee asset value. Each mutual fund's portfolio is invested to match the objective stated in the prospectus. Syn. open-end investment company; open-end management company. See balanced fund; contractual plan; net asset value.
444
Define: NASAA
See North American Securities Administrators Association.
445
Define: NASD
See National Association of Securities Dealers, Inc.
446
Define: Nasdaq
See National Association of Securities Dealers Automated Quotation System.
447
Define: NASD 5% markup policy
A guideline for reasonable markups, markdowns, and commissions for secondary over-the-counter transactions. According to the policy, all commissions on broker transactions and all markups or markdowns on principal transactions should equal 5% or should be fair and reasonable for a particular transaction. Syn. markup policy.
448
Define: National Association of Securities Dealers, Inc.
(NASD) The self-regulatory organization for the over-the-counter market. NASO was organized under the provisions of the 1938 Maloney Act. See Maloney Act, FINRA. National Association of Securities Dealers Automated Quotation System (Nasdaq) The nationwide electronic quotation system for up-to-the-second on approximately 3,100 over-the-counter stocks trade information. Sometimes referred to as the Nasdaq Stock Market. All securities traded here are federal covered as defined in the NSMIA of 1996.
449
Define: NAV per share
The value of a mutual fund share, calculated by dividing the fund's total net asset value by the number of shares outstanding.
450
Define: negotiability
A characteristic of a security that permits the owner to assign, give, transfer, or sell it to another person without a third party's permission.
451
Define: negotiable certificate of deposit (CD)
An unsecured promissory note issued with a minimum face value of $100,000. It evidences a time deposit of funds with the issuing bank and is guaranteed by the bank.
452
Define: net asset value (NAV)
A mutual fund share's value, as calculated once a day on the basis of the closing market price for each security in the fund's portfolio. It is computed by deducting the fund's liabilities from the portfolio's total assets and dividing chis amount by the number of shares outstanding. See mutual fund.
453
Define: net investment income
The source of an investment company's dividend payments. It is calculated by subtracting the company's operating expenses from the total dividends and interest the company receives from the securities in its portfolio.
454
Define: net present value
The difference between the present value of the future cash flows from an investment and the current market price. Syn NPV
455
Define: net worth
The amount by which assets exceed liabilities.
456
Define: new account form
The form that must be filled out for each new account opened with a brokerage firm. The form specifies, at a minimum, the account owner, trading authorization, payment method, and types of securities appropriate for the customer.
457
Define: new issue market
The securities market for shares in privately owned businesses that are raising capital by selling common stock to the public for the first time. Syn. primary market. See initial public offering; secondary market.
458
Define: no-load fund
A mutual fund whose shares are sold without a commission or sales charge. The investment company distributes the shares directly. See mutual fund; net asset value; sales load.
459
Define: nominal yield
The interest rate stated on the face of a bond that represents the percentage of interest the issuer pays on the bond's face value. Syn. coupon rate; stated yield. See bond yield.
460
Define: nominee
A person or company whose name is given as having title to a stock, real estate, and so forth, but who is not the actual owner. See street name.
461
Define: nonaccredited investor
An investor not meeting the net worth requirements of Regulation D. Nonaccredited investors are counted for purposes of the 35-investor limitation for Rule 506(6) Regulation D private placements. See accredited investor; private placement; Regulation D.
462
Define: noncontributory plan
A retirement plan to which only the employer makes contributions. See contributory plan.
463
Define: noncumulative preferred stock
An equity security that does not have to pay any dividends in arrears to the holder. See cumulative preferred stock; preferred stock.
464
Define: non-diversification
A portfolio management strategy that seeks to concentrate investments in a particular industry or geographic area in hopes of achieving higher returns. See diversification.
465
Define: nonqualified retirement plan
A corporate retirement plan that does not meet the standards set by the Employee Retirement Income Security Act of 1974. Contributions to a nonqualified plan are not tax deductible. See also qualified retirement plan.
466
Define: nonqualified stock option
A type of employee stock option. When NSOs are exercised, the difference between the current market price at the time of exercise and the strike price is reported as wages on the tax returns of the employer and the employee. See incentive stock option.
467
Define: non recourse financing
Debt incurred for the purchase of an asset that pledges the asset as security for the debt but that does not hold the borrower personally liable.
468
Define: nonsystematic risk
The potential for an unforeseen event to affect the value of a specific investment. Examples of such events include strikes, natural disasters, poor management decisions, introductions of new product lines, and attempted takeovers. This risk is diversifiable. Syn. unsystematic risk. See systematic risk.
469
Define: no-par stock
An equity security issued without a stated value.
470
Define: normal yield curve
A chart showing long-term debt instruments having higher yields than short-term debt instruments. Syn. positive yield curve. See flat yield curve; inverted yield curve; yield curve.
471
Define: North American Securities Administrators Association
Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities Administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.
472
Define: note
A short-term debt security, usually maturing in five years or less. See Treasury note.
473
Define: notice filing
(1) Method by which a registered investment company and certain other federal covered securities file records with state securities Administrators. (2) SEC-registered advisers (federal covered) may have to provide state securities authorities (the Administrator) with copies of documents that are filed with the SEC and pay a filing fee.
474
Define: offer
(1) Under the Uniform Securities Act, any attempt to solicit a purchase or sale in a security for value. (2) An indication by an investor, a trader, or a dealer of a willingness to sell a security; the price at which an investor can buy from a broker-dealer. See bid.
475
Define: open-end investment company
See mutual fund.
476
Define: opening purchase
Entering the options market by buying calls or puts. See opening sale.
477
Define: opening sale
Entering the options market by selling calls or puts. See dosing purchase; opening purchase.
478
Define: open-market operations
The buying and selling of securities (primarily government or agency debt) by the Federal Open Market Committee to effect control of the money supply. These transactions increase or decrease the level of bank reserves available for lending.
479
Define: operating income
The profit realized from one year of operation of a business.
480
Define: operating ratio
The ratio of operating expenses to net sales; the complement to the margin of profit ratio.
481
Define: optimal portfolio
The optimal portfolio under modern portfolio theory assumes that investors seek a portfolio of assets that minimizes risks while offering the highest possible return.
482
Define: ordinary income
Earnings other than capital gain.
483
Define: OTC Bulletin Board (OTCBB)
An electronic quotation system for equity securities that are not listed on a national exchange or included in the Nasdaq system. These are not federal covered securities and generally require registration with both the SEC and the states.
484
Define: OTC Link
An electronic inter-dealer quotation system that displays quotes from broker-dealers for many
485
Define: over-the-counter securities.
Formerly known as the Pink Sheets, OTC Link does not require companies whose securities are quoted on its systems to meet any listing requirements.
486
Define: OTC market
The security trading system in which broker-dealers negotiate directly with one another rather than through an auction on an exchange floor. The trading takes place over computer and telephone networks that link brokers and dealers around the world. Both listed and OTC securities, as well as municipal and U.S. government securities, trade in the OTC market.
487
Define: out-of-the-money
The term used to describe an option that has no intrinsic value, such as a call option when the stock is selling below the exercise price or a put option when the stock is above the exercise price.
488
Define: over the counter (OTC)
The term used to describe a security traded through the telephone-linked and computer-connected OTC market rather than through a stock exchange. See OTC market.
489
Define: oversubscribed
The term used to describe a new security issue where the demand for the shares greatly exceeds the available supply. The issues usually appreciate rapidly on the first day of trading and failure to properly allocate them is a prohibited practice.
