Glossary Flashcards
accredited investor
As defined in Rule 501 of Regulation D, any institutional net worth requirements for the purchase of securities qualifying under the Regulation D registration exemption. An individual accredited investor is generally accepted to be one who, individually or with spouse, has a net worth, excluding the net equity in primary residence, of $1 million or more, or has had an annual income of $200,000 or more in each of the two most recent years (or $300,000 jointly with a spouse), and who has a reasonable expectation of reaching the same income level in the current year.
accumulation state
The period during which contributions are made to an annuity account.
accumulation unit
An accounting measure used to determine an annuitant’s proportionate interest in the insurer’s separate account during an annuity’s accumulation (deposit) state.
acid test
synonym for acid test ratio.
active management style
Unlike the passive style, analysts believe they can identify industries that are undervalued or overvalued in order to weight them appropriately and achieve returns in excess of the market. Some managers engage in sector rotation, which is over-weighting or under-weighting industries based on the current phase of the business cycle.
Securities Act of 1933
Federal legislation requiring the full and fair disclosure of all material information about the issuance of new securities.
Synonym: Act of 1933; Full Disclosure Act; New Issues Act; Prospectus Act; Trust in Securities Act; Truth in Securities Act.
Securities Act of 1934
Federal legislation that established the Securities and Exchange Commission. The act aims to protect investors by regulating the exchanges, the OTC market, the extension of credit by the Federal Reserve Board, broker/dealers, insider transactions, trading activities, client accounts, and net capital.
Synonym: Act of 1934; Exchange Act.
adjusted basis
The value attributed to an asset or security that reflects any deductions taken on, or capital improvements to, the asset of security. Adjusted basis is used to compute the gain or loss on the sale of other disposition of the asset or security.
adjusted gross income (AGI)
Gross income from all sources minus certain adjustments to income, such as deductible contributions to an IRA and net capital losses. It is basically the amount of income that will be subject to tax.
Administrator
An official or agency that administers a state’s securities laws.
American depository 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 US dollars.
Synonym: American depository share (ADS)
advertisement
Any notice, circular, letter, or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, that offers ( 1 ) any analysis, report, or publication concerning securities, or that is to be used in making any determination as to when to by or sell any security, or which security to by or sell; or ( 2 ) any graph, chart, formula, or other device to be used in making any determination as to when to by or sell any security, or which security to buy or sell; or ( 3) any other investment advisory services with regard to securities.
agency issue
A debt security issued by an authorized agency of the federal government. Such an issue is backed by the issuing agency itself, not by the full faith and credit of the US government (except GNMA issues).
Synonym: agency basis.
agency cross transaction
For an advisory client, a transaction in which a person acts as an investment adviser in relation to a transaction in which that investment adviser, or any person controlling, controlled by, or under common control with that investment adviser, acts as broker for both an advisory client and for another person on the other side of the transaction.
agency transaction
A transaction in which a broker/dealer acts for the accounts of others by buying or selling securities on behalf of customers.
Synonym: agency basis
agent
( 1 ) An individual who effects securities transactions for the accounts of others. ( 2 ) Under state law, a securities salesperson who represents a broker/dealer or an issuer when selling or trying to sell securities to the investing public; this individual is considered an agent whether he actually receives or simply solicits orders.
aggressive investment strategy
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.
all or none order (AON)
An order that instructs the floor broker to execute the entire order in one transaction; if the order cannot be executed in its entirety, it is allowed to expire.
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 portfolio beta is 1.5, and the actual return is 25%. According to the CAPM, the portfolio should be expected to return 15% (1.5 times 10%). This is because the portfolio is 1.5 times riskier than the market. The difference between the actual return of 25% and expected return of 15% represents the alpha of this portfolio. In this case, we have a positive alpha of 10%.
alternative minimum tax (AMT)
An alternative tax computation that ads 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.
anti-dilutive covenant
A protective clause found in most convertible issues (proffered 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.
appreciation
The increase in an asset’s value.
arbitrage
The simultaneous buying and selling of the same security in two different markets to take advantage of a temporary price disparity. This is not considered market manipulation.
arithmetic mean
The average of a set of numbers, such as annual returns on an investment.
ask
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.
Synonym: offer.
assessable stock
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.
asset
( 1 ) Anything that an individual or a corporation owns. ( 2 ) A balance sheet item expressing what a corporation owns.
asset class allocation
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.
Synonym: asset allocation
auction market
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an auction market.
Synonym: double auction market
audited financial statement
A financial statement of a program, a corporation, or an issuer (including the profit and loss statement, cash flow and source and application of revenues statement, and balance sheet) that has been examined and verified by an independent certified public accountant.
average basis
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.
balanced fund
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.
balanced investment strategy
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.
balance payments
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 out.
balance of trade
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.
balance sheet
A report of a corporation’s financial condition at a specific time.
balance sheet equation
A formula stating that a corporation’s assets equal the sum if its liabilities plus shareholder’s equity.
bank holding company
A holding company whose primary asset is a commercial bank.
basis
Another term for yield to maturity (e.g., this bond is selling at a 5.78 basis).
basis point
A measure of a bond’s yield, equal to 1/100 of 1% of yield. A bond whose yield increases from 5.0% to 5.50% is said to increase by 50 basis points.
bear
An investor who acts on the belief that a security or the market is falling or will fall.
bear market
A market in which prices of a certain group of securities are falling or are expected to fall.
beta
A means of measuring the co-movement of the return of a security or a portfolio of securities to the return of the overall market. A beta of 1.0 indicates that the security’s returns will be expected to move in tandem with the market. A beta greater than 1.0 indicates that the security’s returns will be expressed to exceed those of the market. A beta of less than 1.0 means returns will expected to be lower than those of the market.
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.
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.”
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.
bona fide
From Latin “good faith,” something that is bona fide is genuine, authentic, and real.
An example would be a bona fide quote.
bond
An issuing company’s or government’s legal obligation to repay the principle of a loan to bond investors at a specified future date. Bonds are usually issued with par or face values of $1,000, representing the amount of money borrowed. The issuer promises to pay a percentage of the par value as interest on the borrowed funds. The interest payment is stated on the face of the bond at issue.
bond fund
A mutual fund whose investment objective is to provide stable income with minimal capital risk. It invests in income-producing instruments, which may include corporate, government, or municipal bonds.
bond quote
One of a number of quotations listed in the financial press and most daily newspapers that provide representative bid prices from the previous day’s bond market. Quotes for corporate and government bonds are percentages of the bonds’ face values (usually $1,000). Corporate bonds are quoted in increments of 1/8. Government bonds are quoted in increments of 1/32. Municipal bonds may be quoted on a dollar basis or on a yield-to-maturity basis.
bond rating
An evaluation of the possibility of a bond issuer’s default, based on an analysis of the issuer’s financial condition and profit potential. Standard and Poor’s, Moody’s Investors Service, and Fitch Investors Service, among others, provide bond rating services.
bond raito
One of several tools used by bond analysts to assess the degree of safety offered by a corporation’s bonds. It measures the percentage of the corporation’s capitalization that is provided by long-term debt financing, calculated by dividing the total face value of the outstanding bonds by the total capitalization.
Synonym: debt ratio.
bond yield
The annual rate of return on a bond investment. Types of yield include nominal yield, current yield, yield to maturity, and yield to call. Their relationships vary according to whether the bond in question is at a discount, at a premium, or at par.
book-entry security
A security sold without delivery of a certificate. Evidence of ownership is maintained on records kept by a central agency; for example, the Treasury keeps records of Treasury bill purchasers. Transfer of ownership is recorded by entering the change on the books or electronic files.
book value per share
A measure of the net worth of each share of common stock is calculated by subtracting intangible assets and preferred stock from total net worth, then dividing the result by the number of shares of common outstanding.
Synonym: net tangible assets per share.
Brady bonds
Debt instruments, generally from third world countries, that may have the US Treasury bond as collateral.
breadth-of-market theory
A technical analysis theory that predicts the strength of the market according to the number of issues that advance or decline in a particular trading day.
bridge loan
A short-term loan made to bridge the gap until permanent financing is arranged.
brochure
A written disclosure statement that investment advisers must provide to most clients and prospective clients. The Form ADV Part 2A may be used for this purpose.
brochure supplement
A written disclosure statement containing information about certain investment adviser’s supervised persons. This disclosure is usually accomplished by the delivery of Form ADV Part 2B to most clients and prospective clients.
broker
( 1 ) An individual or a firm that charges a fee or commission for executing by and sell orders submitted by another individual or firm. ( 2 ) The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.
broker/dealer (BD)
A person in the business of buying and selling securities. A firm may act as both broker (agency) and dealer (principle), but not in the same transaction. Broker/dealers normally must register with the SEC, the appropriate SROs, and any state in which they do business.
bull
An investor who acts on the belief that a security or the market is rising or will rise.
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.
bull market
A market in which prices of a certain group of securities are rising or will rise.
business cycle
A predictable long-term pattern of alternating periods of economic growth and decline. The cycle passes through four stages: expansion, peak, contraction, and trough.
business risk
The risk inherent in equity securities that poor management decisions will have a negative impact on the stock’s performance. Can be reduced through diversification.
Synonym: unsystematic risk
by stop order
An order to by a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.
bypass trust
A trust that is funded with property in an amount equal to the exemption equivalent of the transfer tax credit amount applicable to the decedent ($5.25 million in 2013 and $5.34 million in 2014); thus the property is not subject to federal estate tax.
calendar year
For accounting purposes, a year that ends on December 31st. When an accounting year ends any other time, it is called a fiscal year.
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.
callable bond
A type of bond issued with a provision allowing the issuer to redeem the bond before maturity at a predetermined price.
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.
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.
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.
call protection
a provision in a bond indenture stating that the issue is non-callable for a certain period (e.g., 5 or 10 years) after the original issue date
syn: call feature
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
call risk
the potential for a bond to be called before maturity, leaving the investor without the bonds’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.
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.
capital appreciation
an increase in an asset’s market price
capital asset
all tangible property, including securities, real estate, and other property, held for the long term.
capital gain
the profit realized when a capital asset is sold for a higher price than the purchase price
capitalization
the sum of a corporation’s long-term debt, stock, and surpluses
syn: invested capital
capital 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.
capital loss
the loss incurred when a capital asset is sold for a price lower than the purchase price
