Definitions A-O Flashcards
Define: 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. See balanced investment strategy; defensive investment strategy.
Define: algorithmic trading
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.
Define: all or none order (AON)
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.
Define: alpha
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.
Define: Alternative minimum tax (AMT)
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.
Define: American depository receipt (ADR)
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).
Define: Anti-dilutive covenant
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.
Define: appreciation
appreciation The increase in an asset’s value.
Define: arbitrage
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.
Define: arithmetic mean
arithmetic mean The average of a set of numbers, such as annual returns on an investment.
Define: 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. Syn. offer. See bid; public offering price; quotation.
Define: 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.
Define: asset
(1) Anything that an individual or a corporation owns. (2) A balance sheet item expressing what a corporation owns.
Define: 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. Syn. asset allocation.
Define: auction market
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an auction market. Syn. double auction market.
Define: audited financial statement
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.
Define: 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. See first in, first out; last in, first out.
Define: back-end load
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.
Define: 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. See mutual fund.
Define: 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.
Define: balance of 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 our. See balance of trade.
Define: 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. See balance of payments.
Define: balance sheet
A report of a corporation’s financial condition at a specific time.
Define: balance sheet equation
A formula stating that a corporation’s assets equal the sum of its liabilities plus shareholders’ equity.
Define: bank holding company
A holding company whose primary asset is a commercial bank. See holding company.
Define: basis
Another term for yield to maturity (e.g., this bond is selling at a 5.78 basis).
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.
Define: bear
An investor who acts on the belief that a security or the market is falling or will fall. See bull.
Define: bear market
A market in which prices of a certain group of securities are falling or are expected to fall. See bull market.
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.
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.
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.
Define: Black-Scholes
One of the most popular options pricing models. Appears frequently on the exam as an incorrect choice.
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.
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.”
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.
Define: bona fide
From the Latin “good faith,” something that is
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.
Define: callable bond
A type of bond issued with a provision allowing the issuer to redeem the bond before maturity at a predetermined price.
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.
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.
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.
Define: call feature
See call provision.
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.
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.
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.
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.
Define: capital appreciation
An increase in an asset’s market price.
Define: capital asset
All tangible property, including securities, real estate, and other property, held for the long term.
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.
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.
Define: capitalization
The sum of a corporation’s long-term debt, stock, and surpluses. Syn. invested capital. See capital structure.
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.
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.
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.
Define: capital stock
All of a corporation’s outstanding preferred stock and common stock, listed at par value.
Define: capital structure
The composition of long-term funds (equity and debt) a corporation has as a source for financing. See capitalization.
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.
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.
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.
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.
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.
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.
Define: CBOE
See Chicago Board Options Exchange.
Define: CD
See negotiable certificate of deposit.
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.
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.
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.
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.
Define: Chicago Stock Exchange
Registered stock exchange located in Chicago’s downtown “loop.” Referred to with the initials CHX.
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.
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.
Define: CHX
See Chicago Stock Exchange.
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.
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.
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.
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.
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.
Define: CMO
See collateralized mortgage obligation.
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.
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.
Define: collateralized mortgage obligation (CMO)
A mortgage-backed corporate security. These issues attempt to return interest and principal at a predetermined rate.
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.
Define: collateral trust certificate
See collateral trust bond.
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.
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.
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.
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.
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.
Define: complex trust
A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries.
Define: conduit theory
A means for an investment company to avoid taxation on net investment income distributed
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.
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.
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.
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.
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.
Define: consumption
A term used by economists to refer to the purchase by household units of newly produced goods and services.
Define: contraction
A period of general economic decline, one of the business cycle’s four stages. See business cycle.
Define: contributory plan
A retirement plan to which both the employee and the employer make contributions. See noncontributory plan.
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.
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.
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.
Define: conversion price
The dollar amount of a convertible security’s par value that is exchangeable for one share of common stock.
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.
Define: conversion rate
See conversion ratio.
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.
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.
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.
Define: convexity
The most accurate way of indicating a debt security’s sensitivity to changes in interest rates.
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.
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.
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.
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.
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.
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.
Define: coupon yield
See nominal yield.
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.
Define: covered security
See federal covered security.
Define: CPI
See Consumer Price Index.
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.
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.
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.
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.
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.
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.
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.
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.
Define: custodial account
An account in which a custodian enters trades on behalf of the beneficial owner, often a minor. See custodian.
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.
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.
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.
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.
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.
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.
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.
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.
Define: debenture
A debt obligation backed by the issuing corporation’s general credit. Syn. unsecured bond.
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.
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.
Define: debt-to-equity ratio
The ratio of total long-term debt to total stockholders’ equity; it is used to measure leverage.
Define: decumulation
Disposal of something accumulated. Investors spend much of their working years accumulating for retirement; taking the funds out is decumulation.
Define: default
The failure to pay interest or principal promptly when due.
Define: default risk
See credit risk.
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.
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.
Define: deferred annuity
An annuity contract chat delays payment of income, installments, or a lump sum until the investor elects to receive it.
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).
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.
Define: defined benefit plan
A qualified retirement plan chat specifies the total amount of money chat the employee will receive at retirement.
Define: defined contribution plan
A qualified retirement plan chat specifies the amount of money that the employer will contribute annually to the plan.
Define: deflation
A persistent and measurable fall in the general level of prices. See inflation.
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.
Define: demand
A consumer’s desire and willingness to pay for a good or service. See supply.
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.
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.
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.
Define: depreciation expense
A bookkeeping entry of a noncash expense charged against earnings to recover the cost of an asset over its useful life.
Define: depression
A prolonged period of general economic decline.
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
Define: types of derivatives.
Institutional investors generally use derivatives to increase overall portfolio return or to hedge portfolio risk.
Define: designated market maker (DMM)
See specialist.
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.
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.
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.
Define: discount
The difference between the lower price paid for a security and the security’s face amount at issue.
Define: discount bond
A bond that sells at a lower price than its face value. See par.
Define: discount rate
The interest rate charged by the 12 Federal Reserve Banks for short-term loans made to member banks.
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.
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.
Define: discretionary account
An account in which the customer has given the agent authority to enter transactions at the representative’s discretion.
Define: disgorge(ment)
In legal usage, the forced giving up of profits made through illegal activity, most commonly insider trading.
Define: disposable income (DI)
The sum that people divide between spending and personal savings. See personal income.
Define: distributable net income (DNI)
Taxable income from a trust that determines the amount of income that may be taxable to beneficiaries.
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.
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.
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.
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.
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.
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.
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.
Define: dividends per share
The dollar amount of cash dividends paid on each common share during one year.
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.
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.
Define: DNI
See distributable net income.
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.
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.
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.
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.
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.
Define: Dow Jones Industrial Average (DJIA)
The most widely used market indicator, composed of 30 large, actively traded issues of industrial stocks.
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.
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.
Define: DRIP
See dividend reinvestment plan.
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.
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.
