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
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.
capital stock
all of a corporation’s outstanding preferred stock and common stock, listed at par value.
capital structure
the composition of long-term funds (equity and debt) a corporation has a s a source for financing.
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
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.
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
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.
cash equivalent
a security that can be readily converted into cash. Examples include Treasury bills, certificates of deposit, and money market instruments and funds.
cash flow
the money received by a business minus the money paid out. Cash flow is also equal to net income plus depreciation or depletion.
CBOE
Chicago Board Options Exchange
negotiable certificate of deposit
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.
chartist
a securities analyst who uses charts and graphs of the past price movements of a security to predict its future movements.
Syn: technician
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.
Chicago Stock Exchange
Registered stock exchange located in Chicago’s downtown “loop.” Referred to with the initials CHX.
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.
churning
Excessive trading in a customer’s account by an agent who ignores the customer’s interests and seeks only to increase commissions; violates NASSA’s policies on unethical business practices.
Syn: overtrading
CHX
Chicago Stock Exchange
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 id determined by supply and demand and not by net asset value.
Syn: publicly traded fund; closed-end management company
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.
CMO
collateralized mortgage obligation
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 non-agricultural employment, personal income, and industrial production.
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 the assets.
collateralized mortgage obligation (CMO)
a mortgage-backed corporate security. These issues attempt to return interest and principal at a predetermined rate.
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.
collateral trust certificate
synonym for collateral trust bond
combination privilege
a benefit offered by a mutual fund whereby the investor may qualify for a sale charge break-point by combining separate investments in two or more mutual funds under the same management.
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 270 days.
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 customer, this violates SEC Rule 15-c2-1.
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
common stock
a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and by voting on corporate policy.
complex trust
a trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries.
conduit theory
a means for an investment company to avoid taxation on net investment income distributed 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 income the fund retains.
syn: pipeline theory
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.
constant dollar 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.
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.
consumption
a term used by economists to refer to the purchase by households units of newly produced goods and service.
contraction
a period of general economic decline, one of the business cycle’s four stages.
contributory plan
a retirement plan to which both the employee and the employer make contributions.
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.
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.
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.
conversion price
the dollar amount of a convertible security’s par value that is exchangeable for one share of common stock.
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.
conversion ratio
the amount 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
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.
convertible preferred stock
an equity security that can be exchanged for common stock at specified prices or rates. Dividends may be cumulative or noncumulative.
convexity
the most accurate way of indicating a debt security’s sensitivity to changes in interest rates.
cooling-off period
the period ( a minimum of 20 days) between a registration statements’s filing date with the SEC and the registrations’s effective date. In practice, the period varies in length.
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.
corporate bond
a debt security issued by a corporation. a corporate bond typically has a par value of $1,000, is taxable, has a term maturity, and is traded on a major exchange.
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.
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.
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.
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.
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 US government are considered to have virtually no credit risk.
Note: credit risk only refers to debt security–common stock has no credit risk because there is no debt obligation to the owner.
syn: default risk; financial risk
cumulative proffered 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.
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.
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.
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
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
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.
custodial account
an account in which a custodian enters trades on behalf of the beneficial owner, often a minor.
custodian
an institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interest of another. Mutual funds have custodian banks responsible for safeguarding certificates and performing clerical duties.
customer
any person who opens a trading account with a B/D. a customer may be classified in terms of account ownership, trading authorization, payment method, or types of securities traded.
customer statement
a document showing a customer’s trading activity, potions, and account balance. The SEC requires that customer statements be sent quarterly, but customers general receive them monthly.
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.
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 cancelled.
dealer
(1 ) an individual or a firm engaged in the business of buying and selling securities for its own account, either directly or through ha broker. ( 2 ) The role of a firm when it acts as a principal charges the customer a markup or markdown.
syn: principal
debenture
a debt obligation backed by the issuing corporation’s general credit.
syn: unsecured bond
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 specified date and to pay interest.
debt-to-equity ratio
the ratio of total long-term debt to total stockholder’s’ equity; it is used to measure leverage.
default
the failure to pay interest or principal promptly when due.
defensive industry
a fundamental analysis term for an industry that is relatively unaffected by the business cycle. most defensive industries produce non-durable goods for which demand remains steady throughout the business cycle; examples include the food industry and utilities.
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 invest-able assets in bonds, cash equivalents, and the stocks that are less volatile than average.
deferred annuity
an annuity contract that delays payment of income, installments, or a lump sum until the investor elects to receive it.
deferred compensation plan
a non-qualified retirement plan whereby the employee defers receiving current compensation in favor of a larger payout at retirement.
deficiency letter
The SEC’s notification of additions or corrections that a prospective issuer must make to a registration statement before the SEC will clear the offering for distributions.
defined benefit plan
a qualified retirement plan that specifics the total amount of money that the employee will receive at retirement.
defined contribution plan
a qualified retirement plan that specifies the amount of money that the employer will contribute annually to the plan.
deflation
a persistent and measurable fall in the general level of prices.
demand
a consumer’s desire and willingness to pay for a good or service.
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.
demutualization
Demutualization is the process through which a member-opened 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 entitles such as the New York Stock Exchange.
depreciation
( 1 ) a tax deduction that compensates a business for the cost of certain tangible assets. ( 2 ) a decrease in the value of a particular currency relative to other currencies.
depreciation expense
a bookkeeping entry of a non-cash expense charged against earnings to recover the cost of an asset over its useful life.
depression
a prolonged period of general economic decline
derivative
an investment vehicle, the value of which is based on another security’s value. futures contracts, forward contracts, and options are among them most common types of derivatives. institutional investors generally use derivatives to increase overall portfolio return or to hedge portfolio risk.
designated market maker (DMM) or specialist
stock exchange member who stands ready to quote and trade certain securities either for his own account or for customer accounts. The specialist’s role is to maintain a fair and orderly market in the stocks for which he is responsible.
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.
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.
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 Sub-chapter S corporate offerings.
discount
the difference between the lower price paid for a security and the security’s face amount at issue.
discount bond
a bond that sells at a lower price than its face value
discount rate
the interest rate charged by the 12 Federal Reserve Banks for short-term loans made to member banks.
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.
discretionary account
an account in which the customer has given the agent authority to enter transactions at the representative’s discretion.
disgorge(ment)
in legal usage, the forced giving up of profits made through illegal activity, most commonly insider trading.
disposable income (DI)
the sum that people divide between spending and personal savings.
distributable net income (DNI)
taxable income from a trust that determines the amount of income that may be taxable to beneficiaries.
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.
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.
diversified investment company
as defined by the Investment Company Act of 1940, an investment company that meets certain standards as to the percentage of assets invested. These companies use diversification to manage risk.
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.
syn: stock dividend; dividend yield; property dividend
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.
dividend payout ratio
a measure of a corporation’s policy of paying cash dividends, calculated by dividing the dividends paid on common stocks by the net income available for common stockholders. The ratio is the complement of the retained earnings ratio.
dividends per share
the dollar amount of cash dividends paid on each common share during one year.
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.
DNI
distributable net income
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.
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 the prices are low and fewer shares when the prices are high, thus lowering the average cost per share over time.
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.
Dow Jones averages
the most widely quoted and oldest measure 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.
Dow Jones Composite Average (DJCA)
a market indicator composed of the 65 stocks that make up the Dow Jones Industrial, Transportation, and Utilities Averages.
Dow Jones Industrial Average (DJIA)
The most widely used market indicator, composed of 30 large, actively traded issues of industrial stocks.
Dow Jones Transportation Average (DJTA)
a market indicator composed of 20 transportation stocks.
Dow Jones Utility Average (DJUA)
a market indicator composed of 15 utilities stocks.
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.
duration
duration measures the percentage change in the price of a bond (or bond portfolio) as a result of a small change in interest rates. Duration is also a measure of the time, in years, that it takes a bond to pay for itself.
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.
earned surplus o retained earnings
the amount of a corporation’s net income that remains after all dividends have been paid to preferred and common stockholders.
syn: earned surplus; reinvested earnings
earnings per share (EPS)
a corporation’s net income available for common stock divided by its number of shares of common stock outstanding.
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.
effective tax rate
the overall rate paid on a taxpayer’s total taxable income. it will always be less than the marginal tax rate.
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.
synonym: efficient market hypothesis
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 tow forms: non-qualified (NSOs) and incentive (ISOs).
enjoined
this term includes being subject to a mandatory injunction, prohibitory injunction, preliminary injunction, or a temporary restraining order issued by a court of competent jurisdiction.
equity
common and preferred stockholder’s ownership interests in a corporation.
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.
equity security
a security representing ownership in a corporation or another enterprise.
Examples 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
> put and call options on equity securities
