LEM Glossary Flashcards
accredited investor
defined in rule 501 of Regulation D
any institution or individual meeting minimum 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, including the net equity in the 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 level of income in the current year
accumulation stage
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) stage.
acid test
acid test ratio; asset ratio
active management style
unlike the passive cycle, 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 overweighting or underweighting industries based on the current phase of the business cycle
adjusted basis
the value contributed to an asset or security that reflects any deductions taken on, or capital improvements to, the asset or security.
adjusted basis is used to compute the gain or loss on the sale or 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 state’s securities laws.
adoption
a social media term meaning that a securities firm links to a third-party site and indicates that it endorses the content on that site.
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 buy or sell any security, or which security to buy or sell; or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell; or (3) any other investment advisory service with regard to securities
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 a broker for both an advisory client and for another person on the other side of the transaction.
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 U.S. government (except GNMA issues).
agency transaction
a transaction in which a broker-dealer acts for the accounts of others by buying or selling securities on behalf of customers.
agent
(1) an individual who effects securities transactions for the accounts of others
(2) under state securities laws, 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 solicits orders.
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.
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 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 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. 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 of its liabilities plus shareholder’s equity
bank holding company
a holding company whose primary asset is a commercial bank.
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.
AGI
adjusted gross income
algorithmic trading
computerized trading using proprietary algorithms. there are two types of algorithmic trading
it is estimated that more than 50% of stock trading volume in the US is currently being driven by algorithmic trading
(1) execution trading
(2) high frequency trading
execution trading
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
high-frequency trading
looking for small trading opportunities in the market.
it is estimated that more than 50% of stock trading volume in the US is currently being driven by algorithmic 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 risk-free rate is 3%, the portfolio beta is 1.5, and the actual return is 25%.
according to the CAPM, the portfolio should expect to return 1.5 times the index after netting out the risk-free rate. this is because the portfolio is 1.5x riskier than the market.
if we take the index return after subtracting the 3% has risk-free rate, we get 7%. multiple 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 11.5.
alternative minimum tax (AMT)
an alternative tax computation that adds certain tax preference items back intro adjusted gross income. if the AMT is higher than the regular tax and the amount by which the AMT exceeds the regular tax are paid.
American depositoty 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
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.
appreciation
the increase in an asset’s value.
arbitrage
a legal strategy that generates a guaranteed profit from transaction. a common form of the same security in different markets at different prices to lock in a profit.
this is not considered market manipulation.
arithmetic mean
the average of a set of numbers, such as annual returns on investment.
ask
an indication by a trader or a dealer of willingness to sell a security or a commodity; the price at which an investor can buy from a broker-dealer;
offer; bid; public offering price; quotation
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 issues today is nonassesable.
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 commodities; asset allocation
auction market
a market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. the NYSE is an auction market; double action 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 determined the investor’s tax liability.
first in, first out; last in, first out
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 form 5.00% 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 on or are expected to fall.
benchmark portfolio
a model portfolio of a larger number of assets, such as the S&P 500, against which the performance of a fund or portfolio is measured.
beta
a means of measuring the co-movement of the return of 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 succeed those of the market.
a beta less than 1 means returns will be expected to be lower than those of the markert.
bid
an indication by an investor, a trader, or a dealer of a willingness to buy a security; the price at which at which an investor can sell to a broker- dealer;
public offering price; quotation
Black-Scholes
one of the most popular options pricing models. appears frequently on the exam as an incorrect choice.
block trade
a large trading order, defined as an order that consists of 10,000 or more of shares of a given stock or at a total market value of $200,000 or more; block sale
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 the latin “good faith”
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 price; preferred stock
call buyer
an investor who pays a premium for an option contract and receives, for a specified time, the right to buy an underlying security at a specified price;
call writer; put
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 feature; call provision
the written agreement between an issuer an 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.
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; call provision
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.
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 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.
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.
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.
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 source for financing.
capital surplus
the money a corporation receives in excess of the status value of stock at the time of the first sale.
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 not purchased not later than two days after the standard period set by industry practice codes;
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
ex. 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 Echange
CD
negotiable certificate of deposit
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.
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 captial.
chartist
a securities analyst who uses charts and graphs of the past price movements of a security to predict its future movements;
technician; technical analysis
Chicago Board Options Exchange (CBOE)
the self-regulatory organization (SRO) 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”; 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;
information barriers
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.
Class A share
a class of mutual fund shares issued with a front-end sales load. a mutual fund offers the type of sales charge they will pay;
front-end load
Class B share
a class of mutual fund share issued with a back-end load. a mutual fund offers the type of sales charge they will pay;
back-end load
Class C share
a class of mutual fund share issued with a level load. a mutual fund offers the type of sales charge they will pay.
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;
publicly traded fund; closed-end management compnay
closing purchase
an options transaction in which the seller buys back an option in the same series; the two transactions effectively cancel each other our and the position is liquidated
coincident indicator
a measurable economic factor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy;
examples: nonagricultural 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 to 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;
collateral trust certificate
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.
commercial paper
an unsecured, short-term promissory note issued by a corporation or financing accounts receivable and inventories. it is usually issued at a discount reflecting prevailing market interest rates. maturities range up to nine months.
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.
commission
a service charge an agent assess in return for arranging a security’s purchase or sale. a commission must be fair and reasonable, consider all the relevant factors of the transaction;
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 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 the income and fund retains;
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 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 the fixed dollar level
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.
Consumer Price Index (CPI)
a measure of price changes in a “market basket” of consumer goods and services used to identify periods of inflation and deflation.
consumption
a term used by economists to refer to the purchase by household units of newly produced goods and services.
contraction
a period of general economic decline, 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. 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.
control security
any security owned by a director or an officer of the issuer or by a stockholder who owns more than 10% of an 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 number of shares of common stock per par value amount that the holder would receive for converting a convertible bond or preferred share;
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 statement’s filing date with the SEC and the registration’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, its interest is taxable, and it has a term maturity
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 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 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;
default risk; financial risk
credit spread
(1) a position established when the premium received for the option sold exceeds the premium paid for the option bought; debt spread
(2) the difference in yields between two securities; yield spread
cumulative preferred stock
an equity 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: liquid items (cash and equivalents), accounts receivable, inventory, prepaid expenses
current liabilities
a corporation’s debt obligations due for payment within the next 12 months.
examples: accounts payable, accrued wages payable, 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;
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;
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 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.
custody
maintaining physical possession of a customer’s assets. state-registered investment advisers must notify the Administrator if they intend to take custody, assuming the state law permits such.
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.
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.
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.
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.
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.
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 charged the customer a markup or markdown;
principal
debenture
a debt obligation backed by the issuing corporation’s general credit;
unsecured bond
debit spread
a position established when the premium paid for the option bought exceeds the premium received for the option sold.
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.
debt-to-equity ratio
the ratio of total long-term debt to total stockholders’ equity; it is used to measure leverage
decumulation
disposal of something accumulated. investors spend much of their working years accumulating for retirement; taking the funds out is decumulation.
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 nondurable goods for which demand remains steady throughout the business cycle;
examples: food industry and utilities
defensive investment strategy
a method of portfolio allocation and management aimed at minimizing risk of losing principal. defensive investors place a high percentage of their investable assets in bonds, cash equivalents, and 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 (or in the case of disability or death).
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 distribution.
defined benefit plan
a qualified retirement plan that specifies 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.
delta
one of the four Greeks used by option 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 0 to 1 for calls (0 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.
demand
a consumer’s desire and willingness to pay for a good or service.
demand deposit
(DDA) refers to a type of account held at banks and financial institutions that may be withdrawn at any time by the consumer. 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-owned company becomes shareholder-owned. historically, this has usually been done by mutual life insurance companies (think MetLife or Prudential), but, in recent years has been done by other member-owned entities such as the New York Stock Exchange (NYSE).
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 noncash 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 the most common types. institutional investors generally use derivatives to increase overall portfolio return or to hedge portfolio risk.
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: oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, and S corporation 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.
discounted cash flow
(DCF) is a model or method of valuation in which future cash flows are discounted back to a present value using the time-value of money. an investment’s worth is equal to the present value of all projected future cash flows.
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.
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.
dividend discount model
(DDM) 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.
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 growth model
a valuation method which takes into consideration dividend per share and its expected growth. the 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 DDM.
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.
dividends per share
the dollar amount of cash dividends paid on each common share during one year.
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.
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.
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 prices are low and fewer shares when 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 avergaes
the most widely quotes 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.
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 Utilities Average (DJUA)
a market indicator composed of 15 utilities stocks.
DRIP
dividend reinvestment plan
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
an approximate measure of a bond’s price sensitivity to changes in interest rates. 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.
EAFE
the EAFE index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Austalasia, and Far East, but not the U.S. or Canada.
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.
earnings momentum
a term used to describe that earnings are growing at an increasing rate. that is, if they grew at a rate of 10% in the first quarter, 11% in the second quarter, and 14% in the most recent quarter, this shows earnings increasing at an accelerating rate. that is positive earnings momentum. used by those following a growth style of portfolio management.
earnings multiplier
another term for the price-to-earning (PE) ratio. the earnings multiplier is the price of the stock divided by its earnings per share.
earnings per share (EPS)
a corporation’s net income available for common stock divided by its number of shares of common stock outstanding.
economically targeted investing (ETI)
a form of impact investing in investments selected for the economic benefits they create apart from their investment return to the employee benefit plan.
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 margin 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, semistrong, and strong;
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 two forms: nonqualified (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.
entangled
a social media term meaning that a securities firm has participated in the development of content on a third-party site to which it publishes links.
environmental, social, and governance (ESG)
a form of impact investing. it is a set of standards for a company’s operations that socially conscious investors use to screen investments.
equity
common and preferred stockholders’ 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: common and preferred stock, interests in a limited partnership or joint venture; securities that carry the right to be traded for equity securities, such as convertible bonds, rights, and warrants; and put and call options on equity securities.
eurobond
a long-term debt instrument of a government or corporation that is denominated in the currency of the issuer’s country but is issued and sold in a different country.
Eurodollar
U.S. currency held in banks outside the United States
exchange-listed security
a security that has met certain requirements an dhas been admitted to full trading privileges on a stock exchange. the NYSE and regional exchanges set listing requirements for volume of shares outstanding, corporate earnings, and other characteristics.
exchange privilege
a feature offered by a mutual fund allowing an individual to transfer an investment in one fund to another fund under the same sponsor without incurring an additional sales charge;
conversion privilege
exchange traded fund (ETF)
an investment company originally designed to track a specific index that is traded on a stock exchange. rather than basing the price on NAV, the ETF’s market price is constantly changing as does the price of any other listed stock. ETFs may be purchased on margin and sold short. although most ETFs still track indexes, there are a number of ETFs that are actively managed.
executor, (f. executrix)
a person given fiduciary authorization to manage the affairs of a decedent’s estate. an executor’s authority is established by the decedent’s last will.
exempt reporting adviser
ERAs are advisers that are exempt from registration relying on either the venture capital fund adviser or the private fund adviser exemption. although exempt from registration, an ERA is subject to certain reporting, recordkeeping, and other obligations.
exempt security
a security exempt from the registration requirements (although not from the antifraud requirements) of the Securities Act of 1933 or the Uniform Securities Act
examples: U.S. government securities and municipal securities
exempt transaction
a transaction that does not trigger a state’s registration and advertising requirements under the USA.
examples: nonissuer transactions in outstanding securities (normal market trading); transactions with financial institutions; unsolicited transactions; and private placement transactions.
no transaction is exempt from the USA’s antifraud provisions.
exercise price
the cost per share at which an option or a warrant holder may buy or sell the underlying security;
strike price
expansion
a period of increased business activity throughout the economy; one of the four stages of the business cycle
expansionary policy
a monetary policy that increases the money supply, usually with the intention of lowering interest rates and combating deflation.
expense ratio
a ratio for comparing a mutual fund’s efficiency by dividing the fund’s expenses by its net assets.
Farm Credit Administration (FCA)
the government agency that coordinates the activities of the banks in the Farm Credit System.
Farm Credit System (FCS)
an organization of 37 privately owned banks that provide credit services to farmers and mortgages on farm property. included in the system are the Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.
federal covered adviser
as defined by the NSMIA of 1996, either an IA registered with the SEC or excluded from the definition of IA under the Investment Advisers Act of 1940.
under Dodd-Frank, these advisers registering with the SEC must generally meet a threshold of $100 million or more AUM.
Federal covered security
under the NSMIA of 1996, a new definition was created: covered security, generally referred to as a federal covered security on the exam.
state securities registration requirements were preempted with respect to covered securities, other than the ability to require notice filing, particularly in the case of registered investment companies. the most tested federal covered securities include those on the major U.S. exchanges and Nasdaq as well as investment companies registered with the SEC and securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 (private placements).
Federal Deposit Insurance Corporation (FDIC)
the government agency that provides deposit insurance for member banks and prevents banks from thrift failures.
federal funds
the reserves of banks and certain other institutions greater than the reserve requirements or excess reserves. these funds are available immediately.
federal funds rate
the interest rate charged by one institution lending federal funds to another.
Federal Home Loan Bank (FHLB)
a government-regulated organization that operates a credit reserve system for the nation’s savings and loan institutions.
Federal Home Loan Mortgage Corporation (FHLMC)
a publicly traded corporation that promotes the nationwide secondary market in mortgages by issuing mortgage-backed pass-through debt certificate;
Freddie Mac
Federal Intermediate Credit Bank (FICB)
one of 12 banks that provide short-term financing to farmers as part of the Farm Credit System.
Federal National Mortgage Association (FNMA)
a publicly held corporation that purchases conventional mortgages and mortgages from government agencies, including the Federal Housing Administration, Department of Veterans Affairs, and Farmers Home Administration;
Fannie Mae
Federal Open Market Committee (FOMC)
a committee that makes decisions concerning the Fed’s operations to control the money supply.
Federal Reserve Board (FRB)
a committee that makes decisions concerning the Fed’s operations to control the money supply;
Federal Reserve System
the central bank system of the U.S. its primary responsibility is to regulate the flow of money and credit. the system includes 12 regional banks, 24 branch breaks, and hundreds of national and state banks;
fed; the fed
fiduciary
a person legally appointed and authorized to hold assets in trust for another person and manage those assets for that person’s benefit.
filing date
the day on which an issuer submits tot he SEC the registration statement for a new securities issue.
fill-or-kill order (FOK)
an order that instructs the floor broker to fill the entire order immediately; if the entire order cannot be executed immediately, it is cancelled.
final prospectus
the legal document that states a new issue security’s price, delivery date, and underwriting spread, as well as other material information. it must be given to every investor who purchases a new issue of registered securities;
prospectus
final roder
a term used in both state and federal law to refer to a decision rendered by a regulatory body. the final order may result in a suspension, revocation, or denial of registration. it is analogous to the judge passing sentence in trial.
Financial Industry Regulatory Authority (FINRA)
organized in July 2007 as a joint effort of NASD and the NYSE to harmonize regulation in the securities industry.
firm quote
the actual price at which a trading unit of a security (such as 100 shares od stock or five bonds) may be bought or sold. all quotes are firm quotes unless otherwise indicated.
first in, first out (FIFO)
an accoutning method used to assess a company’s inventory, in which it is assumed that the first goods acquired are the first to be sold. the same method is used by the IRS to determine cost basis for tax purposes.
fiscal policy
the federal tax and spending policies set by Congress and the President. these policies affect tax rates, interest rates, and government spending in an effort to control the economy.
fiscal year
term used to describe an accounting years that ends other than December 21st (calendar year accounting)
fixed annuity
an insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. the insurance company guarantees both earnings and principal.
fixed dollar annuity; guaranteed dollar annuity
fixed asset
a tangible, physical property used in the course of a corporation’s everyday operations, including buildings, equipment, and land.
flat yield curve
a chart showing the yields of bonds with short maturities as equal to the yields of bonds with long maturities;
even yield curve
flow-through
a term that describes the way income, deductions, and credits resulting from the activities of a business are applied to individual taxes and expenses as though each incurred the income and deductions directly.
FNMA
Federal National Mortgage Association
FOK
fill-or-kill order
FOMC
Federal Open Market Committee
foreign curency
money issued by a country other than the one in which the investor resides. options and futures contracts on numerous foreign currencies are traded on U.S. exchanges.
foreign exchange rate
the price of one country’s currency in terms of another currency;
exchange rate
Form 706
the IRS form used for the computation of estate tax. it must be filed within nine months of death unless an extension has been obtained.
Form 709
the United States Gift (and Generation-Skipping Transfer) Tax Return is filed on Form 709.
Form 1040
the IRS form used to file individual income tax. schedule C of the Form 1040 is used to report business income for sole proprietorships.
Form 1041
the IRS form used by estates and trusts to report their income for tax purposes.
Form 1065
the information return field by a partnership or LLC. because income and losses flow through to owners, the entity pays no tax.
Form 1120 & 1120S
the tax returns filed by corporations. the “S” is for an S corporation.
Form D
the SEC form required to be filed when engaging in a Regulation D private placement.
forward contract
a forward contract is a direct commitment between one buyer and one seller for a specific commodity. because forward contracts are direct obligations between a specific buyer and seller (unlike futures and options, they are not standardized), they are not easily transferred and are considered illiquid.
forward pricing
the valuation process for mutual fund shares, whereby an order to purchase or redeem shares is executed at the price determined by the portfolio valuation calculated after the order is received. portfolio valuations occur at least once per business day.
fractional share
a portion of a whole share of stock. mutual fund shares are frequently issued in fractional amounts. fractional shares used to be generated when corporations declared stock dividends, merged, or voted to split stock, but today it is more common for corporations to issue the cash equivalent of fractional shares.
fraud
the deliberate concealment, misrepresentation, or omission of material information or the truth, so as to deceive or manipulate another party for unlawful or unfair gain.
Freddie Mac
Federal Home Loan Mortgage Corporation
front-end load
a mutual fund commission or sales fee that is charged at the time shares are purchased. the load is added to the share’s net asset value when calculating the public offering price.
front runnings
the prohibited practice of entering an order for the benefit of a firm or a securities professional before entering customer orders.
full power of attorney
a written authorization for someone other than an account’s beneficial owner to make deposits and withdrawals and to execute trades in the account.
full trading authorization
an authorization, usually provided by a full power of attorney, for someone other than the customer to have full trading privileges in an account.
fundamental analysis
a method of evaluating securities by attempting to measure the intrinsic value of a particular stock. fundamental analysts study the overall economy, industry conditions, and the financial condition and management of particular companies.
futures
futures contracts are exchange-traded obligations for a specific commodity. a buyer goes long, or establishes a long position, and is obligated to take delivery of the commodity on the future date specified. a seller goes short, or establishes a short position, and is obligated to deliver the commodity on the specified future date. if the seller does not own the commodity, his potential loss is unlimited because he has promised delivery and must pay any price to acquire the commodity to deliver. futures may be highly leveraged.
future value
the amount to which a current deposit will grow at a given rate of compound interest to a specific date in the future.
GAAP
the acronym for generally accepted accounting principles, the standard method used in the U.S. by professional accountants.
gamma
one of the four Greeks used by options and analysts. an option’s gamma is a measure of the rate of change of its delta. the gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price.
general obligation bond (GO)
a municipal debt issue backed by the full faith, credit, and taxing power of the issuer for payment of interest and principal;
full faith and credit bond
general partnership (GP)
an association of two or more entities formed to conduct business jointly. the partnership does not require documents for formation, and the general partners are jointly and severally liable for the partnership’s liabilities.
generation skipping trust
a form of bypass trust that is designed to have assets pass to grandchildren (or great-grandchildren) in order to “skip” a generation of estate tax.
geometric mean
a type of average that indicates the central tendency of a set of numbers that, instead of finding the sum as with the arithmetic mean, takes the product of the numbers and divides that by the nth root (where n is the count of numbers). it will always be lower than the arithmetic mean [unless all od the numbers are the same (.e.g, 6, 6, and 6)].
good-til-canceled order (GTC)
an order that is left on the specialist’s book until it is either executed or canceled;
open order
