Terms Flashcards
10-K
A comprehensive summary report of a company’s performance that must be submitted annually to the Securities and Exchange Commission. Typically, the 10-K contains much more detail than the annual shareholder’s report.
10-Q
A comprehensive report of a company’s performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. In the 10-Q, firms are required to disclose relevant information regarding their financial position.
12b-1 Fee
An annual charge against the fund’s assets covering the mutual fund’s cost of advertising and marketing.
30-Day Visible Supply
A measure of all municipal securities offerings that are scheduled to come into the marketplace in the next 30 calendar days. It is published in the Daily Bond Buyer.
8-K
A report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders or the Securities and Exchange Commission. Examples are acquisitions, bankruptcy, or a change in the fiscal year.
Access Persons
An SEC-defined term referring to registered investment advisers and their directors, officers, and partners, and supervised persons who have access to non-public information.
Accredited Investors
A defined term under the Securities Exchange Act of 1934 that covers numerous types of investors. Among that list is a natural person with earned income that exceeded $200,000 in each of the prior two years, and who reasonably expects the same for the current year OR who has a net worth over $1 million (excluding the value of the person’s primary residence), either alone or together with a spouse.
Accretion
The process of increasing the basis of a security issued at a discount and maturing at face value (typically used with zero-coupon bonds).
Accrued Interest
Represents interest that has accrued from the last interest payment date up to the sale of the bond. The buyer of the bond pays accrued interest to the seller.
Accumulation Unit
An accounting measure used to determine a variable annuity contract owner’s interest in the separate account of securities. Accumulation units are converted into annuity units when the accumulation period ends and the annuity period begins.
Acid Test (Quick) Ratio
Current Assets Less Inventory/ Current Liabilities
Active Asset Allocation
Refers to active “stock picking” and market timing to constantly rebalance the portfolio to attempt to obtain returns in excess of a specific benchmark or expected return.
Additional Bond Test
Before bonds of an additional issue having the same claim or lien on pledged revenues can be issued, an earnings test must be performed and satisfied.
Adjusted Gross Income (AGI)
he starting point to calculate federal income tax liability. Gross income minus adjustments equals AGI.
Advanced Computerized Execution System (ACES)
A voluntary FINRA order routing and execution system that provides market makers with the ability to automatically execute trades for authorized order entry firms in NASDAQ/NMS and NASDAQ Small Cap securities.
Administrator
The designated person in a state who administers the securities regulations of the state and administers the Uniform Securities Act.
Advances and Declines
The ratio of advancing stock prices to declining stock prices.
Advertising
The term “advertising” refers to material designed for use through a mass medium. A Broker-Dealer using advertising material cannot control who receives it as it may be transmitted by radio, television, or newspaper.
Affidavit of Domicile
Document that attests to the residence of a deceased person. In certain states, to transfer securities in a joint tenancy on the death of a tenant, an Affidavit of Domicile, Death Certificate, and Inheritance Tax Waiver must be completed.
Affiliated Person
Defined as someone who can influence management decisions in that corporation (i.e. insiders). May include officers, directors, principal stockholders, and members of their immediate families.
After-Tax Yield
Annual Interest x (100% - Investor’s Tax Rate)
Agency Cross
An agency cross means that the same broker represents the buyer and the seller in the same transaction.
Agent
Any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. An agent acts on behalf of a customer and charges a commission on a securities transaction.
All or None Order (AON)
This is an order to buy or sell securities which must be executed in its entirety or not at all. An “all or none order” does not have to be executed immediately.
Alpha
Statistical measurement that describes the expected return of a particular security relating to the security itself rather than market conditions.
Alternative Display Facility (ADF)
Is a display-only facility that is operated by FINRA as an alternative to the exchange used to post quotes, compare, and report trades for CQS-listed securities and NASDAQ equity securities.
Alternative Minimum Tax (AMT)
A Federal Income Tax designed to prevent taxpayers from escaping taxes by investing in Tax Preference Items.
Alternative Order
This order has either of two alternatives: For example, a customer places an order to either: Buy 1000 XYZ at 40 stop GTC, or Buy 1000 XYZ at 35 GTC. The execution of either order causes cancellation of the other order. If there is a partial execution, for example, 600 shares of XYZ are purchased at 35, the remaining open order becomes: Buy 400 XYZ at 40 stop GTC, or Buy 400 XYZ at 35 GTC
American Depositary Receipts (ADRs)
Represents receipts for shares in foreign corporations. By purchasing ADR’s, American investors receive dividends in American dollars through the bank that holds the shares.
American Style Options
Type of Option Style that can be exercised at any time after purchase
Amortization
An accounting procedure or process in which the premium of a bond is written off over its remaining life. Municipal bond premiums may be amortized by an investor. Amortization of a municipal or corporate bond decreases the cost basis of the bond. If the same amount is amortized each year, it is referred to as “straight-line amortization”.
And Interest (Plus Interest)
When a security trades “and interest”, interest is added to the purchase price. When an investor buys a bond, the investor pays the purchase price plus accrued interest.
Angel Investors
High net worth individuals who invest in small or “start-up” businesses and frequently advise on the management of the business.
Annual Fund Operating Expense
A type of mutual fund expense that covers the cost of regular and recurring operating expenses.
Annualized Return
Annual rate of return on an investment. It includes appreciation, capital gains or losses, dividends or interest, and other distributions.
Annuity
A contract sold by a life insurance company that guarantees a fixed or variable payment to the investor (annuitant) at a future date in time, generally retirement.
Annuity Units
An accounting measure used to determine the amount of each payment to the annuitant. The annuity unit fluctuates according to the value of the securities kept in a separate account. Annuity units exist after annuitization, whereas accumulation units exist before annuitization.
Arbitrage
Buying securities in one marketplace and selling them in another to take advantage of a price disparity. For example, buying 100 shares of ABC at 25 on the NYSE and immediately selling 100 shares of ABC at 25.25 in the OTC market.
Arbitration
A legally binding method of handling disputes which does not involve the court system. Arbitration is less costly and more efficient than regular litigation.
Ask
In equities trading, the ask (also referred to as offer) is the price at which a market maker is willing to sell shares to a buyer.
Asset Allocation Principles
“Asset Allocation” refers to how a client’s portfolio is invested. A certain percentage of the client’s assets are invested in varying asset classes such as equity securities, debt securities, and other investments. A client’s asset allocation will be determined by the agent or adviser and will depend heavily on the client’s investment objectives and risk tolerance.
Assets
Anything that carries value for the company on a balance sheet. This category includes Current Assets, Fixed Assets, and Other Assets.
Associated Person
An associated person of a broker-dealer means any partner, officer, director, or branch manager of a broker-dealer, any person directly or indirectly controlled by or under common control of a broker-dealer, and any employee of the broker-dealer except any person whose functions are solely clerical.
At-the-Money
Describes a situation where the market price of the underlying security and the strike price of the option are the same. For example, assume a customer buys 1 ABC July 40 call. If the underlying security, ABC, is selling at $40 per share, then the option is selling at-the money.
Authorized
Represents the maximum number of shares a company may legally create for issuance. These terms are included in the Articles of Incorporation.
Automated Confirmation of Transaction (ACT)
System that facilitates the reporting and clearing of trades.
Automated Customer Account Transfer Service (ACATs)
ACATs is the system used when a customer requests his or her account held at one member firm be transferred to another member firm.
Back-end load
The sales load that an investor pays redeeming mutual fund shares.
Balance of Payments
Refers to money flowing into and out of the U.S. If a Balance of Payments deficit exists, the deficit would increase due to the following: 1. An increase in U.S. investments abroad. 2. U.S. loans to other countries. 3. U.S. tourists spending abroad. 4. A raising of interest and dividends owned by foreigners. A U.S. Balance of Payments deficit would improve or lessen with: 1. New foreign investments in the U.S. 2. Commodity exports. 3. Spending by foreign tourists in the U.S. 4. Increase in interest and dividends earned on foreign investments.
Balance Sheet (Corporation)
The Balance Sheet of a corporation shows all of the assets and liabilities as of a particular date, usually by the end of the year. The basic balance sheet equation is: Total Assets = Total Liabilities + Net Worth
Balance Sheet (Personal)
Personal Balance Sheet may be constructed at a point in time and is used to create a trend and calculate estate tax. The basic balance sheet equation is: Assets = Liabilities + Equity
Bank Guarantee Letter
Issued by an Options Clearing Corporation (OCC) approved bank. The Letter states that a particular customer has funds equal to the aggregate exercise of a put option which has been sold. The Bank agrees to deliver the funds to the broker-dealer if the option is exercised against the customer
Bank Secrecy Act
Federal anti-money laundering and counter-terrorism statue.
Banker’s Acceptance
A money market instrument designed primarily to enable businessmen to finance foreign trade. It is a draft or bill exchange that becomes a money market instrument when payment is guaranteed by a bank. Banker’s Acceptance are normally issued on a discount basis and mature within nine months.
Barbell Portfolio
A portfolio of bonds with concentrations of short and long term maturities but very few mid-range maturities. The portfolio is adjusted to maintain the long and short distributions.
Basic Balance Sheet Equation
Assets = Liabilities + Stockholder’s Equity. All of the assets of a corporation equal to the claims against them. Assets are anything of value owned by a corporation. Liabilities are claims of creditors against the assets. Stockholder’s Equity represents the claims of owners against the assets.
Basis Point
Represents 1/100 of one percent in terms of yield. Assume Bond A has a yield of 6.75% and Bond B has a yield of 6.50%; the difference in the two yields is 25 basis points.
Bearish
An investor that expects the market price of the stock to decrease or go down.
Bearish Call Spread
An investor purchases the call with a higher strike price and sells the call with a lower strike price. Assume a customer puts on the following bearish call spread: Long 1 ABC July 60 call at 1, Short 1 ABC July 50 call at 7
Benchmark
A point of reference to measure investor’s portfolio or security returns. Benchmarks vary and are used for many asset classes such as stocks, bonds, and commodities. A benchmark can be an interest rate, the value of a group of stocks, or bonds. However, the most common benchmark are indices, with the S&P 500 the most common benchmark that stock portfolio managers track.
Best Efforts Underwriting
The underwriting group acts as agent in attempting to distribute a new issue to the public.
Best Execution
In any transaction for or with a customer or a customer of another broker-dealer, member firms and persons associated with a member firm must use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the price to the customer is as favorable as possible under prevailing market conditions.
Beta
A statistical measure used to assess the volatility of a particular security to the market as a whole. Stocks with a beta of 1.0 are expected to fluctuate more than the general market, while those with a beta of less than 1.0 are expected to fluctuate less than the general market.
Bid
In equities trading, the bid is the price at which a market maker is willing to buy shares from a seller.
Bid Form
Underwriters bidding on a new issue of municipal securities during a competitive underwriting submit this form and the interest rate proposed for the issue. The issuer normally grants the issue to the underwriting syndicate with the lowest net interest cost.
Bid Wanted
For inactively traded securities, a Bid Wanted (BW) indication may be placed in the Pink Sheets by a dealer. For example, a quotation for XYZ may be indicated as follows: XYZ BW - 14 This means the dealer is indicating an interest to sell shares at $14, but is seeking a bid from another dealer.
Binary Options
Options that have one of two outcomes: If the option is at-the-money or in-the-money, the investor gets the fixed amount depending on the option ($100 or $1,000). If the option is out-of-the-money, the investor gets $0.
Black-Scholes Pricing Model
Attempts to determine whether an option is fairly priced, over-valued or undervalued. It considers the price of the underlying stock, the strike price, time until expiration, volatility of the underlying stock, interest rates, and the risk-free rate of return.
Block Trade
A large number of shares traded at one time. Under NYSE rules, it is defined as at least 10,000 shares or a quantity of stock with a market of value of $200,000 or more.
Blotter
Blotters are records of original entry such as journals, diaries, and day books.
Blotter
A list or log generally of activity which takes place in the branch office of a broker-dealer. It is a temporary record until such activities are transferred to permanent record books.
Blue Chip Stock
Stock issued by a nationally known company that has a good reputation for quality of management, products, and services. Blue Chip Stocks are expected to pay dividends in good times and in bad times. They will generally maintain about a 50% Dividend Payout Ratio.
Blue List
It is a daily publication which lists municipal bonds being offered by dealers. It contains information such as the name of the issuer, par value, interest rate, maturity date, price or yield, and the dealer offering the bond.
Blue Sky Laws
State securities laws are referred to as “blue sky laws.” The purpose of these laws is to protect against fraudulent transactions with a particular state.
Board of Directors
Elected by stockholders of a corporation to manage the entity. The Board of Directors appoints the management of the corporation.
Bond
Bonds are loans. When an investor buys a bond, the investor is lending money to an organization whether it be a public corporation, the federal government, or a municipality. Bonds represent a debt obligation of the issuing organization and are classified as debt securities.
Bond Buyer
The name of an organization that publishes the Daily Bond Buyer and Weekly Bond Buyer. Any significant new issue of a municipal bond will be advertised in the Daily Bond Buyer through a Notice of Sale.
Bonus Annuity
New annuity contract that provides an extra 3% to 5% premium credit as an incentive to buy the annuity. This benefit typically comes with higher contract costs and longer surrender periods subject to surrender charges.
Book Entry
A security issue which is not available to a purchaser in physical form. The owner of a book entry security has a book entry advice of confirmation as proof of ownership. Book entry securities transfer by journal entry.
Book value per share
Total shareholder’s equity - preferred stock/ Common shares outstanding
Bottom-Up Investing
An investment analysis approach that starts with a company-by-company analysis of individual firms.
Brady Bond
U.S. Dollar- denominated bonds issued by Latin American countries that are collateralized by U.S. Treasury zero-coupon bonds.
Branch Office
FINRA definition: Any location where one or more associated persons of a member regularly conducts the business of effecting any transactions in, or inducing, or attempting to induce the purchase or sale of any security, or a location that is held out as such.
Breakeven - Options
The point at which the buyer or seller of an option will not realize a gain or loss.
Breakpoint
Refers to the minimum dollar amount of mutual fund shares purchased that will give the customer a volume discount. For example, a customer who invests $20,000 pays a sales charge of 8% on mutual fund while a customer who invests less than $20,000 would pay a sales charge of 8 1/2%.
Brochure Rule
Part 2 of Form ADV which requires that investment advisers to make certain disclosures to prospective clients and existing clients.
Broker
A broker acts in an agency capacity bringing a buyer and seller together in a securities transaction for compensation via commission.
Broker Loan Rate
The interest rate that banks charge broker-dealers who borrow money using customers’ securities as collateral. This is also referred to as the “Call Loan Rate”.
BrokerCheck
FINRA has developed BrokerCheck to provide information about FINRA-registered firms and brokers to help investors determine whether to conduct, or continue to conduct, business with these brokerage firms and brokers.
Broker-Dealer
Any person engaged in the business of effecting or attempting to effect transactions in securities for the accounts of others or for his/her own account.
Bullish
An investor that expects the market price of a stock to increase or go higher.
Bullish Call Spread
Buying a call with a lower strike price and selling a call with a higher strike price. For example, assume a customer engages in the following: Sell 1 ABC July 30 call @ 1, and Buy 1 ABC July 20 call @ 5
Business Continuity Plan
Business Continuity Plans are designed to address natural disasters and other forms of disruption that may occur due to unforeseen circumstances. They include planning for alternative means of communication, data back-up and recovery methods, and even alternative physical locations for an office. BCPs do not deal with day-to-day business issues such as customer fraud, margin deficiencies, or technological advancements.
Business Cycle
Refers to increases and decreases in economic activity over a period of time. The Business Cycle has four major phases: Peak - Recession - Trough - Recovery.
Business Enterprises
The main forms of business enterprises are sole proprietorship, partnerships, and corporations. Owners of sole proprietorships and general partners in a partnership have unlimited personal liability for the debts of the business enterprise. Stockholders in a corporation have limited liability and can only lose the amount of their investment in the corporation.
Business Risk
Type of Unsystematic Risk, also known as Credit Risk or Financial Risk, and is the risk associated with the unique situation that an individual company will fail (go bankrupt).
Butterfly Spread
A neutral option strategy that has limited risk and limited profit potential. It is the combination of a Bull Spread and a Bear Spread using 3 strike prices, using either calls or puts, and done at either a net credit or net debit.
Buy-In (Close-out by Purchaser)
A buy-in occurs when the selling broker has not completed the transaction (delivered the securities) according to its terms.
Buy-Write Strategy
Investors that buy stock and write covered calls for income, generally with the intent of increasing their rate of return and the intent of lowering volatility.
C Corporation
A “C” Corporation is a legal and taxable entity separate from its owners. It is owned by shareholders. An advantage is shareholders have limited liability. A disadvantage is it is subject to double taxation.
Calendar Spread
An option spread in which the strike prices are the same and the expiration months are different. Assume a customer puts on the following spread position: Sell 1 ABC April 40 call @ 5, and Buy 1 ABC July 40 call @ 8. This is a calendar spread since the strike prices are the same and the expiration months are different.
Call (Reinvestment) Risk
The risk that bondholders will have their bonds called or redeemed prior to maturity. The bonds would be redeemed by the issuer if interest rates declined. This would leave the bondholders reinvesting their money at a lower return.
Call Option
In the equities market, the right but not the obligation to buy 100 shares of a particular stock at a predetermined price.
Call Protection
A fixed time period during which a bond may not be called by the issuer. It is valuable to an investor when interest rates are falling since the issuer cannot call the bond away from the investor. An investor interested in call protection would not purchase a premium bond callable at par.
Callable Bond
A feature added to bonds that allow the issuer to redeem the bond before maturity, at a pre-established premium price, after a specified date. The “call provision” of a callable bond will specify the callable date and price at which the bond will be called.
Capital Asset Pricing Model (CAPM)
A model that measures expected returns in relation to the amount of risk that an investment carries.
Capital Gain Distribution
A distribution made by an investment company from long-term capital gains realized by its portfolio.
Capital Gain or Loss
Realized on the sales of a capital asset such as a security. A capital gain is realized when the sales proceeds from a capital asset exceed the cost basis. A capital loss is realized when the sales proceeds are less than the cost basis.
Capital Market
Markets where long-term debt and equity instruments are traded. Capital Markets consist of stock exchanges and the over-the-counter market. Capital Market instruments include items such as equities (common and preferred stock), corporate, municipal and U.S. Government bonds and mortgages.
Capping
Selling stock short to keep the price of the underlying stock down so that calls will expire worthless and the writer can keep the premium
Cash Account
A securities account in which the customer pays for a purchase of securities in full. The entire risk of the market value of the securities is placed on the customer.
Cash Assets Ratio
Cash Assets Ratio = Cash and Equivalents / Current Liabilities.
