Terms Flashcards
1
Q
Regulation S-P
A
is an SEC regulation designed to safeguard privacy of confidential information and data about customers. See Privacy Notices.
2
Q
Regressive Taxes
A
Regressive Taxes - a tax which is the same percentage for all taxpayers regardless of how much one earns. Examples include sales tax, gasoline tax, cigarette tax, and whiskey tax. A regressive tax imposes a higher burden on the poor than on the rich, because it represents a higher percentage of a poor man’s disposable income. See Progressive Tax.
3
Q
SEC
A
Securities Exchange Commission, U.S. Congress created in 1934, federal agency. Mission to protect investors to maintain fair orderly efficient markets worthy of the public’s trust
4
Q
Securities Act of 1933
A
Truth in securities act. Material info accurate n not misleading provided before stocks n bonds are purchased in the primary market.focus on initial securities offerings and requires registration with SEC before being allowed to offer or sell securities to the public.
Prospectus is a disclosure detailing all the investor needs to know about the company because of securities act of 1933. Sec nor any state securities commission has approved it disapproved the accuracy must be prominently mentioned.
5
Q
Issuer
A
Any individual or entity issuing a stock or bond or other security to investors for our abuse. Example Facebook is an issuer of common stock.
6
Q
Blue sky-ing
A
State level registration. Usually for securities not traded on NYSE or NASDAQ or any other major securities exchange which require SEC exclusive registration.
7
Q
Effective date
A
The release date that SEC allows sales to be finalized and issuers receives Capital it is seeking.
8
Q
Securities Act of 1934
A
Securities and Exchange Commission created authority over all aspects of the securities industry. Gives SEC disciplinary powers over entities and persons including SRO.. Allows requires periodic reporting of info like quarterly and annual reports with the SEC. additional reports when officers and members sell shares. Mergers and acquisitions.
Capping - illegal attempt to put a lid on the price of a stock or other security. This is a good example of market manipulation. It violates the Securities Exchange Act of 1934. But really, it’s hard to fathom how any one person could successfully keep the price of a stock from rising in today’s volatile markets. See Market Manipulation.
9
Q
SRO
A
Self regulatory organizations that regulates its own members and enforced its own rules along with the SEC. ex. FINRA, NASDAQ, NYSE. OCC
OPTIONS CLEARING CORPORATION
FIXED INCOME CLEARING CORPORATION
NSCCNATIONALSECURITIES CLEARING COORPORATION AND DEPOSIT trust corporation ARE PART OF DTCC DEPOSITORY TRUST & clearing corporation
10
Q
U.S.A.
A
Uniform Securities Act. Model legislation for each state’s admin office that regulate securities and the professionals. U.S.A. For state. SEC for federal.requires both persons working in the securities industry and offerings of securities be registered with the state securities department.
11
Q
FinCEN
A
Financial crimes enforcement networK if the United States treasury. Firms
12
Q
T-notes t-bonds
A
Financing of the federal government by issuing department of treasury securities such as t-notes and t-bonds
13
Q
SIPC
A
Securities investor protection corporation. Protects bd customers missing assets.
14
Q
Securities investor protection act 1970
A
Requires bds to belong to SPIC. An industry funded insurance company. Protection up to $500k. $250 cash.
15
Q
Primary vs secondary market
A
New issue of stocks issued to investors for the first time vs stocks and bonds trading among investors
16
Q
Recision
A
the act of refunding monies to a client when an I.A. representative or agent has made a sale that violates a state’s U.S.A. See Uniform Securities Act. See U.S.A.
17
Q
12b-1 Fees
A
sometimes a mutual fund tacks on charges to pay for its selling overhead generated by its sales force. The industry calls these charges “12b-1 fees” or “distribution fees.” A mutual fund would deduct these charges, typically 0.5 percent per annum, on a daily basis.
18
Q
403(b) Plans
A
retirement plans allowed by IRS for employees of public schools, employees of tax-exempt organizations, and religious ministers. A 403(b) plan was formerly known as a tax-sheltered annuity (TSA). However, today 403(b) plans are not limited to annuities. A public corporation may not set up a 403(b) plan. Nor are they intended for employees of the federal government.
19
Q
457 Plans
A
these are deferred compensation plans that offer tax deferral until monies are withdrawn. They are intended for employees of local and state governments.
20
Q
529 Plans
A
529 Plans—These plans allow a contributor to build up a tax-advantaged fund to pay for university/college education expenses for a lucky young person. Also for expenses at private schools for grades K-12. A donor makes contributions to a 529 plan with after-tax dollars. IRS considers earnings generated to be tax-free, not merely taxdeferred, assuming that the student uses the proceeds for education expenses at a college or university, or at a private school for grades K-12, the latter being limited to $10,000 distribution per student per year.
21
Q
Accelerated Cost Recovery System (ACRS)
A
a method of accounting for depreciation. The amount of depreciation is greater in earlier years, thus the name “accelerated.”
22
Q
“acid test” is the “quick ratio.”
A
quick assets (i.e., current assets minus inventories and minus other questionable assets) divided by current liabilities.
23
Q
Agency capacity vs principal capacity
A
a brokerage firm may act either as “agent” or “principal” in its securities business. When it acts as agent, it stands in the middle between a customer who purchases and another person who sells. The brokerage firm is acting as agent in this example. See Commissions. See Principal Capacity. See Agency Cross Transaction.
Principal Capacity - a brokerage firm may act either as “agent” or “principal” in dealing with customers and other persons. When the brokerage firm acts in a principal capacity, it buys and sells for its own account as a “principal,” i.e., one of the parties to the transaction. If a brokerage firm, acting as principal, buys from a customer or sells to a customer, it will usually add a “markup” or subtract a “markdown.” See Commissions. See also Agency Capacity. See also Markups.
Commissions - these are charged by a brokerage firm when acting in an agency capacity for a customer on a trade. A brokerage firm must send a confirmation on every trade. Here’s an example. “As agent, we have purchased for your account 100 XYZ common at $44.00 per share. Total due $4,400 plus $35.00 commission.” See Markups. See Agency Capacity. See Principal Capacity.
24
Q
Agency Cross Transaction
A
this occurs when an advisory firm executes trades, which it has recommended, for two clients, one who buys and the other who sells. It does this through its brokerage affiliate. The brokerage affiliate acts as agent, and collects two commissions. In addition, the advisory firm earns an advisory fee. There are serious conflicts of interest inherent in this arrangement.
25
Alpha
Alpha - this measures the percentage gain of a stock portfolio or mutual fund, as compared to the return of a passively managed portfolio, such as an index fund. See Index Fund.
Index Fund - a type of mutual fund with a passively managed portfolio. There is no active management of portfolio. The performance of a broad-based index fund mirrors the performance of the market as a whole.
26
Alternative investments
Alternate Investments—other than plain vanilla stocks and bonds, alternate investments include limited partnerships, exchange-traded notes (ETN's), leveraged funds, inverse funds, structured products, and viatical/life settlements.
27
Bank Secrecy Act, AmL, FinCEN, CMIR
Bank Secrecy Act—the platform for anti-money laundering laws and regulations, applying to financial firms, (but not yet applying to investment advisory firms), although FinCen has proposed rules that would apply to advisory firms in the near future. See FinCen.
CMIR—a report under the Bank Secrecy Act, regulating the transmittal of cash in excess of $10,000 in or out of the U.S. See Anti-Money Laundering. See also Currency Transportation Report.
Currency Transportation Report—also abbreviated as CMIR. This is a report under the Bank Secrecy Act regulating the transmittal of cash in or out of the U.S., in an amount exceeding $10,000, and also including checks without naming the payee. See CMIR.
28
Annuities
Annuities - issued by life insurance companies, the basic premise of all annuities is that the annuity will periodically pay an amount of money to the annuitant until death. See Fixed Annuities. See Variable Annuities. See Equity Indexed Annuities.
29
Assessable
there are some investment contracts whose terms allow the general partner or manager to levy future assessments or charges on investors. This assessment requires that investors put up additional money. Be careful before investing in an investment or scheme where there is possibility of a future assessment. Make sure you know what you are signing!
30
Securitization, asset based securities, collateralized debt obligations
Asset-Backed Securities—these are bonds that have backing of certain assets, such as auto loans, credit card receivables, or trade receivables. An investment bank will group these receivables into a package, and then sell bonds and other debt instruments, backed by these packages. See Securitization. See also Collateralized Debt Obligations.
Collateralized Debt Obligations—these are bonds backed up by debt or bonds, other than mortgage indebtedness.
Securitization—Many investment banks, if not all, engage in the process of securitization. They assemble items, such as trade receivables, student loans, credit card receivables, mortgages, into a package, and then arrange to sell shares of this package to investors. By so doing, the investment bank has converted trade receivables into a security. See Asset-Backed Securities.
31
Auditor disclosures and the types
Auditor Disclosures—the reports of auditors giving their opinions of a company's financial statements. These include non-qualified opinions, qualified opinions, adverse opinions, and disclaimer of opinion.
32
Authorized Stock, Issued Shares, Outstanding Shares, Treasury Shares.
Authorized Stock - when a corporation files for its incorporation in a state, it lists the number of shares that it wishes to authorize. The corporation can then issue shares up to the number authorized. See Issued Shares. See Outstanding Shares. See Treasury Shares.
Treasury Shares - after a company issues common shares, sometimes it decides to repurchase some of them. These are called “treasury shares.” They do not vote or receive dividends. See Issued Shares. See Outstanding Shares.
33
BCP / Business Continuity Plan
BCP—stands for business continuity plan. The SEC requires that every investment advisory firm registered with it have a business continuity plan in its manual of supervisory or compliance procedures that allows a firm to remain in business and fulfill its fiduciary obligations to clients. See Business Continuity Plan.
34
C Corporation vs S Corporation
C Corporation - a regular corporation, such as General Motors Corp. Unlike a direct participation program, it does not pass through any tax benefits to shareholders. See S Corporation. See Direct Participation Program.
35
Direct Participation Program (DPP)
Direct Participation Program (DPP) - a form of business organization that passes through to its shareholders or partners all of its income, expenses, tax deductions, and tax benefits. See Limited Partnership. See also S Corporation. See also Limited Liability Corporation. See also General Partnership.
36
Other Terms
Benchmarks—these are usually well-known indexes on stocks or bonds that are used to measure performance of an investment adviser for his/her clients.
Blind Pool – An offering of new shares of a company that has no stated business, no earnings, no history. An investment in such shares is throwing good money into a speculative, unknown, and untested scheme.
Brady Bonds - these were bonds issued in the late 1980's by developing countries to replace troubled loans that they owed to megabanks. The bonds were named after the then U.S.
Secretary of the Treasury, Nicholas Brady.
Capital Losses - when a taxpayer sells a stock or other asset for less than she paid, a capital loss results. Capital losses may offset capital gains. A taxpayer may “net” (i.e., subtract) capital gains from capital losses. If Beth has realized $6,000 in capital gains and $10,000 in capital losses, she may net the two, and arrive at a net capital loss of $4,000. Net capital losses can be used to offset a taxpayer’s ordinary income up to $3,000 per year.
CFTC - the Commodities Futures Trading Commission. It has governmental authority to regulate markets in commodities and futures.
Client Contracts—an adviser sometimes induces a client to agree that the client will not press any criminal charges or bring any civil suits against the advisor. Such contracts are illegal, null, and void.
37
Beta
Beta - a measurement of the price volatility of a stock or mutual fund in relation to the whole market. Stocks with betas of less than one are less volatile and less risky than the average of the whole stock market. Investments with negative betas react in an opposite manner from the stock market, meaning if the market goes up, they go down, and vice versa.
38
Brochure ; ADV
Brochure for Wrap Fee Clients - Part 2A Appendix 1 is the “brochure” for clients of an investment advisory firm who participate in a wrap fee program sponsored by the advisory firm. See Part 2A Appendix 1.
Brochure Rule - the SEC requirement that federal investment advisers give clients a copy of Part 2A of their Form ADV. Part 2A contains information about the adviser and his/her business practices, such as how much an adviser has under management, his or her methods of securities analysis, how the adviser arranges for brokerage trades to be executed, etc. See Part 2A Form ADV.
Part 2A Form ADV - the part of Form ADV that serves as the basis for the “Brochure” for clients of an investment adviser. It, or information that it contains, must be given to each new client at or before the time that the client signs a contract with an investment adviser, and annually thereafter, if there are any material changes. See Form ADV. Part 2B Form ADV - the part of Form ADV that lists the specifications and qualifications of each officer or advisory firm employee who renders investment advice, including the person’s regulatory and/or disciplinary history. This employee is called a “supervised person.” Distribute Part 2B to each client for every employee/officer who deals with that client, or who devises an investment plan for the client. See Form ADV. See also Part 2A Form ADV. See also Part 2A Appendix 1 Form ADV.
Conflicts of Interest - each investment adviser or investment advisory firm has the obligation to disclose the presence of any and all conflicts of interest. An investment adviser would list potential conflicts in Part 2A of Form ADV, otherwise known as the “Brochure.” See Brochure. See Fiduciary.
39
Options
Call - an option that gives the holder the right to purchase stock or some other asset at a specified price. The holder of a call will profit if the price of the underlying stock goes up. See Put. See Options.
40
Capital Asset Pricing Model (CAPM)
this is an approach to evaluating prices of individual securities by comparing the expected return of one stock to its market risk, using beta, and taking into account the risk-free return of a T-bill. See Beta. See Negative Correlation.
Negative Correlation - some assets increase in price when stocks go down, and vice versa. This is an example of negative correlation. See Beta. See Capital Asset Pricing Model.
41
Capital Market vs money market
Capital Market - the market for long-term debt securities, such as bonds, mortgages, as opposed to the “money market,” the market for short-term debt securities.
42
Capitalization, retained earnings, paid in surplus
Capitalization - refers to the total amount of monies (i.e., capital) raised by a corporation when it issues stock, bonds, and when it retains earnings from its businesses. Capitalization includes bonds, preferred stock, common stock, paid-in surplus, and retained earnings. See Paid-in Surplus. See Retained Earnings.
43
Capping in market manipulation
Capping - illegal attempt to put a lid on the price of a stock or other security. This is a good example of market manipulation. It violates the Securities Exchange Act of 1934. But really, it’s hard to fathom how any one person could successfully keep the price of a stock from rising in today’s volatile markets. See Market Manipulation.
Market Manipulation - any illegal attempt to control the price of a security by, for example, spreading false rumors, or by falsely reporting large sales, hoping to create upward or downward pressure on a stock’s price. See Manipulation.
44
Cash flow
Cash Flow - to arrive at a simplified calculation of “cash flow,” add non-cash charges or expenses, such as depreciation and depletion, to net income. Non-cash charges or expenses don’t require a corporation to write a check. A more complete formula of cash flow is EBITDA—earnings before interest, taxes, depreciation, and amortization. EBITDA shows earnings, or cash taken in, before paying interest on bonds, taxes, and the non-cash expenses of depreciation and amortization. See EBITDA.
45
CPI VS C CPI
Chained CPI (C-CPI)—The Tax Cuts and Jobs Act of 2017 made government payments that have an automatic inflation adjustment utilize chained CPI. This C-CPI assumes that if one consumer product increases in price, consumers will look for, and purchase, a cheaper substitute. Thus C-CPI does not automatically rise when certain goods increase in price. See CPI.
46
Cheap stock , promoter
Cheap Stock - this is stock of a new issue that is offered at a sizeable discount from the public offering price. Usually awarded to promoters or underwriters to reward them for their services. Here is an example. GHI Corp. issues new common shares at $20 per share. It sells 1,000 shares to Joey, a promoter, for $1 per share. Joe gets cheap stock. See Promoter.
47
Churning
Churning—when a broker or adviser executes excessive number of trades in a customer's account for purposes of increasing the amount of commissions. Churning violates a professional's fiduciary obligations to the client. See Excessive Trading.
48
Closed end vs open end fund
Closed-End Fund - an investment company whose price depends solely on supply/demand, not on the worth of the stocks and bonds in its portfolio. It does not redeem its shares, unlike an open-end fund. See Open-End Fund. See also Pooled Investments.
49
Other terms 2
Code of Ethics – every investment advisory firm must create and establish in writing a code of ethics, covering the fiduciary obligations of each officer and employee. It must give a copy to each "supervised person."
Consent to Service - before a court enters a judgment against any person, it must give that person advance notice in accord with constitutional guarantees of due process. Usually this requires that a plaintiff serve a defendant with written notice of forthcoming legal action. When a person files an application for registration and licensing, she must give consent to have notice of legal action pending against her served upon the administrator. Once notice is served upon an administrator, it has the same effect as if the lawsuit papers were personally presented to, or served upon, the applicant. She cannot thereafter claim that no one gave her proper notice.
50
Indicators (coincident, leading, lagging)
Coincident Indicators - these economic indicators show what is happening to the economy here and now. Coincident indicators include items such as non-farm personal income; amount of manufacturing and trade
51
Contingent Deferred Sales Charge (CDSC)
a charge imposed by some mutual funds if a shareholder decides to liquidate or redeem shares within the first five or seven years. The charge is usually higher in the beginning years and lower in the later years. Consult the prospectus of a mutual fund to see if and/or how much it imposes as a CDSC.
52
Convertible security
Convertible Security - a security which the holder may convert into common stock in accord with terms set by the issuer.
53
Cooling off period, what is the minimum
Cooling-Off Period - the period of time between submitting a registration statement to the SEC and the earliest date on which the securities can be legally sold. The minimum cooling-off period is twenty days.
54
Minimum period of keeping correspondence records?
Correspondence—every investment advisory firm should keep records of all correspondence, coming in or going out. Most records should be kept for a minimum period of five years.
55
Coverdell education plan maximum contribution and beneficiary age?
Coverdell Education Plan—a donor may contribute a maximum of $2,000 per year in a Coverdell Education Plan. Imagine that Johnny, age 13, is a Coverdell beneficiary. He must use the savings prior to turning 30. Johnny must use the monies for education expenses, whether incurred in elementary or high school, or even to pay costs of college or university.
56
Cumulative Preferred
Cumulative Preferred - a preferred stock having a provision that, if the issuing corporation skips or omits one or more preferred dividends, the company will not pay any dividends on common shares, until and unless it pays all dividends in arrears on the preferred.
57
Cumulative Voting
Cumulative Voting - a method of voting for corporate directors which enables a shareholder to multiply the number of his shares by the number of directorships being voted on. If he desires, a shareholder may cast the total all for one director or for one selected group of directors. A shareholder with 100 shares normally has the voting power to cast 100 votes for each of, say, three nominees to the board. His votes total 300. Under cumulative voting, this shareholder may vote 300 votes (three times 100) for one nominee, or 150 for two, or 100 for three, or split up his 300 votes in any other way he wishes.
58
Currency Transportation Report (CMIR)
Currency Transportation Report—also abbreviated as CMIR. This is a report under the Bank Secrecy Act regulating the transmittal of cash in or out of the U.S., in an amount exceeding $10,000, and also including checks without naming the payee. See CMIR.
59
Current Ratio vs quick ratio
Current Ratio - this formula shows the ratio of a corporation’s current assets to current liabilities. Divide current assets by current liabilities. Look for a minimum current ratio of two to one. See Quick Test. See Acid Test. See Quick Assets.
Current Assets - these are liquid assets that a company reasonably believes it can easily convert into cash in the near future. Current assets include cash, securities that have a ready market, notes receivable, accounts receivable, and inventories on hand.
Current Liabilities - these are monies payable by a company within a short period of time. Examples are bills payable, notes payable, taxes payable. See Long-term Liabilities.
Quick Assets - these are a corporation’s liquid current assets. The formula for quick assets is, “current assets less [inventories on hand, pre-paid expenses, and assets of doubtful collection].” See Quick Test. See also Current Ratio. See also Quick Ratio.
Quick Ratio - this formula shows the ratio between a corporation’s quick assets (i.e., liquid current assets) and current liabilities. Divide quick assets by current liabilities. Look for a minimum quick ratio of one to one. See Quick Assets. See also Acid Test. See also Current Ratio.
60
Current Return
Current Return - amount of yearly dividends or interest divided by the current market price of the stock or bond. Example. XYZ Corp. pays annual dividends on its common stock of $1.20 per share. The market price of XYZ common is $40. The current return on XYZ common is found by dividing $1.20 by $40.00. This equals 3.00 percent.
61
Dark Pools
Dark Pools—to minimize the dangers of seeing someone else front-run an imminent order of a financial institution, brokerage firms now offer alternate trading systems (ATS's) that hide orders from third parties before execution. These are known as "dark pools," and to date are permitted by the SEC.
62
Dealer
Dealer - a person (or firm) in the securities business who buys for the firm’s own account, or who sells to a customer from the firm’s own inventory. The dealer’s profit or loss is the difference between the price he (or his firm) pays and the price which he receives for the same security. When a dealer sends a confirmation to a client, he (or his firm) must disclose how the firm has acted, either as “agent” or “principal.” See Agency Capacity. See Principal Capacity.
63
Debenture, debt service, debt risk
Debenture - an unsecured bond issued by a corporation. The bond issue is backed by the company’s general credit and not by any hard collateral. Beware of purchasing debentures that are issued by start-up companies, charitable organizations, or churches. They are more likely to have difficulties paying debt service when due. See Debt Service. See Debt Service Risk.
Debt Service - refers to an amount of principal and interest which an issuer of bonds must pay annually on its bonded debt. See Debt Service Risk.
Debt Service Risk - refers to the risk that an issuer of bonds may not be able to pay principal and/or interest when due. See Bonded Debt.
64
Debt-to-equity ratio
Debt-to-Equity Ratio - a formula used to compare the amount of bonded debt of a corporation to the amount of its shareholders equity. The formula is, “total bonded indebtedness divided by shareholders equity.” See Bonded Debt. See also Shareholders Equity.
65
Deflation
Deflation - when prices are falling, yet no one wants to purchase. Here is an example. The stock market crashes. Prices of stocks drop more than 20 percent. Yet, no one wants to purchase shares.
66
Depletion vs depreciation
Depletion - this happens when a company digs up natural resources, such as oil, gas, or coal from the ground. Accountants say that such natural resources are being “depleted” or used up. See Non-Cash Expense. See also Depreciation. Depreciation - this is a deduction listed as an expense on a company’s income statement. It happens when a corporation uses its fixed assets, such as machinery, over time. The machine over its life becomes worth less than when it was brand new. Thus, the deduction or expense. It is a bookkeeping entry. It does not represent any actual cash paid out. Therefore, we refer to depreciation as a “non- cash expense.” See Non-Cash Expense. See also Depletion.
67
Depression vs recession
Depression - according to many economists, when the economy falters for a period of two years in a row, as seen in economic indicators.
Recession - some observers define a recession as when the economy falters for two quarters in a row (six months). See Depression.
68
Derivatives, futures, forward contracts, options, see, put
Derivatives - a class of securities whose price depends on some other underlying security. For example, a put or call option on XYZ stock is a derivative. Its price depends on the price of the underlying XYZ stock. Some observers also consider derivatives to include futures contracts and forward contracts. See Futures. See also Forward Contracts. See Options. See Call. See Put.
Futures - these are standardized contracts traded on commodities exchanges that allow a person to lock in a price on grain, metal, or financial asset. See Forward Contracts.
Forward Contracts - private deals made between buyer and seller of goods, especially physical commodities, whereby a buyer will take possession sometime in the future. Both parties agree on the price at the time that they effectuate the contract. A forward contract differs from a futures contract, insofar as the latter is traded on a commodities exchange and has standardized contract terms. See Futures.
69
Directors
Directors - members of a company’s board of directors have the authority to supervise the doings and operations of a corporation. A company may not pay dividends unless its directors first authorize and approve.
70
Discount Bonds
Discount Bonds – these are bonds whose market value is less than its par value. ABC Corp. bonds have a par value of $1,000. ABC bonds sell at a market value for $900. They are discount bonds. See Par Value. See also Premium Bond.
71
Discount Rate
Discount Rate - the rate charged to member banks by the Federal Reserve Bank (“Fed”) on money borrowed at the Fed’s discount window. See Fed. See also Reserve Requirements. See also Federal Open Market Operations. See also Moral Suasion.
72
Discounted cash flow
Discounted Cash Flow—a method of establishing the net present value of an investment by discounting all future cash flows back into today's dollars.
73
Discretionary authority
Discretionary Authority - necessary for an adviser or representative to obtain before exercising discretionary authority in a client’s account. An agent needs written discretionary authority from the customer before executing the first trade. But an I.A. representative has more leeway. He or she may accept authority given orally, but then must obtain authority in writing within 10 days following the first trade. See Discretionary Account.
74
Dividend Payout ratio
Dividend Payout Ratio - a formula used by financial analysts to compare the amount of dividends paid by a company in relation to its earnings available for the common (EAC). The formula is “dividends per share of common stock divided by earnings available for the common (EAC).” See Earnings Available to Common.
Earnings Available for Common (EAC) - the higher the EAC, the higher the earnings per share (EPS). EAC is computed by subtracting any preferred dividends paid from a corporation’s net income. Here is an example. ABC Corp. has net income for the year of $20 million. It pays out $2 million as dividends to preferred shareholders. ABC Corp. thus has EAC of $18 million. See Earnings Per Share. See EPS.
75
EAC , Earnings available for Common
Earnings Available for Common (EAC) - the higher the EAC, the higher the earnings per share (EPS). EAC is computed by subtracting any preferred dividends paid from a corporation’s net income. Here is an example. ABC Corp. has net income for the year of $20 million. It pays out $2 million as dividends to preferred shareholders. ABC Corp. thus has EAC of $18 million. See Earnings Per Share. See EPS.
Earnings Per Share (EPS) - a frequently used formula, it expresses net earnings of a company in terms of each common share. EPS is calculated by dividing the earnings available for the common (EAC) by the number of outstanding common shares. Here is an example. XYZ Corp. has EAC of $18 million. It has three million common shares outstanding. XYZ Corp. has EPS of $6.00 per share. See Earnings Available for Common. See Outstanding Shares.
76
Earnings Dilution
Earnings Dilution - when a company issues additional shares of common stock, it tends to water down or dilute the earnings (EPS) of existing common shares. Assuming the same amount of earnings, more shares outstanding will reduce earnings per share. Here’s an example. ABC Corp. has earnings available for the common of $2 million. There are one million common shares outstanding. Now, if ABC Corp. issues another one million shares, EPS (earnings per share) will go from $2.00 to only $1.00. This is earnings dilution. See Earnings Per Share. See EPS.
Earnings Per Share (EPS) - a frequently used formula, it expresses net earnings of a company in terms of each common share. EPS is calculated by dividing the earnings available for the common (EAC) by the number of outstanding common shares. Here is an example. XYZ Corp. has EAC of $18 million. It has three million common shares outstanding. XYZ Corp. has EPS of $6.00 per share. See Earnings Available for Common. See Outstanding Shares.
77
Earnings Per Share (EPS)
Earnings Per Share (EPS) - a frequently used formula, it expresses net earnings of a company in terms of each common share. EPS is calculated by dividing the earnings available for the common (EAC) by the number of outstanding common shares. Here is an example. XYZ Corp. has EAC of $18 million. It has three million common shares outstanding. XYZ Corp. has EPS of $6.00 per share. See Earnings Available for Common. See Outstanding Shares.
EPS - stands for earnings per common share. If ABC Corp. has total earnings of $10,000, and if there are 5,000 ABC common shares outstanding, then EPS will be $2.00. See Outstanding Shares. See Earnings Per Share.
78
EBITDA
EBITDA—stands for operating earnings of a company before it takes out its payments for interest on its bonds, taxes, and the non-cash expenses of depreciation and amortization. EBITDA is a more complex formula for cash flow from operations. See Cash Flow.
79
Economic Cycle
Economic Cycle - the progress of a country’s economy over time. It goes in this order—prosperity, decline, recession, recovery. Pick whichever one you want to go first. In good times, some investors forget that prosperity is short-lived and does not last forever.
80
Efficient Market Hypothesis
Efficient Market Hypothesis – some, but not all, academics believe that the securities markets quickly digest and reflect new information. Under this theory, markets incorporate news almost instantaneously. For believers in an “efficient market,” it is near impossible for any portfolio manager to beat the market.
81
Equity Indexed Annuities
Equity Indexed Annuities - a type of fixed annuity that offers the possibility of increased returns, over and above a guaranteed rate. The extra return depends on the performance of some benchmark or some chosen index. See Variable Annuity. See also Fixed Annuity.
Fixed Annuities - an annuity payable until the death of the annuitant. Payments are fixed throughout the annuity’s term. See Variable Annuity. See also Equity Indexed Annuity.
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Employee Retirement Income Security Act
ERISA - stands for the Employee Retirement Income Security Act. It created the individual retirement account (IRA) in 1974. ERISA has many rules and regulations regarding the duties and conduct of fiduciaries in retirement plans, such as 401(k) plans. See Erisa 404(c).
ERISA 404(c) - this section of ERISA contains recommended behavior for plan fiduciaries, which, if obeyed, offers some protection from being sued by plan participants. Therefore, prudent fiduciaries follow the precepts of 404(c). See Fiduciary. See Plan Sponsor. See Conflicts of Interest.
Plan Sponsor - an employer, usually a corporation, that sponsors a retirement plan for its employees. See Fiduciary.
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Escrow of securities
Escrow of Securities - in cases where an issuing company has previously issued securities within the past five years, or where an issuer sells shares to a promoter at a price substantially lower than the price to public, or where an issuer gives new shares to a person other than for cash, an administrator has the power to require that shares of the new issue be held in trust (i.e. escrow), until the matter has been cleared up. In addition, the administrator has the legal power to impound the proceeds of the offering and withhold the monies from the issuer.
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Estate Taxes
Estate Taxes—these taxes apply only for estates of deceased persons in excess of $10 million. The Tax Cuts and Jobs Act of 2017 established $10 million as the basic exclusion amount.
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Exchange Traded Funds
ETF’s—stands for Exchange Traded Funds. These are more popular than mutual funds. Their shares can be traded throughout the trading day, unlike shares of a mutual fund which can be purchased or sold only at the close of the market. ETF’s offer diversification, professional portfolio management, and the ability to invest small amounts in a large portfolio. See Exchange Traded Funds. See Pooled Investments. See Open End Funds.
Exchange Traded Funds (ETF’s) - these are like mutual funds insofar as they have a diversified portfolio of investments and are professionally managed. They are dissimilar insofar as their shares are tradeable anytime during a trading day. See ETF’s. See also Exchange Traded Note. See also Pooled Investments.
Pooled Investments - any type of investment company which provides professional selection, ongoing management, and diversification of portfolio. See ETF. See also REIT. See Open End Fund. See Closed End Fund.
Open-End Fund - an investment company which continuously offers shares. Its price or net asset value is directly dependent on the value of its securities holdings. It stands ready at all times to redeem shares which it has issued. Also called a “mutual fund.” See ETF. See also Closed End Fund. See also Pooled Investment.
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Dual licensing
Dual Licensing - the Uniform Securities Act generally prohibits dual licensing for agents of broker/dealers, but allows dual registration for I.A. representatives. Go figure! An administrator may always change these provisions, either by rule or order.
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Eurodollar deposits
Eurodollar Deposits - these are American dollars held abroad on deposit in a foreign bank, usually in London. Why deposit U.S. dollars in a London bank? Answer—to obtain interest higher than available in the U.S.
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Exchange traded notes
Exchange-Traded Notes (ETN's)—similar to exchange-traded funds, except that exchange-traded notes are not equity, but debt, usually issued by banks. ETN's increase in value when the underlying index goes up, or in the case of inverse ETN's, when the underlying index goes down. See ETF's. See also ETN's.
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Executor / personal representative of an estate
Executor - now referred to as the “personal representative of an estate,” this is a person who is appointed to handle and disburse the estate of a deceased person. See Personal Representative.
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Exempt reporting advisors
Exempt Reporting Advisors—consist of those advisers who advise only venture capital funds, or those advisers who advise only private funds and have less than $150 million under management.
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Exempt securities
Exempt Securities - the Uniform Securities Act lists certain types of securities that are exempt from registration in a state. Examples include securities issued by the U.S. Government, securities designated by the SEC as “federal covered securities,” and securities issued by banks that are members of the Federal Reserve System. See Federal Covered Securities. See Exempt Transactions.
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Exempt Transactions
Exempt Transactions - there are certain transactions that are exempt under the Uniform Securities Act, meaning that the occurrence of an exempt transaction does not violate the rule that most securities must be properly registered with a state before any sale. An “exempt transaction” is different from an “exempt security.” An example of an “exempt transaction” is the sale of unregistered securities to institutional investors. See Exempt Securities.
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Futures vs Forward
Futures - these are standardized contracts traded on commodities exchanges that allow a person to lock in a price on grain, metal, or financial asset. See Forward Contracts.
Forward Contracts - private deals made between buyer and seller of goods, especially physical commodities, whereby a buyer will take possession sometime in the future. Both parties agree on the price at the time that they effectuate the contract. A forward contract differs from a futures contract, insofar as the latter is traded on a commodities exchange and has standardized contract terms. See
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Fundamental vs technical analysis
Fundamental Analysis - this is analysis of a company’s stock based on such intrinsic factors as sales, assets, earnings, products or services, markets and management. As opposed to technical analysis, which is based on charts and formations. See Technical Analysis.
Technical Analysis - this is analysis of the market and stocks based on chart formations. A technician studies price movements, volume, trends, and patterns which are revealed by charting these factors. The technician is not concerned with the inner reality of a company, such as earnings, book value, working capital, or quality of management. See Fundamental Analysis. See Support Line. See Resistance Line.
Support Line - a concept from technical analysis, it is an imaginary line on a price chart of a stock. Technicians believe that the price of a stock probably will not go below this line. If there is a trade below, or through, the support line, they view this as very bearish. See Technical Analysis. See Resistance Line.
Resistance Line - an imaginary line on a chart of a stock’s price. Technicians view any movement of a stock’s price through or above the resistance line to be bullish. See Technical Analysis. See Support Line.
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GDP
GDP - stands for Gross Domestic Product. Some economists define GDP as the total of goods produced, amount of savings, and amount of U.S. Government spending. If unadjusted for inflation, GDP is called “nominal GDP.” If nominal GDP is adjusted by inflation, it is called “real” GDP.
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General Obligation (GO) Bond
General Obligation Bond (GO Bond) - this is a type of municipal bond which represents the general obligation of the citizens of the issuing municipality. Citizens are responsible for the payment of principal and interest on a GO Bond issue. See Revenue Bond. See also Municipal Bond.
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Direct Participation Programs
| General participation
Direct Participation Program (DPP) - a form of business organization that passes through to its shareholders or partners all of its income, expenses, tax deductions, and tax benefits. See Limited Partnership. See also S Corporation. See also Limited Liability Corporation. See also General Partnership.
General Partnership - a business consisting of at least two partners, each fully liable for the actions of the partnership. It offers tax advantages and tax benefits. It is a form of Direct Participation Program (DPP). See Limited Partnership. See Limited Liability Corporation. See S Corporation.
Limited Liability Corporation - a corporation which passes through tax benefits and tax deductions to its shareholders. See Direct Participation Program. See Limited Partnership. See S Corporation.
Limited Partnership - a partnership where there is at least one general partner and one limited partner. It passes through tax benefits and tax deductions to its partners. See Direct Participation Program. See Limited Liability Corporation. See S Corporation.
S Corporation - a type of corporation where all earnings and losses flow through to the shareholders. It is a type of direct participation program (DPP). A maximum of 100 shareholders is allowed. See Direct Participation Program.
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Hedge Funds
Hedge Funds - these are similar to mutual funds, but shares are not sold to the public through a public offering. Hedge funds are organized as limited partnerships, with the fund manager acting as general partner. See Limited Partnership.
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Hedging
Hedging - an attempt to protect investment assets in times of price volatility. An example is the purchase of puts at the same time that an investor is long shares of stock. If the price of the shares fall, the put options increase in value. Thus, hedging attempts to offset a loss on one type of asset with a gain on another.
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Holding period return
Holding Period Return - the return on an investment, shown on an annualized basis. For example, a 30 percent return, attained in only six months, would be much greater than 30 percent realized over a one-year time period.
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Index fund
Index Fund - a type of mutual fund with a passively managed portfolio. There is no active management of portfolio. The performance of a broad-based index fund mirrors the performance of the market as a whole.
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Inside Information
Inside Information - a term used to denote trading on information which has not yet been made available to the general public, with hopes of making an illicit profit. It is illegal to utilize inside information, especially if a person has a fiduciary relationship with a specific corporation or with its shareholders, such as being a member of the board of directors.
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Institutional investor
Institutional Investor - includes pension funds, investment companies, insurance companies, universities, banks and broker/dealers. Generally an institutional investor has at least $10 million in assets.
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Interest-rate risk
Interest-Rate Risk - if interest rates increase, this will cause a decrease in the market price of bonds. Don’t purchase bonds if you believe that interest rates will go up in the near future!
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Internal rate of return
Internal Rate of Return (IRR) - a way of obtaining a true yield on an investment. Costs are expressed in present values. Future benefits are converted into present dollars. Costs are then compared with benefits.
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Inventory turnover ratio
Inventory Turnover Ratio - a formula used by financial analysts to see how fast or how slowly a company is selling its inventory of finished products. The formula is “net sales divided by average inventory on hand.”
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Inverse funds vs leveraged funds
Inverse Funds—those funds and ETF's that go up when the underlying asset goes down, and vice versa. See Leveraged Funds.
Leveraged Funds—those ETF's and funds that return two or three times the result of the underlying asset or index. Leverage also refers to borrowing monies to enhance performance of funds or ETF's. See Inverse Funds.
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Investment advisor representative
Investment Adviser Representative - a person who works under the supervision of an investment adviser or investment advisory firm. To be registered as an I.A. representative, a person needs, among other requirements, to take and pass either the Series 65 or 66 exam. See Series 65. See also Series 66.
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Investment advisor representative
Investment Adviser Representative - a person who works under the supervision of an investment adviser or investment advisory firm. To be registered as an I.A. representative, a person needs, among other requirements, to take and pass either the Series 65 or 66 exam. See Series 65. See also Series 66.
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Investment advisor contract
Investment Advisory Contracts—every investment adviser must first sign a contract with a new client, prior to any trades, setting forth the advisor's charges, methods of doing business, and what services the adviser will provide. See Client Contracts.
Client Contracts—an adviser sometimes induces a client to agree that the client will not press any criminal charges or bring any civil suits against the advisor. Such contracts are illegal, null, and void.
Investment Contract - any type of arrangement or scheme whereby a person invests money in a common enterprise, owned or operated by some manager, with hopes of realizing a profit in the future. The Uniform Securities Act includes “investment contract” in its definition of “security.”
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Investment policy statement
Investment Policy Statement—ERISA requires that every private-sector retirement plan hand out a statement of investment policy to all participants in the plan. The policy statement sets forth the goals of the plan, and includes restrictions on the types of investments that the plan can purchase.
