Vocabulary Flashcards
Accredited Investor
As defined in Rule 501 of Regulation D, any institution or individual meeting the minimum requirements for the purchase of securities qualifying under the Regulation D registration exemption.
An individual with a net worth of $1 million (excluding primary residence) or has had an annual income of $200,000 or more in each of the two most recent years ($300,000 with a spouse), and has expectation to reach the same income level 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
Active Management Style
Analysts believe that 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 attributed 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 a state’s securities laws.
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
(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
(3) any other investment advisory service with regard to securities.
Agency Cross Transaction
A transaction in which a person acts as an investment adviser in relation to a transaction in which that investment adviser, or any person controlling, controlled by, or under common control with that investment adviser, acts as broker for both an advisory client and for another person on the other side of the transaction.
Agency Issue
A debt security issued by an authorized agency of the federal government. Such an issue is backed by the issuing agency itself, not by the full faith and credit of the US Government (except GNMA issues).
Agency Transaction
A transaction in which a broker-dealer acts for the accounts of others by buying or selling securities on behalf of customers; agency basis.
Agent
(1) an individual who effects securities transactions for the accounts of others
(2) under state law, a securities salesperson who represents a broker-dealer or an issuer when selling or trying to sell securities to the investing public; this individual is considered an agent whether he actually receives or simply solicits orders.
Aggressive Investment Strategy
A method of portfolio allocation and management aimed at achieving maximum return. Aggressive investors place a high percentage of their investable assets in equity securities and a far lower percentage in safer debt securities and cash equivalents, and they pursue aggressive policies including margin trading, arbitrage, and option trading.
Algorithmic Trading
Computerized trading using proprietary algorithms. There are two types of algorithmic trading.
Execution trading is when an order (often a large order) is executed via an algorithmic trade. The program is designed to get the best possible price. It may split the order into smaller pieces and execute at different times.
The second type of algorithmic trading is not executing at a set order but looking for small trading opportunities in the market. It is estimated that more than 50% of stock trading volume in the US is currently being driven by algorithmic trading.
Also known as high-frequency trading.
All or Non 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 CAPM, the portfolio should be expected to return 1.5 times the index after netting out the risk-free rate. This is because the portfolio is 1.5 times more riskier than the market. If we take the index return after subtracting the 3% risk-free rate, we get 7%. Multiply that times 1.5 and the measured portfolio should have returned 10.5% for taking the extra risk. It actually returned 22% over the risk-free rate giving us an alpha of 11.5.
Alternative Minimum Tax (AMT)
An alternative minimum tax computation that adds certain tax preference items back into adjusted gross income. If the AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are paid.
American Depositary Receipt (ADR)
A negotiable certificate representing a given number of shares in a foreign corporation. It is issued by a domestic bank. ADRs are bought and sold in the American securities markets, and are traded in English and US 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 a transaction. A common form of arbitrage is the simultaneous purchase and sale of the same security in different markets at different prices to lock in a profit. This is not considered market manipulation.
Arithmetic Mean
The average of a set of numbers, such as annual returns on an investment.
Ask
An indication by a trade or a dealer of a willingness to sell a security or a commodity; the price at which an investor can buy from a broker-dealer.
Assessable Stock
A stock that is issued below its par or stated value. The issuer and/or creditors have the right to assess the shareholder for the deficiency. All stock issued today is nonassessable.
Asset
(1) Anything that an individual or a corporation owns
(2) A balance sheet item expressing what a corporation owns.
Asset Class Allocation
Dividing an investment portfolio among different asset categories, such as stocks, bonds, cash, and tangible assets such as real estate and precious metals and other commodities.
Auction Market
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an auction market.
Audited Financial Statement
A financial statement of a program, a corporation, or an issuer (including the profit and loss statement, cash flow and source and application of revenues statement, and balance sheet) that has been examined and verified by an independent certified public accountant.
Average Basis
An accounting method used when an investor has made multiple purchases at different prices of the same security; the method averages the purchase prices to calculate an investor’s cost basis in shares being liquidated. The difference between the average cost basis and the selling price determines the investor’s tax liability.
Balanced Fund
A mutual fund whose stated investment policy is to have at all times some portion of its investment assets in bonds and preferred stock, as well as in common stock, in an attempt to provide both growth and income.
Balanced Investment Strategy
A method of portfolio allocation and management aimed at balancing risk and return. A balanced portfolio may combine stocks, bonds, packaged products such as investment companies, DPPs, or REITs, and cash equivalents.
Balance 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, and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy, and foreign investments in the domestic economy.
Balance Sheet
A report of a corporation’s financial condition at a specific time.
Balance Sheet Equation
Assets = Liabilities + Equity
Bank Holding Company
A holding company whose primary asset is a commercial bank.
Basis
Another term for yield to maturity (this bond is selling at a 5.78 basis).
Basis Point
A measure of a bond’s yield, equal to 1/100 of 1% of yield. A bond whose yield increases from 5.00% 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 or are expected to fall.
Benchmark Portfolio
A model portfolio of a large number of assets, such as the S&P 500, against which the performance of a fund or portfolio is measured.
Beta
A means of measuring the co-movement of the return of a security or a portfolio of securities to the overall market. A beta of 1 indicates that the security’s returns will be expected to move in tandem with the market. A beta greater than 1 indicates that the security’s returns will be expected to exceed those of the market. A beta less than 1 means returns will be expected to be lower than those of the market.
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 shares of a given stock or at a total market value of $200,000 or more.
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,” something that is bona fide is genuine, authentic, and real. An example would be a bona fide quote.
Bond
An issuing company’s or government’s legal obligation to repay the principal of a loan to bond investors at a specified future date. Bonds are usually issued with par or faces values of $1,000, representing the amount of money borrowed. The issuer promises to repay a percentage of the par value as interest on the borrowed funds. The interest payment is stated on the face of the bond at issue.
Bond Fund
A mutual fund whose investment objective is to provide stable income with minimal capital risk. It invests in income-producing instruments, which may include corporate, government, or municipal bonds.
Bond Quote
One of a number of quotations listed in the financial press and most daily newspapers that provide representative bid prices from the previous day’s bond market. Quotes for corporate and government bonds are percentages of the bonds’ face values (usually $1,000). Corporate bonds are quoted in increments of 1/8. Government bonds are quoted in increments of 1/32. Municipal bonds may be quoted on a dollar basis or on a yield-to-maturity basis.
Bond Rating
An evaluation of the possibility of a bond issuer’s default, based on an analysis of the issuer’s financial condition and profit potential. Standard & Poor’s, Moody’s Investors Service, and Fitch Investors Service, among others, provide bond rating services.
Bond Ratio
One of several tools used by bond analysts to assess the degree of safety offered by a corporation’s bonds. It measures the percentage of the corporation’s capitalization that is provided by long-term debt financing, calculated by dividing the total face value of the outstanding bonds by the total capitalization.
Bond Yield
The annual rate of return on a bond investment. Types of yield include nominal yield, current yield, yield to maturity, and yield to call. Their relationships vary according to whether the bond in question is at a discount, at a premium, or at par.
Book-Entry Security
A security sold without delivery of a certificate. Evidence of ownership is maintained on records kept by a central agency; for example, the Treasury keeps records of treasury bill purchasers. Transfer of ownership is recorded by entering the change on the books or electronic files.
Book Value Per Share
A measure of the net worth of each share of common stock is calculated by subtracting intangible assets and preferred stock from total net worth, then dividing the result by the number of shares of common outstanding.
Brady Bonds
Debt instruments, generally from third world countries, that may have a US Treasury bond as collateral.
Breadth-of-Market Theory
A technical analysis theory that predicts the strength of the market according to the number of issues that advance or decline in a particular trading day.
BRIC
An acronym referring to investments in Brazil, Russia, India, and China.
Bridge Loan
A short-term loan made to bridge the gap until permanent financing is arranged.
Brochure
A written disclosure statement that investment advisers must provide to most clients and prospective clients. The form ADV Part 2A may be used for this purpose.
Brochure Supplement
A written disclosure statement containing the information about certain of an investment adviser’s supervised persons. This disclosure is usually accomplished by the delivery of Form ADV Part 2B to most clients and prospective clients.
Broker
(1) An individual or a firm that charges a fee or commission for executing buy and sell orders submitted by another individual or firm.
(2) The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.
Broker-Dealer (BD)
A person in the business of buying and selling securities. A firm may act as both broker (agency) and dealer (principal), but not in the same transaction. Broker-dealers normally must register with the SEC, the appropriate SROs, and any state in which they do business.
Bull
An investor who acts on the belief that a security or the market is rising or will rise.
Bull Market
A market in which prices of a certain group of securities are rising or will rise.
Business Cycle
A predictable long-term pattern of alternating periods of economic growth and decline. The cycle passes through four stages: expansion, peak, contraction, and trough.
Business Risk
The risk inherent in equity securities that poor management decisions will have a negative impact on the stock’s performance. Can be reduced through diversification.
Buy Stop Order
An order to buy a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.
Bypass Trust
A trust that is funded with property in an amount equal to the exemption equivalent of the transfer tax credit amount applicable to the decedent ($5.45 million in 2016); thus, the property is not subject to federal estate tax.
Calendar Year
For accounting purposes, a year that ends on December 31. When an accounting year ends any other time, it is called a fiscal year.
Call
(1) An option contract giving the owner the right to buy a specified amount of an underlying security at a specified price within a specified time.
(2) The act of exercising a call option.
Callable Bond
A type of bond issued with a provision allowing the issuer to redeem the bond before maturity at a predetermined price.
Callable Preferred Stock
A type of preferred stock issued with a provision allowing the corporation to call in the stock at a certain price and retire it.
Call Buyer
An investor who pays a premium for an option contract and receives, for a specified time, the right to buy the underlying security at a specified price.
Call Date
The date, specified in the prospectus of every callable security, after which the security’s issuer has the option to redeem the issue at par or at par plus a premium.
Call Protection
A provision in a bond indenture stating that the issue is noncallable for a certain period (5 years or 10 years) after the original issue date.
Call Provision
The written agreement between an issuer and its bondholders or preferred stockholders giving the issuer the option to redeem its senior securities at a specified price before maturity and under certain conditions; also call feature.
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 contract, 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 as a source for financing.
Capital Surplus
The money a corporation receives in excess of the stated value of stock at the time of first sale.
Capping
An illegal form of market manipulation that attempts to keep the price of a subject security from rising. It is used by those with a short position.
Cash Account
An account in which the customer is required by the SEC’s Regulation T to pay in full for securities purchased not later than two days after the standard payment period set by industry practice codes.
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 to cash. Examples include Treasury bills, certificates of deposit, and money market instruments and funds.
Cash Flow
The money received by a business minus the money paid out. Cash flow is also equal to net income plus depreciation or depletion.
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 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 into another CD. These are insured up to $250,00 by the FDIC and are considered the best method of preservation of capital.
Chartist
A securities analyst who uses charts and graphs of the past price movements of a security to predict its future movements.
Chicago Board Options Exchange (CBOE)
The self-regulatory organization with jurisdiction over all writing and trading of standardized options and related contacts listed on that exchange. Also, the first national securities exchange for the trading of listed options.
Chicago Stock Exchange
Registered stock exchange located in Chicago’s downtown “loop.” Referred to with the initials CHX.
Chinese Wall
A descriptive name for the division within a brokerage firm that prevents insider information from passing from corporate advisers to investment traders, who cold make use of the information to reap illicit profits. The preferred term today is 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.
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, ether 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.
Closing Purchase
An options transaction in which the seller buys back an option in the same series; the two transactions effectively cancel each other out and the position is liquidated.
Coincident Indicator
A measurable economic factor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy. Examples include nonagricultural employment, personal income, and industrial production.
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. Also 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 for 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 assesses in return for arranging a security’s purchase or sale. A commission must be fair and reasonable, considering all the relevant factors of the transaction.
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 the fund retains.
Confirmation
A printed document that states the trade dates, 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 to 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 or 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, one of the business cycle’s four stages.
Contributory Plan
A retirement plan to which both the employee and the employer make contributions.
Control Person
(1) A director or an officer of an issuer.
(2) A stockholder who owns more than 10% of any class of a corporation’s outstanding securities.
(3) Spouse or other immediate family of any of the previous.
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 any class of a corporation’s outstanding securities. Who owns a security, not the security itself, determines whether it is a control security.
Conversion Parity
Two securities, one of which can be converted into the other, of equal dollar value. A convertible security holder can calculate parity to help decide whether converting would lead to gain or loss.
Conversion Price
The dollar amount of a convertible security’s par value that is exchanged 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 received 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 interested 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.
Corrrelation
The extent to which two or more securities or portfolios move together. The correlation coefficient is a number that ranges from -1 to +1. A perfect correlation would have a coefficient of +1, whereas two securities that move in total opposite directions would have a -1. A coefficient of 0 would reflect a totally random correlation between two securities.
Cost Basis
The price paid for an asset, including any commissions or fees, used to calculate capital gains or losses when the asset is sold.
Covered Call Writer
An investor who sells a call option while owning the underlying security or some other asset that guarantees the ability to deliver if the call is exercised.
Credit Risk
The degree of probability that the issuer of a debt security will default in the payment of either principal or interest. Securities issued by the US government are considered to have virtually no credit risk.
Note: credit risk only refers to debt securities - common stock has no credit risk because there is no debt obligation to the owner.
Credit Spread
A position established when the premium received for the option sold exceeds the premium paid for the option bought.
Cumulative Preferred Stock
An equity security that offers the holder any unpaid dividends in arrears. These dividends accumulate and must be paid to the cumulative preferred stockholder before any dividends can be paid to the common stockholders.
Current Assets
Cash and other assets that are expected to be converted into cash within the next 12 months. Examples include such liquid items as cash and equivalents, accounts receivable, inventory, and prepaid expenses.
Current Liabilities
A corporation’s debt obligations due for payment within the next 12 months. Examples include accounts payable, accrued wages payable, and current long-term debt.
Current Market Value (CMV)
The worth of the securities in an account. The market value of listed securities is based on the closing prices on the previous business day.
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.
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; bond yield.
Custodial Account
An account in which a custodian enters trades on behalf of the beneficial owner, often a minor.
Custodian
An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another. Mutual funds have custodian banks responsible for safeguarding certificates and performing clerical duties.
Customer
Any person who opens a trading account with a 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 charges the customer a markup or markdown.
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, 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 include the food industry and utilities.
Defensive Investment Strategy
A method of portfolio allocation and management aimed at minimizing the risk of losing principal. Defensive investors place a high percentage of their 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 nonqualified retirement plan whereby the employee defers receiving current compensation in favor of a larger payout at retirement, 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 4 Greeks used by options analysts. An option’s delta is the rate of change of the price of the option with respect to its underlying security’s price. The delta of an option ranges in value from 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
Demand deposit (DDA) refers to a type of account held at banks and financial institutions that may be withdrawn at any time by the customer. The majority of such demand deposit accounts are checking accounts, although many now include savings accounts in the definition as well.
