Vocabulary Flashcards
1
Q
Accredited Investor
A
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.
2
Q
Accumulation Stage
A
The period during which contributions are made to an annuity account.
3
Q
Accumulation Unit
A
An accounting measure used to determine an annuitant’s proportionate interest in the insurer’s separate account during an annuity’s accumulation (deposit) stage.
4
Q
Acid test
A
Acid test ratio
5
Q
Active Management Style
A
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.
6
Q
Adjusted Basis
A
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.
7
Q
Adjusted Gross Income (AGI)
A
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.
8
Q
Administrator
A
An official or agency that administers a state’s securities laws.
9
Q
Advertisement
A
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.
10
Q
Agency Cross Transaction
A
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.
11
Q
Agency Issue
A
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).
12
Q
Agency Transaction
A
A transaction in which a broker-dealer acts for the accounts of others by buying or selling securities on behalf of customers; agency basis.
13
Q
Agent
A
(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.
14
Q
Aggressive Investment Strategy
A
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.
15
Q
Algorithmic Trading
A
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.
16
Q
All or Non Order (AON)
A
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.
17
Q
Alpha
A
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.
18
Q
Alternative Minimum Tax (AMT)
A
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.
19
Q
American Depositary Receipt (ADR)
A
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.
20
Q
Anti-Dilutive Covenant
A
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.
21
Q
Appreciation
A
The increase in an asset’s value.
22
Q
Arbitrage
A
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.
23
Q
Arithmetic Mean
A
The average of a set of numbers, such as annual returns on an investment.
24
Q
Ask
A
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.
25
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.
26
Asset
(1) Anything that an individual or a corporation owns
| (2) A balance sheet item expressing what a corporation owns.
27
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.
28
Auction Market
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an auction market.
29
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.
30
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.
31
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.
32
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.
33
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.
34
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.
35
Balance Sheet
A report of a corporation's financial condition at a specific time.
36
Balance Sheet Equation
Assets = Liabilities + Equity
37
Bank Holding Company
A holding company whose primary asset is a commercial bank.
38
Basis
Another term for yield to maturity (this bond is selling at a 5.78 basis).
39
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.
40
Bear
An investor who acts on the belief that a security or the market is falling or will fall.
41
Bear Market
A market in which prices of a certain group of securities are falling or are expected to fall.
42
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.
43
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.
44
Black-Scholes
One of the most popular options pricing models. Appears frequently on the exam as an incorrect choice.
45
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.
46
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."
47
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.
48
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.
49
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.
50
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.
51
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.
52
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.
53
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.
54
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.
55
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.
56
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.
57
Brady Bonds
Debt instruments, generally from third world countries, that may have a US Treasury bond as collateral.
58
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.
59
BRIC
An acronym referring to investments in Brazil, Russia, India, and China.
60
Bridge Loan
A short-term loan made to bridge the gap until permanent financing is arranged.
61
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.
62
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.
63
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.
64
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.
65
Bull
An investor who acts on the belief that a security or the market is rising or will rise.
66
Bull Market
A market in which prices of a certain group of securities are rising or will rise.
67
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.
68
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.
69
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.
70
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.
71
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.
72
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.
73
Callable Bond
A type of bond issued with a provision allowing the issuer to redeem the bond before maturity at a predetermined price.
74
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.
75
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.
76
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.
77
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.
78
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.
79
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.
80
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.
81
Capital Appreciation
An increase in an asset's market price.
82
Capital Asset
All tangible property, including securities, real estate, and other property, held for the long term.
83
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.
84
Capital Gain
The profit realized when a capital asset is sold for a higher price than the purchase price.
85
Capitalization
The sum of a corporation's long-term debt, stock, and surpluses.
86
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.
87
Capital Loss
The loss incurred when a capital asset is sold for a price lower than the purchase price.
88
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.
89
Capital Stock
All of a corporation's outstanding preferred stock and common stock, listed at par value.
90
Capital Structure
The composition of long-term funds (equity and debt) a corporation has as a source for financing.
91
Capital Surplus
The money a corporation receives in excess of the stated value of stock at the time of first sale.
92
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.
93
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.
94
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.
95
Cash Equivalent
A security that can be readily converted to cash. Examples include Treasury bills, certificates of deposit, and money market instruments and funds.
96
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.
97
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.
98
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.
99
Chartist
A securities analyst who uses charts and graphs of the past price movements of a security to predict its future movements.
100
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.
101
Chicago Stock Exchange
Registered stock exchange located in Chicago's downtown "loop." Referred to with the initials CHX.
102
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.
103
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.
104
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.
105
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.
106
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.
107
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.
108
Collateralized Mortgage Obligation (CMO)
A mortgage-backed corporate security. These issues attempt to return interest and principal at a predetermined rate.
109
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.
110
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.
111
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.
112
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.
113
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.
114
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.
115
Complex Trust
A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries.
116
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.
117
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.
118
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.
119
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.
120
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.
121
Consumption
A term used by economists to refer to the purchase by household units of newly produced goods and services.
122
Contraction
A period of general economic decline, one of the business cycle's four stages.
123
Contributory Plan
A retirement plan to which both the employee and the employer make contributions.
124
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.
125
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.
126
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.
127
Conversion Price
The dollar amount of a convertible security's par value that is exchanged for one share of common stock.
128
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.
129
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.
130
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.
131
Convertible Preferred Stock
An equity security that can be exchanged for common stock at specified prices or rates. Dividends may be cumulative or noncumulative.
132
Convexity
The most accurate way of indicating a debt security's sensitivity to changes in interest rates.
133
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.
134
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.
135
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.
136
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.
137
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.
138
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.
139
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.
140
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.
141
Credit Spread
A position established when the premium received for the option sold exceeds the premium paid for the option bought.
142
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.
143
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.
144
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.
145
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.
146
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.
147
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.
148
Custodial Account
An account in which a custodian enters trades on behalf of the beneficial owner, often a minor.
149
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.
150
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.
151
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.
152
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.
153
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.
154
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.
155
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.
156
Debenture
A debt obligation backed by the issuing corporation's general credit; unsecured bond.
157
Debit Spread
A position established when the premium paid for the option bought exceeds the premium received for the option sold.
158
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.
159
Debt-to-Equity ratio
The ratio of total long-term debt to total stockholders' equity; it is used to measure leverage.
160
Decumulation
Disposal of something accumulated. Investors spend much of their working years accumulating for retirement; taking the funds out is decumulation.
161
Default
The failure to pay interest or principal promptly when due.
162
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.
163
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.
164
Deferred Annuity
An annuity contract that delays payment of income, installments, or a lump sum until the investor elects to receive it.
165
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.
166
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.
167
Defined Benefit Plan
A qualified retirement plan that specifies the total amount of money that the employee will receive at retirement.
168
Defined Contribution Plan
A qualified retirement plan that specifies the amount of money that the employer will contribute annually to the plan.
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Deflation
A persistent and measurable fall in the general level of prices.
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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.
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Demand
A consumer's desire and willingness to pay for a good or service.
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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.
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Demutualization
Demutualization is the process through which a member-owned company becomes shareholder-owned. Historically, this has usually been done by mutual life insurance companies (think MetLife and Prudential), but, in recent years has been done by other member-owned entities such as the New York Stock Exchange.
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Depreciation
(1) A tax deduction that compensates a business for the cost of certain tangible assets.
(2) A decrease in the value of a particular currency relative to other currencies.
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Depreciation Expense
A bookkeeping entry of a noncash expense charges against earnings to recover the cost of an asset over its useful life.
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Depression
A prolonged period of general economic decline.
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Derivative
An investment vehicle, the value of which is based on another security's value. Futures contracts, forward contracts, and options are among the most common types of derivatives. Institutional investors generally use derivatives to increase overall portfolio return or to hedge portfolio risk.
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Designated Market Maker (DMM)
Specialist
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Dilution
A reduction in earnings per share of common stock. Dilution occurs through the issuance of additional shares of common stock and the conversion of convertible securities.
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Directed Brokerage
The ability of an investment adviser or a client to determine broker-dealers to be used in the execution of transactions in their advisory accounts.
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Direct Participation Program (DPP)
A business organized so as to pass all income, gains, losses, and tax benefits to its owners, the investors; the business is usually structured as a limited partnership. Examples include oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, and S corporation offerings.
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Discount
The difference between the lower price paid for a security and the security's face amount at issue.
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Discount Bond
A bond that sells at a lower price than its face value.
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Discount Rate
The interest rate charged by the 12 Federal Reserve Banks for short-term loans made to member banks.
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Discretion
The authority given to someone other than an account's beneficial owner to make investment decisions for the account concerning the security, the number of shares or units, and whether to buy or sell. The authority to decide only timing or price does not constitute discretion.
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Discretionary Account
An account in which the customer has given the agent authority to enter transactions at the representatives's discretion.
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Disgorge(ment)
In legal usage, the forced giving up of profits made through illegal activity, most commonly insider trading.
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Disposable Income (DI)
The sum that people divide between spending and personal savings.
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Distributable Net Income (DNI)
Taxable income from a trust that determines the amount of income that may be taxable to beneficiaries.
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Diversification
A risk management technique that mixes a wide variety of investments within a portfolio, thus minimizing the impact of any one security on overall portfolio performance.
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Diversified Common Stock Fund
A mutual fund that invests its assets in a wide range of common stocks. The fund's objectives may be growth, income, or a combination of both.
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Dividend
A distribution of a corporation's earnings. Dividends may be in the form of cash, stock, or property. The board of directors must declare all dividends.
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Dividend Discount Model
The simplest model for valuing equity is the dividend discount model - the value of a stock is the present value of expected dividends on it.
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Dividend Exclusion Rule
An IRS provision that permits a corporation to exclude from its taxable income 70% of dividends received from domestic preferred and common stocks. The Tax Reform Act of 1986 repealed the dividend exclusion for individual investors.
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Dividend Growth Model
A valuation method which takes into consideration dividend per share and it’s expected growth. This model assumes that dividends grow at the same rate forever. Therefore, it is most commonly used to value companies belonging to for mature and stable industries, having steady dividend growth. It will show a higher valuation than the DDM.
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Dividend Payout Ratio
A measure of a corporation's policy of paying cash dividends, calculated by dividing the dividends paid on common stock by the net income available for common stockholders. The ratio is the complement of the retained earnings ratio.
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Dividends Per Share
The dollar amount of cash dividends paid on each share of common stock during one year.
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Dividend Reinvestment Plan
Frequently referred to as a DRIP, the plan allows shareholders the option of having cash dividends automatically reinvested in shares of the issuer's stock, frequently at a discounted price and/or without commissions. In most plans, additional investments are permitted.
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Dividend Yield
The annual rate of return on a common or preferred stock investment. The yield is calculated by dividing the annual dividend by the stock's purchase price.
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Dodd-Frank Bill
The general term by which the Wall Street Reform and Consumer protection Act of 2010 is known. Considered to be the most significant legislation impacting the securities industry since the 1930s.
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Dollar Cost Averaging
A system of buying mutual fund shares in fixed dollar amounts at regular fixed intervals, regardless of the share's price. The investor purchases more shares when prices are low and fewer shares when prices are high, thus lowering the average cost per share over time.
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Donor
A person who makes a gift of money or securities to another. Once the gift is donated, the donor gives up all rights to it. Gifts of securities to minors under the Uniform Gift to Minors Act provide tax advantages to the donor.
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Dow Jones Averages
The most widely quoted and oldest measures of change in stock prices. Each of the four averages is based on the prices of a limited number of stocks in a particular category.
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Dow Jones Composite Average (DJCA)
A market indicator composed of the 65 stocks that make up the Dow Jones Industrial, Transportation, and Utilities Averages.
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Dow Jones Industrial Average (DJIA)
The most widely used market indicator, composed of 30 large, actively traded issues of industrial stocks.
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Dow Jones Transportation Average (DJTA)
A market indicator composed of 20 transportation stocks.
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Dow Jones Utilities Average (DJUA)
A market indicator composed of 15 utilities stocks.
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Durable Power of Attorney
A document giving either full or limited authority to a third party that survives the mental or physical incompetence (but not death) of the grantor.
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Duration
Duration is an approximate measure of a bond's price sensitivity to changes in interest rates. Duration can be used to compare bonds with different issue and maturity dates, coupon rates, and yields to maturity. The duration of a bond is expressed as a number of years from its purchase date.
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Earned Income
Income derived from active participation in a trade or business, including wages, salary, tips, commissions, and bonuses. Also included is alimony received. One must have earned income in order to make contributions to an IRA.
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Earned Surplus
Retained earnings
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Earnings Momentum
A term used to describe that earnings are growing at an increasing rate. That is, if they grew at a rate of 10% in the first quarter, 11% in the second quarter, and 14% in the most recent quarter, this shows earnings increasing at an accelerating rate. That is positive earnings momentum. Used by those following a growth style of portfolio management.
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Earnings Multiplier
Another term for the price-to-earning (PE) ratio. The earnings multiplier is the price of the stock divided by its earnings per share.
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Earnings Per Share (EPS)
A corporation's net income available for common stock divided by its number of shares of common stock outstanding.
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Effective Date
The date the registration of an issue of securities becomes effective, allowing the underwriters to sell the newly issued securities to the public and confirm sales to investors who have given indications of interest.
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Effective Tax Rate
The overall rate paid on a taxpayer's total taxable income. It will always be less than the marginal tax rate.
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Efficient Market Theory
A theory based on the premise that the stock market processes information efficiently. The theory postulates that, as new information becomes known, it is reflected immediately in the price of a stock and therefore stock prices represent fair prices. There are three forms of this theory: weak, semi-strong, and strong, depending upon the amount of information available.
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Employee Stock Options
A form of employee compensation where the employing corporation makes available the opportunity for employees to acquire the issuer's stock. There are two forms: nonqualified (NSOs) and incentives (ISOs).
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Enjoined
This term includes being subject to a mandatory injunction, prohibitory injunction, preliminary injunction, or a temporary restraining order issued by a court of competent jurisdiction.
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Equity
Common and preferred stockholders' ownership interests in a corporation.
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Equity Financing
Raising money for working capital or for capital expenditures by selling common or preferred stock to individual or institutional investors. In return for the money paid, the investors receive ownership interests in the corporation.
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Equity Security
A security representing ownership in a corporation or another enterprise. Examples of equity securities include:
- common and preferred stock
- interests in a limited partnership or joint venture
- securities that carry the right to be traded for equity securities, such as convertible bonds, rights, and warrants
- put and call options on equity securities
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Eurobond
A long-term debt instrument of a government or corporation that is denominated in the currency of the issuer's country but is issued and sold in a different country.
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Eurodollar
US Currency held in banks outside the United States.
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Exchange-listed Security
A security that has met certain requirements and has been admitted to full trading privileges on a stock exchange. The NYSE and regional exchanges set listing requirements for volume of shares outstanding, corporate earnings, and other characteristics.
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Exchange Privileges
A feature offered by a mutual fund allowing an individual to transfer an investment in one fund to another fund under the same sponsor without incurring an additional sales charge.
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Exchange Traded Fund
An investment company originally designed to track a specific index that is traded on a stock exchange. Rather than basing the price on NAV, the ETF's market price is constantly changing as does the price of any other listed stock. ETF's may be purchased on margin and sold short. Although most ETF's still track indexes, there are a number of ETF's that are actively managed.
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Executor
A person given fiduciary authorization to manage the affairs of a decendent's estate. An executor's authority is established by the decendent's last will.
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Exempt Reporting Adviser
ERAs are advisers that are exempt from registration relying on either the venture capital fund adviser or the private fund adviser exemption. Although exempt from registration, an ERA is subject to certain reporting, recordkeeping, and other obligations.
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Exempt Security
A security exempt from the registration requirements (although not from the antifraud requirements) of the Securities Act of 1933 or the Uniform Securities Act. Examples include US Government securities and municipal securities.
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Exempt Transaction
A transaction that does not trigger a state't registration and advertising requirements under the Uniform Securities Act. Examples of exempt transactions include:
- nonissuer transactions in outstanding securities (normal market trading)
- transactions with financial institutions
- unsolicited transactions
- private placement transactions
No transaction is exempt from the Uniform Securities Act's antifraud provision.
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Exercise Price
The cost per share at which an option or warrant holder may buy or sell the underlying security.
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Expansion
A period of increased business activity throughout an economy; one of the four stages of the business cycle.
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Expansionary Policy
A monetary policy that increases the money supply, usually with the intention of lowering interest rates and combating deflation.
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Expense Ratio
A ratio for comparing a mutual fund's efficiency by dividing the fund's expenses by its net assets.
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Farm Credit Administration (FCA)
The government agency that coordinates the activities of the banks in the Farm Credit System.
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Farm Credit System (FCS)
An organization of 37 privately owned banks that provide credit services to farmers and mortgages on farm property. Included in the system are the Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooporatives.
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Federal Covered Adviser
As defined by the NSMIA of 1996, either an investment adviser registered with the SEC or excluded from the definition of investment adviser by the Investment Advisers Act of 1940. Under Dodd-Frank, these advisers registering with the SEC must generally meet a threshold of $100 million or more in assets under management.
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Federal Covered Security
Under the NSMIA of 1996, a new definition was created; covered security, generally referred to as federal covered security on the exam. State securities registration requirements were preempted with respect to covered securities, other than the ability to require notice filing, particularly in the case of registered investment companies. The most tested federal covered securities include those listed on the major US exchanges and Nasdaq as well as investment companies registered with the SEC and securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 (private placement).
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Federal Deposit Insurance Corporation (FDIC)
The government agency that provides deposit insurance for member banks and prevents bank and thrift failures.
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Federal Funds
The reserves of banks and certain other institutions greater than the reserve requirements for excess reserves. These funds are available immediately.
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Federal Funds Rate
The interest rate charged by one institution lending federal funds to another.
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Federal Home Loan Bank (FHLB)
A government regulated organization that operates a credit reserve system for the nation's savings and loan institutions.
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Federal Home Loan Mortgage Corporation (FHLMC)
A publicly traded corporation that promotes the nationwide secondary market in mortgages by issuing mortgage-backed pass-through debt certificates.
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Federal Intermediate Credit Bank (FICB)
One of the 12 banks that provide short-term financing to farmers as part of the Farm Credit System.
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Federal National Mortgage Association (FNMA)
A publicly held corporation that purchases conventional mortgages and mortgages from government agencies, including the Federal Housing Administration, Department of Veterans Affairs, and Farmers Home Administration.
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Federal Open Market Committee (FOMC)
A committee that makes decisions concerning the Fed's operations to control the money supply.
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Federal reserve Board (FRB)
A seven-member group that directs the operations of the Federal Reserve System. The President appoints board members, subject to Congressional approval.
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Federal Reserve System
The central bank of the United States. Its primary responsibility is to regulate the flow of money and credit. The system includes 12 regional banks, 24 branch banks, and hundreds of national and state banks.
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Fiduciary
A person legally appointed and authorized to hold assets in trust for another person and manages those assets for that person's benefit.
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Filing Date
The day on which an issuer submits to the SEC the registration statement for a new securities issue.
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Fill-or-Kill Order (FOK)
An order that instructs the floor broker to fill the entire order immediately; if the entire order cannot be executed immediately, it is canceled.
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Final Prospectus
The legal document that states a new issue security's price, delivery date, and underwriting spread, as well as other material information. It must be given to every investor who purchases a new issue of registered securities.
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Final Order
A term used in both state and federal law to refer to a decision rendered by a regulatory body. The final order may result in a suspension, revocation, or denial of registration. It is analogous to the judge passing sentence in a trial.
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Financial Industry Regulatory Authority (FINRA)
Organized in July 2007 as a joint effort of NASD and the NYSE to harmonize regulation in the securities industry.
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FINRA
The acronym for the Financial Industry Regulatory Authority, the result of the cooperative effort of NASD and the NYSE to harmonize regulation in the securities industry.
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Firm Quote
The actual price at which a trading unit of a security (such as 100 shares of stock or five bonds) may be bought or sold. All quotes are firm quotes unless otherwise indicated.
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First In, First Out (FIFO)
An accounting method used to assess a company's inventory, in which it is assumed that the first goods acquired are the first to be sold. The same method is used by the IRS to determine cost basis for tax purposes.
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Fiscal Policy
The federal tax and spending policies set by congress or the president. These policies affect ax rates, interest rates, and government spending in an effort to control the economy.
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Fiscal Year
The term used to describe an accounting year that ends other than December 31st (calendar year accounting).
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Fixed Annuity
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.
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Fixed Asset
A tangible, physical property used in the course of a corporation's everyday operations, including buildings, equipment, and land.
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Flat Yield Curve
A chart showing the yields of bonds with short maturities as equal to the yields of bonds with long maturities.
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Flow-Through
A term that describes the way income, deductions, and credits resulting from the activities of a business are applied to individual taxes and expenses as though each incurred the income and deductions directly.
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Foreign Currency
Money issued by a country other than the one in which the investor resides. Options and futures contracts on numerous foreign currencies are traded on US exchanges.
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Foreign Exchange Rate
The price of one country's currency in terms of another currency.
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Form 706
The IRS form used for the computation of estate tax. it must be filed within 9 months of deal unless an extension has been obtained.
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Form 709
The United State Gift (and Generation-Skipping Transfer) Tax Return is filed on Form 709.
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Form 1040
The IRS form used to file individual income tax. Schedule C of the Form 1040 is used to report business income for sole proprietorships.
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Form 1041
The IRS form used by estates and trusts to report their income for tax purposes.
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Form 1065
The information return filed by a partnership or LLC. Because some income and losses flow through to owners, the entity pays no tax.
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Form 1120 and 1120S
The tax returns filed by corporations. The S is for an S corporation.
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Form D
The SEC for, required to be filed when engaging in a Regulation D private placement.
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Forward Contract
A forward contract is a direct commitment between one buyer and one seller for a specific commodity. Because forward contracts are direct obligations between a specific buyer and seller (unlike futures and options, they are not standardized), they are not easily transferred and are considered illiquid.
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Forward Pricing
The valuation process for mutual fund shares, whereby an order to purchase or redeem shares is executed at the price determined by the portfolio valuation calculated after the order is received. Portfolio valuations occur at least once per business day.
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Fractional Share
A portion of a whole share of stock. Mutual fund shares are frequently issued in fractional share amounts. Fractional shares used to be generated when corporations declared stock dividends, merged, or voted to split stock, but today it is more common for corporations to issue the cash equivalent of fractional shares.
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Fraud
The deliberate concealment, misrepresentation, or omission of material information or the truth, so as to deceive or manipulate another party for unlawful or unfair gain.
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Front-End Load
A mutual fund commission or sales fee that is charged at the time shares are purchase. The load is added to the share's net asset value when calculating the public offering price.
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Front Running
The prohibited practice of entering an order for the benefit of a firm or a securities professional before entering customer orders.
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Full Power of Attorney
A written authorization for someone other than an account's beneficial owner to make deposits and withdrawals and to execute trades in the account.
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Full Trading Authorization
An authorization, usually provided by a full power of attorney, for someone other than the customer to have full trading privileges in an account.
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Fundamental Analysis
A method of evaluating securities by attempting to measure the intrinsic value of a particular stock. Fundamental analysts study the overall economy, industry conditions, and the financial condition and management of particular companies.
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Futures
Futures contracts are exchange-traded obligations for a specific commodity. A buyer goes long, or establishes a long position, and is obligated to take delivery of the commodity on the future date specified. A seller goes short, or establishes a short position, and is obligated to deliver the commodity on the specified future date. If the seller does not own the commodity, his potential loss is unlimited because he has promised delivery and must pay any price to acquire the commodity to deliver. Futures may be highly leveraged.
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GAAP
The acronym for generally accepted accounting principles, the standard method used in the United States by professional accountants.
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Gamma
One of the 4 Greeks used by options analysts. An option's gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a 1 point movement of the underlying stock price.
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General Obligation Bond (GO)
A municipal debt issue backed by the full faith, credit, and taxing power of the issuer for payment of interest and principal.
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General Partnership (GP)
An association of two or more entities formed to conduct a business jointly. The partnership does not require documents for formation, and the general partners are jointly and severally liable for the partnership's liabilities.
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Generation Skipping Trust
A form of bypass trust that is designed to have assets pass to grandchildren (or great-grandchildren) in order to "skip" a generation of estate tax.
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Geometric Mean
A type of average that indicates the central tendency of a set of numbers that, instead of finding the sum as with the arithmetic mean, takes the product of the numbers and divides that by the nth root (where n is the count of numbers). It will always be lower than the arithmetic mean [unless all of the numbers are the same].
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Good-til-canceled Order (GTO)
An order that is left on the specialist's book until it is either executed or canceled.
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Goodwill
An intangible asset that represents the value that a firm's business reputation adds to its perceived value. It is not included in net worth for the purposes of computing book value per share.
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Government National Mortgage Association (GNMA)
A wholly government-owned corporation that issues pass-through mortgage debt certificates backed by the full faith and credit of the US government.
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Grantor
An individual or organization that gives assets to a beneficiary by transferring fiduciary duty to a third-party trustee that will maintain the assets for the benefit of the beneficiaries.
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Grantor Trust
A trust that requires that the grantor be taxed on income produced by trust property if trust income is distributed to the grantor or to the grantor's spouse; trust income discharges a legal obligation of the grantor or grantor's family; and the grantor retains power to revoke or amend the trust.
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Gross Domestic Product (GDP)
The market value of all final goods and services produced within a country in a given period of time.
GDP = consumption + investment + government spending + (exports - imports) investment.
To account for inflation, GDP is based on a constant dollar, currently the value in 2005.
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Gross Income
All income of a taxpayer, from whatever source derived.
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Gross Margin
Gross margin is the operating profit of a business prior to interest and taxes. It is computed by subtracting the cost of goods sold (COGS) from the company's sales (or revenues). gross margin is frequently expressed as a percentage, called the margin of profit. The calculation is the gross margin divided by the sales (revenue). For example, a company has sales of $5 million and COGS of $3.5 million resulting in a gross margin of $1.5 million and a margin of profit of 30%. (1.5/5)
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Gross Revenues
All money received by a business from its operations. The term typically does not include interest income or income from the sale, refinancing, or other disposition of properties.
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Growth Fund
A diversified common stock fund that has capital appreciation as its primary goal. It invests in companies that reinvest most of their earnings for expansion, research, or development.
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Growth Industry
An industry that is growing faster than the economy as a whole as a result of technological changes, new products, or changing consumer tastes.
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Growth Stock
A common stock that is believed to offer significant potential for capital gains. It often pays low dividends and sells at a high price-earnings ratio.
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Growth Style Investing
A management style that attempts to find stocks with positive earnings momentum. These stocks typically sell at the upper end of their 52-week price range, have high P/E ratios, and lower than average payout ratios.
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Guaranteed Security
Under the Uniform Securities Act, the term guaranteed means guaranteed by a third party as to payment of principal, interest, or dividends, but not capital gains.
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Guardian
A court-appointed fiduciary who manages the assets of a minor or an incompetent for that person's benefit.
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Head and Shoulders
On a technical analyst's trading chart, a pattern that has three peaks resembling a head and two shoulders. The stock price moves up to its first peak (the left shoulder), drops back, then moves to a higher peak (the top of the head), drops again but recovers to another, lower peak (the right shoulder). A head and shoulders top typically forms after substantial rise and indicates a market reversal. A head and shoulders bottom (an inverted head and shoulders) indicates a market advance.
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Hedge
An investment made to reduce the risk of adverse price movements in a security. Normally, a hedge consists of a protecting position in a related security.
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Hedge Clause
Any legend, clause, or other provision that is likely to lead an investor to believe that he has in any way waived any right of action he may have.
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Hedge Fund
A fund that can use one or more alternative investment strategies, including hedging against market downturns, investing in asset classes such as currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives, and arbitrage. These funds tend to have very high minimum investment requirements.
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High Net Worth Individual
An individual with at least $1 million managed by the IA or whose net worth the firm reasonably believes exceeds $2 million. The net worth of an individual may include assets held jointly with that individual's spouse. Performance-based fees may be charged to these clients.
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High Yield Bond
A bond with a less than investment grade rating, characterized by a return commensurate with the higher risk.
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Holder
The owner of a security.
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Holding Company
A company organized to invest in and manage other corporations. Control can occur through the ownership of 50% or more of the voting rights or through the exercise of a dominant influence. It is sometimes referred to as the parent organization.
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Holding Period
A time period signifying how long the owner possesses a security. It starts a day after a purchase and ends on the day of the sale.
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Home State
If an investment adviser is registered with a state Administrator (state registered adviser), the firm's home state is the state where it maintains its principal office and place of business.
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Hypothecation
Pledging to a broker-dealer securities bought on margin as collateral for the margin loan.
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Immediate Annuity
An annuity contract that provides for monthly payments to begin immediately after deposit of the invested funds. Payments usually commence within 30 to 60 days.
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Immediate-or-cancel Order (IRC)
An order that instructs the floor broker to execute it immediately, in full or in part. Any portion of the order that remains unexecuted is canceled.
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Impersonal Investment Advice
Investment advisory services that do not purport to meet the objectives or needs of specific individuals or accounts.
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Incentive Stock Option
A type of employee stock option. As long as stock purchased through exercise of an ISO is held at least two years after the date of grant and one year after the date of exercise, any profits are reported as long-term capital gains. If these time limits are broached, the ISO is taxed like an NSO.
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Income Fund
A mutual fund that seeks to provide stable current income by investing in securities that pay interest or dividends.
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Income Statement
The summary of a corporation's revenues and expenses for a specific fiscal period.
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Indenture
The agreement between a lender and a borrower that details specific terms of the bond issuance. The indenture specifies the legal obligations of the bond issuer and rights of the bondholders. It is sometimes called the deed of trust.
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Index Fund
Investors who wish to invest passively can invest in an index fund, which seeks to replicate the performance of a security market index. There are index mutual funds and index exchange-traded funds.
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Indication of Interest
An investor's expression of conditional interest in buying an upcoming securities issue after the investor has reviewed a preliminary prospectus. An indication of interest is not a commitment to buy.
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Individual Retirement Account (IRA)
A retirement investing tool for employed individuals that allows an annual contribution of 100% of earned income up to a maximum of $6,000 ($7,000 for those 50 and older).
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Industrial Development Bond (IDB)
A debt security issued by a municipal authority, which uses the proceeds to finance the construction or purchase of facilities to be leased or purchased by a private company. The bonds are backed by the credit of the private company, which is ultimately responsible for principal and interest payments; industrial revenue bond (IRB)
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Inelasticity
A lack of responsiveness on the part of consumers and producers to a change in prices.
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Inflation
A persistent and measurable increase in the general level of prices.
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Initial Public Offering (IPO)
A corporation's first sale of common stock to the public.
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Information Barriers
Policies and procedures created to prevent misuse of material non-public information (MNPI) are commonly referred to as information barriers. Formerly referred to as Chinese Walls.
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Inside Information
Material information that has not been disseminated to or is not readily available to the general public.
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Inside Market
When viewing the quotes of all of the market makers in a security, the inside market, or inside quote, is the best (highest) bid and the best (lowest) offer (or ask).
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Insider
Any person who possesses or has access to material nonpublic information about a corporation. Insiders include directors, officers, and stockholders who own more than 10% of any class of equity security of a corporation.
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Insider Trading and Securities Fraud Enforcement Act of 1988
Legislation that defines what constitutes the illicit use of nonpublic information in making securities trades and the liabilities and penalties that apply; Insider Trading Act; Chinese Wall
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Institutional Account
An account held for the benefit of others. Examples of institutional accounts include banks, trusts, pension and profit-sharing plans, mutual funds, and insurance companies.
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Institutional Investor
A person or an organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treatment and lower commissions. An institutional order can be of any size. Institutional Investors are covered by fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.
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Intangible Asset
A property owned that is not physical, such as a formula, a copyright, or goodwill.
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Interest
The charge for the privilege of borrowing money, usually expressed as an annual percentage rate.
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Interest Rate Risk
The risk associated with investments relating to the sensitivity of price or value to fluctuation in the current level of interest rates; also, the risk that involved the competitive cost of money. This term is generally associated with bond prices, but it applies to all investments. In bonds, prices carry interest risk because if bond prices rise, outstanding bonds will not remain competitive unless their yields and prices adjust to reflect the current market.
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Internal Revenue Code (IRC)
The legislation that defines tax liabilities and deductions for US taxpayers.
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Internal Revenue Services (IRS)
The US Government agency responsible for collecting most federal taxes and for administering tax rules and regulations.
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Interstate Offering
An issue of securities registered with the SEC sold to residents of states other than the state in which the issuer does business.
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Intestate
Dying without a legal will. Usually the probate court will appoint an administrator to handle the deceased's estate. For purposes of the Uniform Securities Act, transactions by this administrator (a fiduciary) are considered exempt transactions.
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In-the-money
The term used to describe an option that has intrinsic value, such as a call option when the stock is selling above the exercise price or a put option when the stock is selling below the exercise price.
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Intrastate Offering
An issue of securities exempt from SEC registration, available to companies that do business in one state and sell their securities only to residents of that same state.
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Intrinsic Value
The potential profit to be made from exercising an option. A call option is said to have intrinsic value when the underlying stock is trading above the exercise price.
347
Inverted Yield Curve
A chart showing long-term debt instruments that have lower yields than short-term debt instruments.
348
Investment Adviser
(1) Any person who makes investment recommendations in return for a flat fee or a percentage of assets managed
(2) For an investment company, the individual who bears the day-to-day responsibility of investing the cash and securities held in the fund's portfolio in accordance with objectives stated in the fund's prospectus.
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Investment Adviser Representative (IAR)
Any partner, officer, director, or other individual employed by or associated with an investment adviser whose job function involves the rendering of advice, solicitation for clients, or supervision of those who do.
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Investment Advisers Act of 1940
Legislation governing who must register with the SEC as an investment adviser.
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Investment Banker
An institution in the business of raising capital for corporations and municipalities. An investment banker may not accept deposits or make commercial loans.
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Investment Banking Business
A broker, dealer, or municipal or government securities dealer than underwrites or distributes new issues of securities as a dealer or that buys and sells securities for the accounts of others as a broker.
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Investment Company
A company engaged in the business of pooling investors' money and trading in securities for them. Examples include face-amount certificate companies, unit investment trusts, and management companies.
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Investment Company Act Amendments of 1970
Amendments to the Investment Company Act of 1940 requiring, in particular, that sales charges relate to the services a fund provides its shareholders.
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Investment Company Act of 1940
Congressional legislation regulating companies that invest and reinvest in securities. The act requires an investment company engaged in interstate commerce to register with the SEC.
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Investment Constraints
Limitations or restrictions that are specific to the adviser's client. Investment constraints include, among others, liquidity needs, time horizon, and personal ethical choices (no tobacco or alcohol stocks).
357
Investment-Grade Security
A security to which the rating services (ex. Standard & Poor's and Moody's) have assigned a rating of BBB/Baa or above.
358
Investment Objective
Any goal a client hopes to achieve through investing. Examples include current income, capital growth, and preservation of capital.
359
Investment Policy Statement
Used by those administering employee benefit plans to set out the objectives, policies, investment selections, and monitoring procedures for the plan. May also be used by investment advisers to determine policies to be followed with their clients.
360
Investor
The purchaser of an asset or security with the intent of profiting from the transaction.
361
IRA Rollover
The reinvestment of assets that an individual receives as a distribution from a qualified tax-deferred retirement plan into an individual retirement account within 60 days of receiving the distribution. The individual may reinvest either the entire sum or a portion of the sum, although any portion not reinvested is taxes as ordinary income.
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IRA Transfer
The direct reinvestment of retirement assets from one qualified tax-deferred retirement plan to an individual retirement account. The account owner never takes possession of the assets but directs that they be transferred directly from the existing plan custodian to the new plan custodian.
363
Irrevocable Trust
A trust that cannot be altered or canceled by the grantor at any time.
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Issuer
The entity, such as a corporation or municipality, that offers or proposes to offer its securities for sale.
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Joint Account
AN account in which two or more individuals possess some form of control over the account and may transact business in the account. The account must be designated as either joint tenants in common or joint tenants with right of survivorship.
366
Joint Life with Last Survivor
An annuity payout option that covers two or more people, with annuity payments continuing as long as one of the annuitants remains alive.
367
Joint Tenants with Right of Survivorship (JTWROS)
A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account passes to the surviving tenant(s). Used almost exclusively by husbands and wives.
368
Keogh Plan
A qualified tax-deferred retirement plan for persons who are self-employed and unincorporated or who earn extra income through personal services aside from their regular employment.
369
Keynesian Economics
The theory that active government intervention in the marketplace is the best method of ensuring economic growth and stability.
370
Lagging Indicator
A measurable economic factor that changes after the economy has started to follow a particular pattern or trend. Lagging indicators are believed to confirm long-term trends. Examples include average duration of unemployment, corporate profits, and labor cost per unit of output.
371
Large-Cap
Stocks with a market capitalization of $10 billion or more.
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Last In, First Out (LIFO)
An accounting method used o assess a corporation's inventory in which it is assumed that the last good's acquired are the first to be sold. This method is used to determine the cost basis for tax purposes; the IRS designates last in, first out as the order in which sales or withdrawals from an investment are made. It is the system used for random withdrawals from a non-qualified annuity where the earnings are taxed first before receiving back a return of original principal.
373
Leading Indicator
A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. leading indicators are believed to predict changes in the economy. Examples include new orders for durable goods, slowdowns in deliveries by vendors, and numbers of building permits issued.
374
Legal List
The selection of securities a state agency (usually a state banking or insurance commission) determines to be appropriate investments for fiduciary accounts such as mutual savings banks, pension funds, and insurance companies. This is used in states that do not have the prudent investor rule.
375
Legislative Risk
The potential for an investor to be adversely affected by changes in investment or tax laws.
376
Letter of Intent (LOI)
A signed agreement allowing an investor to buy mutual fund shares at a lower overall sales charge based on the total dollar amount of the intended investment. A letter of intent is valid only if the investor completes the terms of the agreement within 13 months of signing the agreement. A letter of intent may be backdated 90 days.
377
Level Load
A mutual fund sales fee charged annually and based on the net asset value of a share.
378
Leverage
Using borrowed capital to increase investment reutnr.
379
Liability
A legal obligation to pay a debt owed. Current liabilities are debts payable within 12 months. Long-term liabilities are debts payable over a period of more than 12 months.
380
LIBOR
LIBOR is a benchmark interest rate based on the rates at which banks lend unsecured funds to each other on the London interbank market. Published daily, the rate was previously administered by the British Bankers' Association (BBA). But in the aftermath of a scandal in 2012, Britain's primary financial regulator, the Financial Conduct Authority (FCA), shifted supervision of LIBOR to a new entity, the ICE Benchmark Administration, an independent subsidiary of the private exchange operator Intercontinental Exchange, or ICE.
381
Limited Liability
An investor's right to limit potential losses to no more than the amount invested. Equity shareholders, such as corporate stockholders and limited partners, have limited liability.
382
Limited Liability Company (LLC)
A hybrid between a partnership and a corporation in that it combines the pass-through treatment of a partnership with the limited liability accorded to corporate shareholders.
383
Limited Partnership (LP)
An association of two or more partners formed to conduct a business jointly and in which one or more of the partners is liable only to the extent of the amount of money they have invested. Limited partners do not receive dividends but enjoy direct flow-through of income and expenses.
384
Limited Power of Attorney
A written authorization for osmeone other than an account's beneficial owner to make certain investment decisions regarding transactions in the account.
385
Limited Trading Authorization
An authorization, usually provided by a limited power of attorney, for someone other than the customer to have trading privileges in an account. These privileges are limited to purchases and sales; withdrawal of assets is not authorized.
386
Limit Order
An order that instructs the broker-dealer to buy a specified security below a certain price or to sell a specified security for the day or good-til-canceled (GTC).
387
Liquidation Priority
In the case of a corporation's liquidation, the order that is strictly followed for paying off creditors and stockholders:
1. unpaid wages
2. taxes
3. secured claims like mortgage bonds, equipment trust certificates, and collateral trust bonds
4. unsecured liabilities (debentures) and general creditors
5. subordinated debt
6. preferred stockholders
7. common stockholders
388
Liquidity
The ease with which an asset can be converted to cash in the marketplace. A large number of buyers and sellers and a high volume of trading activity provide high liquidity.
389
Liquidity Risk
The potential that an investor might not be able to sell an investment when desired without adverse price disruption.
390
Listed Option
An option contract that can be bought and sold on a national securities exchange in a continuous secondary market. Listed options carry standardized strike prices and expiration dates.
391
Listed Security
A stock, a bond, or another security that satisfies certain minimum requirements and is traded on a regional or national securities exchange such as the New York Stock Exchange.
392
Living Trust
A trust created during the lifetime of the grantor; also known as an inter vivos trust.
393
Long
The term used to describe the owning of a security contract, or commodity. For example, a common stock owner is said to have a long position in the stock.
394
Longevity Annuity
A deferred income annuity that generally does not being payout until the age of 85. If a QLAC (qualified longevity annuity contract), exempt from RMDs for up to 15 years in a qualified retirement plans.
395
Long-term Equity Anticipation Securities
LEAPS options have the same characteristics as standard options, but with expiration dates up to three years in the future.
396
Long-term Gain
The profit earned on the sale of a capital asset that has been owned for more than 12 months.
397
Long-term Loss
The loss realized on the sale of a capital asset that has been owned for more than 12 months.
398
Loss Carryover
A capital loss incurred in one tax year that is carried over to the next year or later years for use as a capital loss deduction.
399
Make A Market
To stand ready to buy or sell a particular security as a dealer for its own account. A market maker accepts the risk of holding the position in the security.
400
Maloney Act
An amendment enacted in 1938 to broaden Section 15 of the Securities exchange Act of 1934. Named for its sponsor, the late Senator Francis Maloney of Connecticut, the amendment provided for the creation of a self-regulatory organization for the specific purpose of supervising the over-the-counter securities market.
401
Mangement Company
An investment company that trades various types of securities in a portfolio in accordance with specific objectives stated in the prospectus.
402
Margin
The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
403
Marginal Tax Rate
The rate of taxation on any additional taxable income received. It is sometimes referred to as the tax on the "next" dollar or the "last" dollar of income.
404
Margin of Profit Ratio
A measure of a corporation's relative profitability. It is calculated by dividing the operation profit by the net sales.
405
Marital Trust
A trust that seeks to pass property to a survivor spouse while taking advantage of the marital deduction.
406
Market Capitalization
The number of outstanding shares multiplied by the current market price. Classed as large-cap, mid-cap, small cap, or micro-cap.
407
Market Maker
A dealer willing to accept the risk of holding a particular security in its own account to facilitate trading in that security.
408
Market Order
An order placed to be executed immediately at the best available price. A market order is the only order that guarantees execution.
409
Market Risk
The potential for an investor to experience losses owing to day-to-day fluctuations in the prices at which securities can be bought or sold.
410
Market Value
The price at which investors buy or sell a share of common stock or a bond at a given time. Market value is determined by buyers' and sellers' interaction.
411
Markup
The difference between the lowest current offering price among dealers and the higher prices a dealer charges a customer.
412
Matched Orders
Simultaneously entering identical (or nearly identical) buy and sell orders for a security to create the appearance of active trading in that security. This violates the antifraud provisions of the Securities Exchange Act of 1934 and the USA.
413
Material Information
Any fact that could affect an investor's decision to trade a security.
414
Maturity Date
The date on which a bond's principal is repaid to the investor and interest payments cease.
415
Mean
When referring to a series of values, such as portfolio returns, the average. A measure of central tendency known as the arithmetic mean. Could also refer to the geometric mean.
416
Median
When viewing a series of values, such as portfolio returns, the number that has as many occurrences above as below. A measure of central tendency.
417
Mid-Cap
Stocks with a market capitalization of $2 billion to $20 billion.
418
Mode
When viewing a series of values, the one that occurs the most frequently. A measure of central tendency.
419
Modern Portfolio Theory (MPT)
A method of choosing investments that focuses on the importance of the relationships among all the investments in a portfolio rather than the individual merits of each investment. The method allows investors to quantify and control the amount of risk they accept and return they achieve.
420
Monetarist Theory
An economic theory holding that the money supply is the major determinant of price levels and that therefore a well-controlled money supply will have the most beneficial impact on the economy.
421
Monetary Policy
The Federal Reserve Board's actions that determine the size and rate of the money supply's growth, which will in turn affect interest rates.
422
Money Market
The securities market that deals in high quality, short-term debt. Money market instruments are very liquid forms of debt that mature in one year or less. Treasury bills, commercial paper, and jumbo CDs are examples of money market instruments.
423
Money Market Fund
A mutual fund that invests in short-term debt instruments. The fund's objective is to earn interest while maintaining a stable new asset value of $1 per share. Always sold with no load, the fund may also offer check-writing privileges and a low initial minimum investment.
424
Monte Carlo Simulation
A statistical method to determine the return profile of a security or portfolio that recreates outcomes by generating random values on the basis of the risk and return characteristics of the securities themselves.
425
Moody's Investors Service
One of the best known investment rating agencies in the United States. A subsidiary of Dun & Bradstreet, Moody's rates bonds, commercial paper, preferred and common stocks, and municipal short-term issues.
426
Mortgage Bond
A debt obligation secured by a property pledge. It represents a lien or mortgage against the issuing corporation's properties and real estate assets.
427
Moving Average Chart
A tool used by technical analysts to track the price movements of a commodity. It plots average daily settlement prices over a defined period of time (for example, over three days for a three-day moving average).
428
Municipal Bond
A bond security issued by a state, a municipality, or another subdivision (such as a school, a park, a sanitation, or another local taxing district) to finance its capital expenditures. Such expenditures might include the construction of highways, public works, or school buildings.
429
Municipal Bond Fund
A mutual fund that invests in municipal bonds and operates either as a unit investment trust of as an open-end fund. The fund's objective is to maximize federally tax-exempt income.
430
Municipal Note
A short-term municipal security issued in anticipation of funds from another source.
431
Municipal Securities Rulemaking Board (MSRB)
A self-regulatory organization that regulates the issuance and trading of municipal securities. The Board functions under the Securities and Exchange Commission's supervision; it has no enforcement powers.
432
Mutual Fund
An investment company that continuously offers new equity shares in an actively managed portfolio of securities. All shareholders participate in the fund's gains or losses. The shares are redeemable on any business day at net asset value. Each mutual fund's portfolio is invested to match the objective stated in the prospectus.
