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A Accredited Investor: Wealthy investors, generally maintaining a net worth of at least $1 million or earning at least $200,000 per year, with the privilege of investing in risky private stock sales or other securities. The term itself is defined under the Securities and Exchange Commission Regulation D Act. Accrued Interest: Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. At the time of sale, the buyer pays the seller the bond’s price plus accrued interest, calculated by multiplying the coupon rate by the number of days that have elapsed since the last payment. Acquisition: One company taking over controlling interest in another company. Investors are always looking out for companies that are likely to be acquired, because those who want to acquire such companies are often willing to pay more than the market price for the shares they need to complete the acquisition. Active Market: Heavy volume of trading in a particular stock, bond or commodity. Also, heavy volume of trading on an exchange as a whole. Advance-Decline: Measurement of the number of stocks that have advanced and the number that have declined over a particular period. It is the ratio of one to the other and shows the general direction of the market. Aftermarket Performance: A term typically referring to the difference between a stock's Offering Price and its current market price. All or None Order: Buy or sell order marked to signify that no partial transaction is to be executed. The order will not automatically be canceled, however, if a complete transaction is not executed; to accomplish that, the order entry must be marked FOK, meaning fill or kill. American Depository Receipt (ADR): Receipt for the shares of a foreign-based corporation held in the vault of a U.S. bank and entitling the shareholder to all dividends and capital gains. Instead of buying shares of foreign-based companies in overseas markets, American investors can buy shares in the U.S. in the form of an ADR. American Stock Exchange (AMEX): Stock exchange that trades stock and bonds of small-medium sized companies. Located at 86 Trinity Place in downtown Manhattan, the Amex was known until 1921 as the Curb Exchange. Annual Meeting: Once-a-year meeting when the managers of a company report to stockholders on the year’s results, and the board of directors stands for election for the next year. Stockholders unable to attend the annual meeting may vote for directors and pass on resolutions through the use of proxy material, which must legally be mailed to all shareholders of record. Annual Report: Yearly record of a corporation’s financial condition that must be distributed to shareholders under Securities and Exchange Commission regulations. Annuity: Form of contract sold by life insurance companies that guarantees a fixed or variable payment to the annuitant at some future time, usually retirement. In a fixed annuity the amount will ultimately be paid out in regular installments varying only with the payout method elected. In a variable annuity, the payout is based on a guaranteed number of units; unit values and payments depend on the value of the underlying investments. Arbitrage: Profiting from differences in price when the same security, currency, or commodity is traded on two or more markets. By taking advantage of momentary disparities in prices between markets, arbitrageurs perform the economic function of making those markets trade more efficiently. Arbitration: Alternative to suing in court to settle disputes between brokers and their clients and between brokerage firms. Asked Price: The lowest round lot price at which a dealer will sell a security. Asset: Anything having commercial or exchange value that is owned by a business, institution, or individual. Asset Allocation: Apportioning of investment funds, among categories of assets, such as cash equivalents, stocks, fixed income investments, and such tangible assets as real estate, precious metals, and collectibles. Also applies to subcategories such as government, municipal, and corporate bonds, and industry groupings of common stocks. Asset allocation affects both risk and return and is a central concept in personal financial planning and investment management. At The Money: At the current price, as an option with an exercise price equal to or near the current price of the stock or underlying futures contract. Audit: Professional examination and verification of a company’s accounting documents and supporting data for the purpose of rendering an opinion as to their fairness, consistency, and conformity with generally accepted accounting principals. Authorized Shares: Maximum number of shares of any class company may legally create under the terms of its Articles of Incorporation. Normally, a corporation provides for future increases in authorized stock by vote of the stockholders. The corporation is not required to issue all the shares authorized and may initially keep issued shares at a minimum to hold down taxes and expenses.
B Balance of Trade: Net difference over a period of time between the value of a country’s imports and exports of merchandise. Movable goods such as autos, foodstuffs, and apparel are included in the balance of trade. Balance Sheet: A financial report showing the status of a company’s assets, liabilities, and owners’ equity on a given date, usually the close of a month. Basis Point: Smallest measure used in quoting yields on bonds and notes. One basis point is 0.01% of yield. Bearer Form: Security not registered on the books of the issuing corporation and thus payable to the one possessing it. A bearer bond has certificates attached, which the bondholder sends in or presents on the interest date for payment. The alternative name for this is a coupon bond. Bearer stock certificates are negotiable without endorsement and are transferred by delivery. Dividends are payable by presentation of dividend coupons, which are dated or numbered. Bear Market: Prolonged period of falling prices. A bear market in stocks is usually brought on by the anticipation of declining economic activity, and a bear market in bonds is caused by rising interest rates. Best Efforts: This term is used to describe a deal in which underwriters only agree to "do their best" in selling shares to the public. An IPO is more commonly done on a Bought or Firm Commitment basis in which the Underwriters are obligated to sell the allotted shares. Beta: A measure of risk commonly used to compare the volatility of stocks and mutual funds to the overall market. The Standard & Poor’s 500 Stock Index has a beta coefficient of 1. Any stock with a higher beta is more volatile than the market, and any with a lower beta can be expected to rise and fall more slowly than the market. A conservative investor whose main concern is preservation of capital should focus on stocks with low betas. Bid and Asked: The bid is the highest price a prospective buyer is prepared to pay at a particular time for a trading unit of given security; and the asked is the lowest price acceptable to a prospective seller of the same security. Big Board: A popular term for the New York Stock Exchange. Black Monday: October 19, 1987, when the Dow Jones Industrial Average plunged a record 508 points following sharp drops the previous week, reflecting investor anxiety about inflated stock price levels, federal budget and trade deficits, and foreign market activity. Blank Check: A company which indicates no specific industry, business or venture when its securities are publicly offered for sale and the proceeds of the offering are not specifically allocated. Not usually a very good sign. Blue Sky Laws: Laws passed by various states to protect investors against securities fraud. These laws require sellers of new stock issues or mutual funds to register their offerings and provide financial details on each issue so that investors can base their judgements on relevant data. Board of Directors: Group of individuals elected, usually at an annual meeting, by the shareholders of a corporation and empowered to carry out certain tasks as spelled out in the corporation’s charter. Among such powers are appointing senior management, naming members of executive and finance committees (if any), issuing additional shares, and declaring dividends. Bond: Any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Book Value: Value at which an asset is carried on the balance sheet. The book value can be a guide in selecting underpriced stocks and is an indication of the ultimate value of securities in liquidation. Breadth of the Market: Percentage of stocks participating in a particular market move. Breadth-of-the-market indexes are alternatively called advance-decline indexes Bridge Loan: Short-term loan, also called a swing loan, made in anticipation of intermediate-term or long-term financing. Broker Dealer: Individual or firm acting as a broker or principal in a securities transaction. Another term for a brokerage firm. Broker Loan Rate: Interest rate at which brokers borrow from banks to cover the securities positions of their clients. The broker loan rate usually hovers a percentage point or so above such short-term interest rates as the federal funds rate and the Treasury bill rate. Since brokers’ loans and their customers’ margin accounts are usually covered by the same collateral, the term "rehypothecation" is used synonymously with broker loan borrowing. Because broker loans are callable on 24-hour notice, the term call loan rate is also used, particularly in money rate tables published in newspapers. Bull Market: Prolonged rise in the prices of stocks, bonds, or commodities. Bull markets usually last at least a few months and are characterized by high trading volume. Buy Order: In securities trading, an order to a broker to purchase a specified quantity of a security at the market price or at another stipulated price. Buy Stop Order: Buy order marked to be held until the market price rises to the stop price, then to be entered as a market order to buy at the best available price. Sometimes called a suspended market order, because it remains suspended until a market transaction elects, activates, or triggers the stop. Such an order is not permitted in the over-the-counter market. Banking: The demand to repay a secured loan usually made when the borrower has failed to meet such contractual obligations as timely payment of interest. When a banker calls a loan, the entire principal amount is due immediately. Bonds: Right to redeem outstanding bonds before their scheduled maturity. The first dates when an issuer may call bonds are specified in the prospectus of every issue that has a call provision in its indenture.
C Canceled Order: Voiding an order to buy or sell. Capital Gain: Gain or profit from the sale of assets or securities Cash Flow: In a larger sense, an analysis of all changes that affect the cash account period. The statement of cash flows included in annual reports analyzes all changes affecting cash in the categories of operations, investments, and financing. For example; net operating income is an increase; the purchase of a new building is a decrease; and the issuance of stocks or bonds is an increase. When more cash comes in than goes out, we speak of a positive cash flow; the opposite is a negative cash flow. Companies with assets well in excess of liabilities may nevertheless go bankrupt because they cannot generate enough cash to meet current obligations. Certificate Of Deposit (CD): Debt instrument issued by a bank that usually pays interest. Institutional CD’s are issued in denominations of $100,000 or more, and individual CD’s start as low as $100. Maturities range from a few weeks to several years. Interest rates are set by competitive forces in the marketplace. Closing Price: Price of last transaction completed during a day’s trading session on an organized securities exchange. Commercial Paper: Short-term obligations with maturities ranging from 2 to 270 days issued by banks, corporations, and other borrowers to investors with temporarily idle cash. Such instruments are unsecured and usually discounted, although some are interest-bearing. They can be issued directly-direct issuers do it that way-or through brokers equipped to handle enormous clerical volume involved. Issuers like commercial paper because the maturities are flexible and because the rates are usually marginally lower than bank rates. Investors-actually lenders, since commercial paper is a form of debt-like the flexibility and safety of an instrument that is issued only by top-rated concerns and is nearly always backed by bank lines of credit. Both Moody’s and Standard & Poor’s assign ratings to commercial paper. Commodities: Bulk goods such as grains, metals, and foods traded on a commodities exchange or on the spot market. Common Stock: Units of ownership of a public corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. Consumer Price Index (CPI): Measure of change in consumer prices, as determined by a monthly survey of the U.S. Bureau of Labor Statistics. Many pension and employment contracts are tied to changes in consumer prices, as protection against inflation and reduced purchasing power. Among the CPI components are housing costs, food, transportation, and electricity. Conversion Price: The dollar value at which convertible bonds, debentures, or preferred stock can be converted into common stock, as announced when the convertible is issued. Convertible Bond: Corporate securities (usually preferred shares or bonds) that are exchangeable for a set number of another form (usually common shares) at a prestated price. Convertibles are appropriate for investors who want higher income than is available from common stock together with greater appreciation potential than regular bonds offer. From the issuer’s standpoint, the convertible feature is usually designed as a sweetener, to enhance the marketability of the stock or preferred. Corporate Bond: Debt instrument issued by a private corporation, as distinct from one issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1000; (3) they have a term maturity-which means they come due all at once- and are paid for out of a sinking fund accumulated for that purpose; (4) they are traded on major exchanges, with prices published in newspapers. Coupon Bond: Bond issued with detachable coupons that must be presented to a paying agent or the issuer for semiannual interest payment. These are bearer bonds, so whoever presents the coupon is entitled to the interest. Once universal, the coupon bond has been gradually giving way to the registered bond, some of which pay interest through electronic transfers. Current Yield: Annual interest on a bond divided by the market price. It is the actual income rate of return as opposed to the coupon rate (the two would be equal if the bond were bought at par) or the yield to maturity. For example, a 10% (coupon rate) bond with face (or par) value of $1000 is bought at a market price of $800. The annual income from the bond is $100. But since only $800 was paid for the bond, the current yield is $100 divided by $800, or 12 ‡%.
D Derivative Instrument: Financial instrument whose value is based on another security. For example, an option is a derivative instrument because its value derives from an underlying stock, stock index, or future. Discount Broker: Brokerage house that executes orders to buy and sell securities at commission rates sharply lower than those charged by a full service broker. Discount Rate: Interest rate that the Federal Reserve charges member banks for loans, using government securities or eligible paper as collateral. Distributions: Payout of realized capital gains on securities in the portfolio of a mutual fund or closed-end investment company. Dividend: Distribution of earnings to shareholders prorated by class of security and typically paid in the form of money or stock. The amount is decided by the board of directors and is usually paid quarterly. Dividends must be declared as income in the year they are received. Mutual fund dividends are paid out of income, usually on a quarterly basis from the fund’s investments. The tax on such dividends depends on whether the distributions resulted from capital gains, interest income, or dividends received by the fund, although these distinctions largely disappeared in 1988 under the tax reform act of 1986. Dow Jones Industrial Average (DJIA): Price-weighted average of 30 actively traded blue chip stocks, primarily industrials but including American Express and AT&T. Prepared and published by Dow Jones & Company, it is the oldest and most widely quoted of all the market indicators. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks. The DJIA is calculated by adding the closing prices of the component stocks and using a divisor that is adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as for subscriptions and mergers. The average is quoted in points, not in dollars. Due Diligence: A reasonable investigation conducted by the parties involved in preparing a disclosure document to form a basis for believing that the statements contained therein are true and that no material facts are omitted.
E Ex-Dividend: Interval between the announcement and the payment of the next dividend. An investor who buys shares during that interval is not entitled to the dividend. Typically, a stock’s price moves up by the dollar amount of the dividend as the ex-dividend date approaches, then falls by the amount of the dividend after that date. A stock that has gone ex-dividend is marked with an x in newspaper listings. F Federal Call: When a customer engages in certain types of transactions in their margin account, the brokerage firm will issue a call notifying the client if additional equity is required by the settlement date in order to satisfy Regulation T. Federal Funds Rate: Interest rate charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. Federal Open Market Committee: See FOMC Fiscal Year: Accounting period covering 12 consecutive months, 52 consecutive weeks, 13 four-week periods, or 365 consecutive days, at the end of which the books are closed and profit or loss is determined. A company’s fiscal year is often, but not necessarily, the same as the calendar year. A seasonal business will frequently select a fiscal rather than a calendar year, so that its year-end figures will show it in its most liquid condition, which also means having less inventory to verify physically. Flipping: This is when an investor has acquired an IPO at its Offering Price and sells it immediately for a quick gain soon after it starts trading on the open market. A practice discouraged by underwriters, that can lead such investors to unfavorable relationships with their underwriters with future IPOs. FOMC: Key committee in the Federal Reserve System, which sets short-term monetary policy for the Federal Reserve. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply. Front End Load: Sales charge applied to an investment at the time of initial purchase. There may be a front-end load on a mutual fund, for instance, which is sold by a broker. Annuities, life insurance policies, and limited partnerships can also have front-end loads. From the investor’s point of view, the earnings from the investment should make up for this up-front fee within a relatively short period of time. Futures Contract: Agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date. The price is established between buyer and seller on the floor of a commodity exchange.
G General Obligation Bond: Municipal bond backed by the full faith and credit (which includes the taxing and further borrowing power) of a municipality. A GO bond, as it is known, is repaid with general revenue and borrowings, in contrast to the revenue from a specific facility built with the borrowed funds, such as a tunnel or a sewer system. Ginnie Mae: Nickname for the Government National Mortgage Association and the securities guaranteed by that agency. Good Delivery: Securities industry designation meaning that a certificate has the necessary endorsements and meets all other requirements (signature guarantee, proper denomination, and other qualifications), so that title can be transferred by delivery to the buying broker, who is then obligated to accept it. Exceptions constitute bad delivery. Government Bonds: Securities issued by the U.S. government, such as Treasury bills, bonds, notes and savings bonds. Government bonds are the most creditworthy of all debt instruments since they are backed by the full faith and credit of the U.S. Government. Growth Stock: Stock of a corporation that has exhibited faster-than-average gains in earnings over the last few years and is expected to continue to show high levels of profit growth. Over the long run, growth stocks tend to outperform slower-growing or stagnant stocks. Growth stocks are riskier investments than average stocks, however, since they usually sport higher price/earnings ratios and make little or no dividend payments to shareholders. Gross National Product (GNP): Total value of goods and services produced in the U.S. economy over a particular period of time, usually one year. The GNP growth rate is the primary indicator of the status of the economy. The GNP is made up of consumer and government purchases, private domestic and foreign investments in the U.S., and the total value of exports. GNP figures are released every quarter. GTC Order: Brokerage customer’s order to buy or sell a security, usually at a particular price, that remains in effect until executed or canceled. If the GTC order remains unfilled after a long period of time, a broker will usually periodically confirm that the customer still wants the transaction occur if the stock reaches the target price.
H Hedging: A strategy used to offset investment risk. A perfect hedge is one eliminating the possibility of future gain or loss. A stockholder worried about declining stock prices, for instance, can hedge his or her holdings by buying a put option on the stock or selling a call option. Selling short is another widely used hedging technique. Investors often try to hedge against inflation by purchasing assets that will rise in value faster than inflation. Large commercial firms that want to be assured of the price they will receive or pay for a commodity will hedge their position by buying and selling simultaneously in the futures market. For example, Hershey’s, the chocolate company, will hedge its supplies of cocoa in the futures market to limit the risk of a rise in cocoa prices. House Call: Brokerage house notification that the customer’s equity in a margin account is below the maintenance level. If the equity declines below that point, a broker must call the client, asking for more cash or securities. If the client fails to deliver the required margin, his or her position will be liquidated. House call limits are usually higher than limits mandated by the National Association of Securities Dealers (NASD), a self-regulatory group, and the major exchanges with jurisdiction over these rules. Such a margin maintenance requirement is in addition to the initial margin requirements set by the regulation T of the Federal Reserve Board.
I Individual Retirement Account (IRA): Provision of the IRA law that enables persons receiving lump-sum payments from their company’s pension or profit-sharing plan because of retirement or other termination of employment to roll over the amount into an IRA investment plan within 60 days. Also, current IRA’s may themselves be transferred to other investment options within the 60-day period. Through an IRA rollover, the capital continues to accumulate tax-deferred until time of withdrawal. Initial Public Offering (IPO): Corporation’s first offering of stock to the public. IPO’s are almost invariably an opportunity for the existing investors and participating venture capitalists to make big profits, since for the first time their shares will be given a market value reflecting expectations for the company’s future growth. Institutional Investor: Organization that trades large volumes of securities. Some examples are mutual funds, banks, insurance companies, pension funds, labor union funds, corporate profit-sharing plans, and college endowment funds. Typically, more than 50% and sometimes upwards of 70% of the daily trading on the New York Stock Exchange is on behalf of institutional investors. Interest: Cost of using money, expressed as a rate per period of time, usually one year, in which case it is called an annual rate of interest. In-The Money: Option contract on a stock whose current market price is above the striking price of a call option or below the striking price of a put option. A call option on XYZ at a striking price of 100 would be in the money if XYZ were selling for 102, for instance, and a put option with the same striking price would be in the money if XYZ were selling for 98. Issued and Outstanding Shares: Shares of a corporation, authorized in the corporate charter, which have been issued and are outstanding. These shares represent capital invested by the firm’s shareholders and owners, and may be all or only a portion of the number of shares authorized. Shares that have been issued and subsequently repurchased by the company are called treasury stock, because they are held in the corporate treasury pending reissue or retirement.
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L Leverage: Means of enhancing return or value without increasing investment. Buying securities on margin is an example of leverage with borrowed money, and extra leverage may be possible if the leveraged security is convertible into common stock. Rights, warrants, and option contracts provide leverage, not involving borrowings but offering the prospect of high return for little or no investment. Liabilities: Claim on the assets of a company or individual-excluding ownership equity. Characteristics: (1) It represents a transfer of assets or services at a specified or determinable date. (2) The firm or individual has little or no discretion to avoid the transfer. (3) The event causing the obligation has already occurred. Limited Partnership: Organization made up of a general partner, who manages a project, limited partners, who invest money but have limited liability, are not involved on day-to-day management, and usually cannot lose more than their capital contribution. Usually limited partners receive income, capital gains, and tax benefits; the general partner collects fees and a percentage of capital gains and income. Typical limited partnerships are in real estate, oil and gas, and equipment leasing, but they also finance movies, research and development, and other projects. Limit Order: Order to buy or sell a security at a specific price or better. The broker will execute the trade only within the price restriction. For example, a customer puts in a limit order to buy XYZ Corp. at 30 when the stock is selling for 32. Even if the stock reached 30 1/8 the broker will not execute the trade. Similarly, if the client put in a limit order to sell XYZ Corp. at 33 when the price is 31, the trade will not be executed until the stock price hits 33. Listed Security: Stock or bond that has been accepted for trading by one of the organized and registered securities exchanges in the United States. Listed securities include stocks, bonds, convertible bonds, preferred stocks, warrants, rights, and options. Loan Value: With respect to regulation T of the Federal Reserve Board, the maximum percentage of the current market value of eligible securities that a broker can lend a margin account customer. Regulation T applies only to securities formally registered or having an unlisted trading privilege on a national securities exchange. For securities exempt from Regulation T, which comprise U.S. government securities, municipal bonds, and bonds of the International Bank for Reconstruction and Development, loan value is a matter of the individual firm’s policy. Lock-up Period: A "lock-up" is enforced on certain shares after an IPO. The lead underwriter bars a company's directors and executives from selling any of their shares. This period usually extends six months after the IPO date. This practice has also been instituted by online brokerage firms in an effort to quell the volatility of Internet IPO stocks.
M Margin Call: Demand that a customer deposit enough money or securities to bring a margin account up to the initial margin or minimum maintenance requirements. If a customer fails to respond, securities in the account may be liquidated. Margin Requirement: Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg T requires a minimum of $2000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Margin Security: Security that may be bought or sold in a margin account Regulation T defines margin securities as (1) any registered security (a listed security or a security having Unlisted Trading privileges); (2) any OTC margin stock or OTC margin bond, which are defined as any Unlisted Security that the Federal Reserve Board (FRB) periodically identifies as having the investor interest, marketability, disclosure, and solid financial position of a listed security; (3) any OTC security designated as qualified for trading in the National Market System under a plan approved by the Securities and Exchange Commission; (4) any mutual fund or unit investment trust registered under the Investment Company Act of 1940. Other securities that are not Exempt Securities must be transacted in cash. Market Capitalization: The total amount of a company's shares outstanding multiplied by the price per share. Due to popularity with investors, Internet stocks often have "market caps" which are somewhat out of line with their earnings and revenues. Market Maker: A broker-dealer who is registered to trade in a given security on Nasdaq. Mark to Market: Adjust the valuation of a security or portfolio to reflect current market values. For example, margin accounts are marked to the market to ensure compliance with maintenance requirements. Option and future contracts are marked to the market at year end with paper profit or loss recognized for tax purposes. Maturity: Date on which the principal amount of a note, draft, acceptance, bond, or other debt instrument becomes due and payable. Also, termination or due date on which an installment loan must paid in full. Merger: Combination of two or more companies, either through a pooling of interests, where the accounts are combined; a purchase, where the amount paid over and above the acquired company’s book value is carried on the books of the purchaser as goodwill; or a consolidation, where a new company is formed to acquire the net assets of the combining companies. Strictly speaking, only combinations in which one of the companies survives as a legal entity are called mergers or, more formally, statutory mergers; thus consolidations, or statutory consolidations, are technically not mergers, though the term merger is commonly applied to them. Money Market Fund: Open-ended mutual fund that invests in commercial paper, banker’s acceptances, repurchase agreements, government securities, certificates of deposit, and other highly liquid and safe securities, and pays money market rates of interest. Launched in the middle 1970’s, these funds were especially popular in the early 1980’s when interest rates and inflation soared. Management’s fee is less than 1% of an investor’s assets; interest over and above that amount is credited to shareholders monthly. The fund’s net asset value remains a constant $1 a share-only the interest rate goes up or down. Most funds are not federally insured, but some are covered by private insurance. Some funds invest only in government-backed-securities, which give shareholders an extra degree of safety. Many money market funds are part of fund families. This means that investors can switch their money from one fund to another and back again without charge. Money in an asset management account usually is automatically swept into a money market fund until the accountholder decides where to invest it next. Mortgage Bond: Bond issue secured by a mortgage on the issuer’s property, the lien on which is conveyed to the bondholders by a deed of trust. A mortgage bond may be designated senior, underlying, first, prior, overlying, junior, senior, third, and so forth, depending on the priority of the lien. Most of those issued by corporation are first mortgage bonds secured by specific real property and also representing unsecured claims on the general assets of the firm. As such, these bonds enjoy a preferred position relative to unsecured bonds of the issuing corporation. Municipal Bond: Debt obligation of a state or local government entity. The funds may support general government needs or special projects. Issuance must be approved by referendum or by an electoral body. Prior to the Tax Reform Act of 1986, the terms municipal and tax-exempt were synonymous, since virtually all municipal obligations were exempt from federal income taxes and most from state and local income taxes, at least in the state of issue. The 1986 Act, however, divided municipals into two broad groups: (1) public purpose bonds, which remain tax-exempt and can be issued without limitation, and (2) private purpose bonds, which are taxable unless specifically exempted. The tax distinction between public and private purpose is based on the percentage extent to which the bonds benefit private parties; if a tax-exempt public purpose bond involves more than a 10% benefit to private parties, it is taxable. Permitted private purpose bonds (those specified as tax-exempt) are generally tax preference items in computing the alternative minimum tax and, effective August 15, 1986, are subject to volume caps. Mutual Fund: Fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities, or money market securities. These funds offer investors the advantages of diversification and professional management. For these services they charge a management fee, typically 1% or less of assets per year. Mutual funds may invest aggressively or conservatively. Investors should assess their own tolerance for risk before they decide which fund would be appropriate for them. In addition, the timing of buying or selling depends on the outlook for the economy, the state of the stock and bond markets, interest, and other factors.
N Nasdaq: National Association of Securities Dealers Automated Quotations System, which is owned and operated by the National Association of Securities Dealers. NASDAQ is a computerized system that provides brokers and dealers with price quotations for securities traded over the counter as well as for many New York Stock Exchange listed securities. NASDAQ quotes are published in the financial pages of most newspapers. National Securities Clearing Corporation (NSCC): Securities clearing organization formed in 1977 by merging subsidiaries of the New York and American Stock Exchanges with the National Clearing Corporation. It functions essentially as a medium through which brokerage firms, exchanges, and other clearing corporations reconcile accounts with each other. Net Asset Value (NAV): Market value of a mutual fund share, synonymous with bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions. Net Income: Difference between total sales and total costs and expenses. Total costs comprise cost of goods sold including depreciation; total expenses comprise selling, general, and administrative expenses, plus income deductions. Net income is usually specified as to whether it is before income taxes or after income taxes. Net income after taxes is the bottom line referred to in popular vernacular. It is out of this figure that dividends are normally paid. No-Load Funds: Mutual fund offered by an open-end investment company that imposes no sales charge (load) on its shareholders. Investors buy shares in no-load funds directly from the fund companies, rather than through a broker, as is done in load funds. Many no-load fund families (see family of funds) allow switching of assets between stock, bond, and money market funds. The listing of the price of a no-load fund in a newspaper is accompanied with the designation NL. The net asset value, market price, and offer prices of this type of fund are exactly the same, since there is no sales charge. Non-Callable Bonds: Preferred stock or bond that cannot be redeemed at the option of the issuer. A bond may offer call protection for a particular length of time, such as ten years. After that, the issuer may redeem the bond if it chooses and can justify doing so. U.S. government bond obligations are not callable until close to maturity. Provisions for noncallability are spelled put in detail in a bond’s indenture agreement or in the prospectus issued at the time a new preferred stock is floated. Bond yields are often quoted to the first date at which the bonds could be called. NSCC: See National Securities Clearing Corporation
O Offering Price: Price per share at which a new secondary distribution of securities is offered for sale to the public; also called public offering price. Offering Range: This is the price range which the company expects to sell its stock. This can be found on the front page of the Prospectus and by no means must be adhered to. As with everything traded, market conditions and demand dictate the final Offering Price. Open Order: Buy or sell order for securities that has not yet been executed or canceled; a Good –Till-Canceled Order. Opening Price: This is the fist price that the company's stock trades on its first day of trading. Option: Securities transaction agreement tied to stocks, commodities, or stock indexes. Also, See Call Option and Put Option Out-of-the-Money: Term used to describe an option whose strike price for a strike is either higher than the current market value, in the case of a call, or lower, in the case of a put. For example, an XYZ December 60 call option would be out of the money when XYZ stock was selling for $55 a share. Similarly, an XYZ December 60 put option would be out of the money when XYZ stock was selling for $65 a share. Someone buying an out-of-the money option hopes that the option will move in the money, or at least in that direction. The buyer of the above XYZ call would want the sock to climb above $60 a share, whereas the put buyer would like the stock to drop below $60 a share. Over-the-Counter (OTC): Security that is not listed and traded on an organized exchange. Market in which securities transactions are conducted through telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange. Over-the-counter stocks are traditionally those of smaller companies that do not meet the Listing Requirements of the New York Stock Exchange or the American Stock Exchange. In recent years, however, many companies that qualify for listing have chosen to remain with over-the-counter trading, because they feel that the system of multiple trading by many dealers is preferable to the centralized trading approach of the New York Stock Exchange, where all trading in a stock has to go through the exchange Specialist in that stock. The rules of over-the-counter stock trading are written and enforced largely by the National Association of Securities Dealers (NASD), a self-regulatory group.
P Pink Sheets: Daily publication of the national quotation bureau that details the bid and asked prices of thousands of over the counter (OTC) stocks. Many of these stocks are not carried in daily OTC newspaper listings. Brokerage firms subscribe to the pink sheets- named for their color-because the sheets not only give current prices but list market makers who trade each stock. Debt securities are listed separately on the yellow sheets. Preferred Stock: Class of capital stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. Most preferred stock is cumulative; if dividends are passed (not paid for any reason), they accumulate and must be paid before common dividends. Price Earnings Ratio (P/E): Price of a stock divided by its earnings per share. The P/E ratio may either use the reported earnings from the latest year (called a trailing P/E) or employ an analyst’s forecast of next year’s earnings (called a forward P/E). The trailing P/E is listed along with a stock’s price and trading activity in the daily newspapers. For instance, a stock selling for $20 a share that earned $1 last year has a trailing P/E of 20. If the same stock has projected earnings of $2 next year, it will have a forward P/E of 10.The price/earnings ratio, also known as the multiple, gives investors an idea of how much they are paying for a company’s earning power. The higher the P/E, the more investors are paying, and therefore the more earnings growth they are expecting. Pricing Date: This date usually refers to the night before shares are sold to the general public. Companies and their Underwriters customarily set an IPO's price after the markets have closed in anticipation the commencement of trading in the morning. Primary Market: Where shares are distributed at the Offering Price to investors. Prime Rate: Interest rate banks charge to their most creditworthy customers. The rate is determined by the market forces affecting a bank’s cost of funds and the rates that borrowers will accept. The prime rate tends to become standard across the banking industry when a major bank moves its prime rate up or down. The rate is a key interest rate, since loans to less-creditworthy customers are often tied to the prime rate. Private Placement: An offering of a limited amount of shares or units, in which the recipients receive restricted stock from the issuer. Producer Price Index (PPI): Measure of change in wholesale prices (formerly called the wholesale price index), as released monthly by the U.S. Bureau of Labor Statistics. The index is broken down into components by commodity, industry sector, and stage of processing. The consumer equivalent of this index is the Consumer Price Index. Prospectus: Formal written offer to sell securities that set forth the plan for a proposed business enterprise or the facts concerning an existing one that an investor needs to make an informed decision. Prospectuses are also issued by mutual funds, describing the history, background of managers, fund objectives, a financial statement, and other essential data. A prospectus for a public offering must be filed with the Securities and Exchange Commission and given to prospective buyers of the offering. The prospectus contains financial information and a description of a company’s business history, officers, operations, pending litigation (if any), and plans (including the use of the proceeds from the issue). Offerings of limited partnerships are also accompanied by prospectuses. Real estate, oil and gas, equipment leasing, and other types of limited partnerships are described in detail, and pertinent financial information, the background of the general partners, and supporting legal opinions are also given. Proxy: Written power of attorney given by shareholders of a corporation, authorizing a specific vote on their behalf at corporate meetings. Such proxies normally pertain to election of the board of directors or to various resolutions submitted for shareholders’ approval. Put Option: Contract that grants the right to sell at a specified price a specific number of shares by a certain date. The put option buyer gains this right in return for payment of an option premium. The put option seller grants this right in return for receiving this premium. For instance, a buyer of an XYZ May 70 put has the right to sell 100 shares of XYZ at $70 to the put seller at any time until the contract expires in May. A put option buyer hopes the stock will drop in price, while the put option seller (called a writer) hopes the stock will remain stable, rise, or drop by an amount less than his or her profit on the premium.
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R Red Herring: Before investors receive the final copy of the prospectus, called the statutory prospectus, they may receive a preliminary prospectus, commonly called a red herring. This document is not complete in all details, though most of the major facts of the offering are usually included. The final prospectus is also called the offering circular. Registered Bond: Bond that is recorded in the name of the holder on the books of the issuer’s registrar and can be transferred to another owner only when endorsed by the registered owner. A bond registered for principal only, and not for interest, is called a registered coupon bond. One that is not registered is called a bearer bond; one issued with detachable coupons for presentation to the issuer or a paying agent when interest or principal payments are due is termed a coupon bond. bearer bonds are negotiable instruments payable to the holder and therefore do not legally require endorsement. Bearer bonds that may be changed to registered bonds are called interchangeable bonds. Regulation T: Federal Reserve Board regulation covering the extension of credit to customers by securities brokers, dealers, and members of the national securities exchanges. It establishes initial margin requirements and defines registered (eligible), unregistered (ineligible), and exempt securities. Regulation U: Federal Reserve Board limit on the amount of credit a bank may extend a customer for purchasing and carrying margin securities. REIT: A company, usually traded publicly, that manages a portfolio of real estate to earn profits traded publicly, that manages a portfolio of real estate to earn profits for shareholders. Patterned after investment companies, REITS make investments in a diverse array of real estate from shopping centers and office buildings to apartment complexes and hotels. Round Lot: Generally accepted unit of trading on a securities exchange. On the New York Stock Exchange, for example, a round lot is 100 shares of stock and $1000 or $5000 par value for bonds. In inactive stocks, the round lot is 10 shares. Increasingly, there seems to be recognition of a 500-share round lot for trading by institutions.
S Savings Bond: U.S. government bond issued in face value denominations ranging from $50 to $10,000. From 1941 to 1979, the government issued Series E bonds. Starting in 1980, Series EE and HH bonds were issued. Series EE bonds, issued at a discount, range from $50 to $10,000; Series HH bonds, which are interest bearing, range from $500 to $10,000. Both earn interest for ten years, though the U.S. Congress often extends that date. The interest from savings bonds is exempt from state and local taxes, and no federal tax is due until the bonds are redeemed. Bond holders wanting to defer the tax liability on their maturing Series EE bonds can exchange them for Series HH. Taxpayers meeting income qualifications can buy EE bonds to save for a child’s higher education and enjoy total or partial federal tax exemption. Secondary Distribution: Public sale of previously issued securities held by large investors, usually corporations, institutions, or other affiliated persons, as distinguished from a new issue or primary distribution, where the seller is the issuing corporation. As with a primary offering, secondaries are usually handled by investment bankers, acting alone or as a syndicate, who purchase the shares from the seller at an agreed price, then resell them, sometimes with the help of a selling group, at a higher public offering price, making their profit on the difference, called the spread. Since the offering is registered with the Securities and Exchange Commission, the syndicate manager can legally stabilize-or peg-the market price by bidding for shares in the open market. Buyers of securities offered this way pay no commissions, since all costs are borne by the selling investor. Secondary Market: Better known as the Stock Market, where shares are openly traded. Security: Investment: instrument that signifies an ownership position in a corporation (a stock), a creditor relationship with a corporation or governmental body (a bond), or rights to ownership such as those represented by an option, subscription right, and subscription warrant. Selling Short: Sale of a security or commodity futures contract not owned by the seller; a technique used (1) to take advantage of an anticipated decline in the price or (2) to protect a profit in a long position (known as selling short against the box). An investor borrows stock certificates for delivery at the time of short sale. If the seller can buy that stock later at a lower price, a profit results; if the price rises, however, a loss results. Serial Bond: Issued, usually of a municipality, with various maturity dates scheduled at regular intervals until the entire issue is retired. Each bond certificate in the series has an indicated redemption date. Series EE Bond: see Savings Bond Settlement Date: Date by which an executed order must be settled, either by a buyer paying for the securities with cash or by a seller delivering the securities and receiving the proceeds of the sale for them. In a regular-way delivery of stocks and bonds, the settlement date is five business days after the trade was executed. For listed options and government securities, settlement is required by the next business day. Simplified Employee Pension Plan (SEP): Pension plan in which both the employee and the employer contribute to an Individual Retirement Account (IRA). Under the Tax Reform Act of 1986, employees (except those participating in SEPs of state or local governments) may elect to have employer contributions made to the SEP or paid to the employee in cash as with cash or deferred arrangements [401(K)Plans]. Elective contributions, which are excludable from earnings for income tax purposes but includable for employment tax (FICA and FUTA) purposes, are limited to $7000, while employer contributions may not exceed $30,000. SEPs are limited to small employers (25 or fewer employees) and at least 50% of employees must participate. Special provisions concern the integration of SEP contributions and social security benefits and limit tax deferrals for highly compensated individuals. Standard & Poor’s Index (S&P 500): Broad-based measurement of changes on stock-market conditions based on the average performance of 500 widely held common stocks; commonly known as the S&P 500. The selection of stocks, their relative weightings to reflect differences in the number of outstanding shares, and publication of the index itself are services of Standard & Poor’s Corporation, a financial advisory, securities rating, and publishing firm. Stock Split: Increase in a corporation’s number of outstanding shares of stock without any change in the shareholders’ Equity or the aggregate market value at the time of the split. In a split, also called a split up, the share price declines. If a stock at $100 par value splits 2-for-1, the number of authorized shares doubles (for example, from 10 million to 20 million) and the price per share drops by half, to $50. A holder of 50 shares before the split now has 100 shares before the split now has 100 shares at the lower price. If the same stock splits 4-for-1, the number of shares quadruples to 40 million and the share price falls to $25. Dividends per share also fall proportionately. Directors of a corporation will authorize a split to make ownership more affordable to a broader base of investors. Where stock splits require an increase in authorized shares and/or a change in par value of the stock, shareholders must approve an amendment of the corporate charter. Stop Limit Order: Order to a securities broker with instructions to buy or sell at a specified price or better (called the stop-limit price) but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. For example, the instruction to the broker might be "buy 100 XYZ 55 STOP 56 LIMIT" meaning that if the market price reaches $55, the broker enters a limit order to be executed at $56 or a better (lower) price. A stop-limit order avoids some of the risks of a stop or order, which becomes a market order when the stop price is reached; like all price-limit orders, however, it carries the risk of missing the market altogether, since the specified limit price or better may never occur. The American Stock Exchange prohibits stop-limit orders unless the stop and limit prices are equal. Stop Order: Order to a securities broker to buy or sell at the market price once the security has traded at a specified price called the stop price. A stop order may be a day order, a good-till-canceled order, or any other form of time-limit order. A stop order to buy, always at a stop price above the current market price, is usually designed to protect a profit or to limit a loss on a short sale. A stop order to sell, always at a price below the current market price, is usually designed to protect or to limit a loss on a security already purchased at a higher price. The risk of stop orders is that they may be triggered by temporary market movements or that they may be executed at prices several points higher or lower than the stop price because of market orders placed ahead of them. Also called a Stop- loss order. Strike Price: Price at which the stock or commodity underlying a call or put option can be purchased (call) or sold (put) over the specified period. For instance, a call contract may allow the buyer to purchase 100 shares of XYZ at any time in the next three months at an exercise or strike price of $65. Supporting Companies: These are the companies which help the underlying company go public. This group is comprised of the auditors, the attorneys, and the transfer agent. There are currently five auditing firms which control an estimated 90% of the IPO Market: Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers. Syndicate: This term is used to refer to the group made up of the Underwriters and other Supporting Companies.
T Tender Offer: Offer to buy shares of a corporation, usually at a premium above the shares’ market price, for cash, securities, or both, often with the objective of taking control of the target company. A tender offer may arise from friendly negotiations between the company and a corporate suitor or may unsolicited and possibly unfriendly, resulting in countermeasures being taken by the target firm. The Securities and Exchange Commission requires and corporate suitor accumulating 5% or more of a target company to make disclosures to the SEC, the target company, and the relevant exchange. Trade: To carry out a transaction of buying or selling a stock, a bond, or a commodity future contract. A trade is consummated when a buyer and seller agree on a price at which the trade will be executed. A trader frequently buys and sells for his or her own account securities for short-term profits, as contrasted with an investor who holds his positions in hopes of long-term gains. Transfer Agent: This agency handles the transfer of shares from one person to another. It records the names and addresses of a company's stockholders, as well as the share amounts they own. Treasury Bills (T-Bills): Short-term securities with maturities of one year or less issued at a discount from face value. Auctions of 91-day and 182-day take place weekly, and the yields are watched closely in the money markets for signs of interest rate trends. Many floating rate loans and variable-rate mortgages have interest rates tied to these bills. The Treasury also auctions 52-week bills once every four weeks. At times it also issues very short-term cash management bills, tax anticipation bills, and treasury certificates of indebtedness. Treasury bills are issued in minimum denominations of $10,000, with $5000 increments above $10,000 (except for cash management bills, which are sold in minimum $10 million blocks). Individual investors who do not submit a competitive bid sold bills at the average price of the winning competitive bids. Treasury bills are the primary instrument used by the Federal Reserve in its regulation of money supply through open market operations. Treasury Stock: Stock reacquired by the issuing company and available for retirement or resale. It is issued but not outstanding. It cannot be voted and it pays or accrues no dividends. It is not included in any of the ratio measuring values per common share. Among the reasons treasury stock is created are (1) to provide an alternative to paying taxable dividends, since the decreased amount of outstanding shares increases the per share value and often the market price; (2) to provide for the exercise of stock options and warrants and the conversion of convertible securities; (3) in countering a tender offer by a potential acquirer; (4) to alter the debt-to-equity ratio by issuing bonds to finance the reacquisition of shares; (5) as a result of the stabilization of the market price during a new issue.
U Unit Investment Trust: Investment vehicle, registered with the securities and exchange commission under the Investment Company Act of 1940, that purchases a fixed portfolio of income producing securities, such as corporate, municipal, or government bonds, mortgage-backed securities, or preferred stock. Units in the trust, which usually cost a least $1000, are sold to investors by brokers, for a load charge of about 4%. Unit holders receive an undivided interest in both the principal and the income portion of the portfolio in proportion to the amount of capital they invest. The portfolio of securities remains fixed until all the securities mature and unit holders have recovered their principle. Most brokerage firms maintain a secondary market in the trusts they sell, so that units can be resold if necessary. In Britain, open-end mutual funds are called unit trusts.
V Variable Annuity: Life insurance annuity contract whose value fluctuates with that of an underlying securities portfolio or other index of performance. The variable annuity contrasts with a conventional or fixed annuity, whose rate of return is constant and therefore vulnerable to the effects of inflation. Income on a variable annuity may be taken periodically, beginning immediately or at any future time. The annuity may be a single-premium or multiple-premium contract. The return to investors may be a single-premium or multi-premium contract. The return to investors may be in the form of a periodic payment that varies with the market value of the portfolio or a fixed minimum payment with add-ons based on the rate of portfolio appreciation. Vesting: Right an employee gradually acquires by length of service at a company to receive employer-contributing benefits, such as payments from a pension fund, profit-sharing, or other qualified plan or trust. Under the tax reform act of 1986, employees must be vested 100% after years of service or at 20% a year starting in the third year and becoming 100% vested after seven years. Volume: Total number of stock shares, bonds, or commodities futures contracts traded in a particular period. Volume figures are reported daily by exchanges, both for individual issues trading and for the total amount of trading executed on the exchange. Technical analysts place great emphasis on the amount of volume that occurs in the trading of a security or a commodity futures contract. A sharp rise in volume is believed to signify future sharp rises or falls in price, because it reflects increased investor interest in a security, commodity, or market.
W Wash Sale: Purchase and sale of the same security either simultaneously or within a short period of time. Wash sales taking place within 30 days of the underlying purchase do not qualify as tax losses under Internal Revenue Service rules. Wilshire 5000 Equity Index: The Wilshire Index is market value-weighted and represents the value, in billions of dollars, of all NYSE, AMEX and over the counter issues for which quotes are available, some 5000 stocks in all. Changes are measured against a base value established December 31, 1980. Options and futures are not traded on the Wilshire Index, which is prepared by the Wilshire Associates of Santa Monica, California. Withdrawn/Postponed: From time to time a company will decide that market conditions are out of favor and not conducive to a successful IPO. There are many reasons why a company will decide to Withdraw its IPO. Among these reasons are: a simple lack of willing investors at at that time, market volatility, or the emergence of a bear market. When a company withdraws its filings with the SEC, the IPO is usually delayed for at least six months.
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