Definitions

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 poli- cies on unethical business practices. Syn. overtrading.

proscribed

A term commonly used in legal situations to describe a prohibited action.

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. See limited partnership. limited, general, and limited liability partnerships, and income trusts and limited liability companies are considered flow through, but are still required to file a K-1 statement.

current assets

Cash and other assets that are ex- pected 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.

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.

nonrecourse financing

Debt incurred for the purchase of an asset that pledges the asset as security for the debt but that does not hold the borrower personally liable.

Brady bonds

Debt instruments, generally from third world countries, that may have a U.S. Treasury bond as collateral. breadth-of-market theory A technical analysis theory that predicts the strength of the market according to the number of issues that advance or decline in a particular trading day.

toxic debt

Debt whose quality has dropped and is now indicating a high likelihood of default. This can be toxic for the investor's portfolio.

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.

decumulation

Disposal of something accumulated. Investors spend much of their working years accumu- lating for retirement; taking the funds out is decumu- lation.

asset class allocation

Dividing an investment port- folio among different asset categories, such as stocks, bonds, cash, and tangible assets such as real estate and precious metals and other commodities. Syn. asset allocation.

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.

intestate

Dying without a legal will. Usually the probate court will appoint an administrator to handle the de- ceased's estate. For purposes of the Uniform Securities Act, transactions by this administrator (a fiduciary) are considered exempt transactions.

exempt reporting adviser

ERAs are advisers that are exempt from registration relying on either the venture capital fund adviser or the private fund adviser ex- emption. Although exempt from registration, an ERA is subject to certain reporting, recordkeeping, and other obligations.

passive income

Earnings derived from a rental property, limited partnership, or other enterprise in which the individual is not actively involved. Passive income therefore does not include earnings from wages or ac- tive business participation, nor does it include income from dividends, interest, and capital gains. See passive loss; unearned income. IRS divides income into 3 categories: Active- Passive- income by which the recipient did not actively participate (limited partnership, rental income) Portfolio- investments dividends, interest, and capital gains

portfolio income

Earnings from interest, dividends, and all nonbusiness investments. See earned income; pas- sive income; unearned income.

ordinary income

Earnings other than capital gain.

retiring bonds

Ending an issuer's debt obligation by calling the outstanding bonds, by purchasing bonds in the open market, or by repaying bondholders the principal amount at maturity.

opening purchase

Entering the options market by buy- ing calls or puts. See opening sale.

opening sale

Entering the options market by selling calls or puts. See closing purchase; opening purchase.

information barriers

policies and procedures created to prevent misuse of material non-public information (MNPI) are commonly referred to as information bar- riers. Formerly referred to as Chinese Walls.

point

A measure of a bond's price; $10 or 1% of the par value of $1,000. See basis point. This is a 100 times the value of a basis point.

asset

(1) Anything that an individual or a corporation owns. (2) A balance sheet item expressing what a corporation owns.

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. See point.

return on common equity

A measure of a corpora- tion's profitability, calculated by dividing after-tax income by common shareholders' equity.

principal

(1) Every business transaction has two princi- pals—the buyer and the seller. When a broker-dealer trades for its own account, it is acting in the capacity of a principal. (2) See dealer. (3) See par.

stop order

(1) A directive from the SEC or the Admin- istrator that suspends the sale of new issue securities to the public when fraud is suspected or filing materials are deficient. (2) A customer order that becomes a market order when the market price of the security reaches or passes a specific price. See limit order; mar- ket order; stop limit order.

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 previ- ous. 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. See insider.

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.

vesting

(1) An ERISA guideline stipulating that employ- ees must be entitled to their entire retirement benefits within a certain period of time even if no longer employed. (2) The amount of time that an employee must work before retirement or before benefit plan contributions made by the employer become the employee's property without penalty. The IRS and the Employee Retirement Income Security Act of 1974 set minimum requirements for vesting in a qualified plan.

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. Syn. principal. See broker; broker-dealer.

broker

(1) An individual or a firm that charges a fee or commission for executing buy and sell orders submit- ted 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. See agent; broker-dealer; dealer. 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. See agent; broker; dealer; principal.

agent

(1) An individual who effects securities trans- actions 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. See broker; broker-dealer; dealer; principal.

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. See put.

put

(1) An option contract giving the owner the right to sell a certain amount of an underlying security at a specified price within a specified time. (2) The act of exercising a put option. See call.

investment adviser

(1) Any person who makes invest- ment 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.

notice filing

(1) Method by which a registered invest- ment company and certain other federal covered securities file records with state securities Administra- tors. (2) SEC-registered advisers (federal covered) may have to provide state securities authorities (the Administrator) with copies of documents that are filed with the SEC and pay a filing fee. notice filing includes copy of the ADV .Part 1 shows advisors education, business and punivtive actions within past 10 years. Second component is advisors fee and investment strategies.

premium

(1) The amount of cash that an option buyer pays to an option seller. (2) The difference between the higher price paid for a security and the security's face amount at issue. See discount.

public offering price (POP)

(1) The price of new shares that is established in the issuing corporation's prospectus. (2) The price to investors for mutual fund shares, equal to the net asset value plus the sales charge. See ask; bid; mutual fund; net asset value.

offer

(1) Under the Uniform Securities Act, any attempt to solicit a purchase or sale in a security for value. (2) An indication by an investor, a trader, or a dealer of a willingness to sell a security; the price at which an investor can buy from a broker-dealer. See bid.

total risk

(As measured by standard deviation) can be broken down into its component parts: unsystematic risk and systematic risk. That is, total risk = systematic risk + unsystematic risk.

right of accumulation

A benefit offered by a mutual fund that allows the investor to qualify or reduced sales loads on additional purchases according to the fund account's total dollar value.

withdrawal plan

A benefit offered by a mutual fund whereby a customer receives the proceeds of periodic systematic liquidation of shares in the account. The amounts received may be based on a fixed dollar amount, a fixed number of shares, a fixed percentage, or a fixed period.

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 manage- ment.

reinstatement privilege

A benefit offered by some mu- tual funds, allowing an investor to withdraw money from a fund account and then redeposit the money without paying a second sales charge.

Wells notice

A Wells notice indicates that the regula- tor intends to bring an enforcement action against an individual or a business. If the notice is against a publicly traded company, it usually has the effect of depressing the current market price.

premium bond

A bond that sells at a higher price than its face value. See discount bond; par value.

discount bond

A bond that sells at a lower price than its face value. See par.

high yield bond

A bond with a less than investment grade rating, characterized by a return commensurate with the higher risk. Syn. junk bond holder The owner of a security. See long. BBB- is lowest investment grade according to Standards Baa3 is lowest investment grade according to Moody's

depreciation expense

A bookkeeping entry of a non- cash expense charged against earnings to recover the cost of an asset over its useful life.

investment banking business

A broker, dealer, or municipal or government securities dealer that under- writes or distributes new issues of securities as a dealer or that buys and sells securities for the accounts of others as a broker. Syn. investment securities business.

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.

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. See capital loss. Limit per year for capital loss deductions is $3000.

negotiability

A characteristic of a security that permits the owner to assign, give, transfer, or sell it to another person without a third party's permission. could mean that price in not yet set, or the asset can be transferred easily.

normal yield curve

A chart showing long-term debt instruments having higher yields than short-term debt instruments. Syn. positive yield curve. See flat yield curve; inverted yield curve; yield curve.

inverted yield curve

A chart showing long-term debt instruments that have lower yields than short-term debt instruments. Syn. negative yield curve. See flat yield curve; normal yield curve.

flat yield curve

A chart showing the yields of bonds with short maturities as equal to the yields of bonds with long maturities. Syn. even yield curve. See in- verted yield curve; normal yield curve; yield curve. flat yield curve = shot and long term maturities have same interest rates, this typically suggest changing economic conditions, transitioning from expansion to slower development and recession, or recovery to expansion. inverted yield curve = short term interest rates are higher than long term ,which means that there is increased demand for short term credit, which means higher demand for short term debt instruments like treasury bills. inverted yield curves have traditionally been used to forecast recessions. normal yield curve = indicates yields on long- term bonds will continue to rise which may be a result of economic expansion

Section 28(e)

A code section of the Securities Ex- change Act of 1934 hat deals with soft-dollar com- pensation. See soft-dollar compensation; state harbor. section 28e deals primarily with the fact that full and comprehensive disclosure must be provided to fund investors when soft dollar compensation in being utilized. soft dollars: a means of paying brokerage firms for their services through commission revenue, as opposed to through normal direct payments (hard dollar dees)

Federal Open Market Committee (FOMC)

A committee that makes decisions concerning the Fed's operations to control the money supply.

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.

investment company

A company engaged in the business of pooling investors' money and trading in securities for them. Examples include: face-amount certificate companies: backed by security interest on assets like real property or other securities, debt is backed by tangible assets, investors hold face amount certificates and are paid fixed amount of annual interest and refunded principal unit investment trusts: un-managed company that offers a fixed portfolio generally sotkcs an bonds, as redeemable units to ivnestors for a speicfic period of time , designed for capital appreciation and dividend income. shares are redeemed based on the NAV (oped ended fund). shreas are terminated at specific date, and at th etemrination date the redeemable units value are paid back to investors. these can be resold to seconrdary market management companies (mutual funds and close end funds)

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 influ- ence. It is sometimes referred to as the parent organi- zation.

Standard & Poor's Corporation (S&P)

A company that rates stocks and corporate and municipal bonds according to risk profiles and that produces and tracks the S&P indexes. The company also publishes a variety of financial and investment reports. See bond rating; Moody's Investors Service; rating; Standard & Poor's 100 Stock Index; Standard & Poor's Composite Index of 500 Stocks.

rating service

A company, such as Moody's or Standard & Poor's, that rates various debt and preferred stock issues for safety of payment of principal, interest, or dividends. The issuing company or municipality pays a fee for the rating. See bond rating; rating.

quote machine

A computer that provides representa- tives and market makers with the information that appears on the Consolidated Tape. The information on the screen is condensed into symbols and numbers.

demand

A consumer's desire and willingness to pay for a good or service. See supply.

pension plan

A contract between an individual and an employer, a labor union, a government entity, or another institution that provides for the distribution of pension benefits at retirement. Two main types of pension plans: Defined Benefit Plan - defined benefit upon retirement regardless of performance Defined Contribution Plan - employer makes specific contributions for the worker ERISA is the governing agency that takes care of most entities involving pension plans. If a plan is qualified this mean it meets IRS and ERISA guidelines. This gives a tax advantaged status. Employers and employees get a tax break on contributions.

nonqualified retirement plan

A corporate retire- ment plan that does not meet the standards set by the Employee Retirement Income Security Act of 1974. Contributions to a nonqualified plan are not tax deductible. See also qualified retirement plan.

qualified retirement plan

A corporate retirement plan that meets the standards set by the Employee Retire- ment Income Security Act of 1974. Contributions to a qualified plan are tax deductible. Syn. approved plan. See also individual retirement account; Keogh plan; nonqualified retirement plan. IRA (individual retirement account) - are not offered by employer and are not qualified -traditional ira : contributions are deductible, distributions are not -roth ira: contributions are not deductible, distributions are deductible -SIMPLE IRA: business owners must set up for employees, business owner contributions are deductible for the business, employees cannot make contributions, and when they withdraw, the money is taxed as income -SEP: Keogh (HR-10) are qualified plans

real estate investment trust (REIT)

A corporation or trust that uses the pooled capital of many inves- tors to invest in direct ownership of either income property or mortgage loans. These investments offer tax benefits in addition to interest and capital gains distributions. However, unlike DPPs, these are not "flow-through" vehicles. combined investments of many, similar to a mutual fund, to own property and generally considered to by very liquid, traded like a stock, to qualify for IRS tax qualification, REITS must payout 90% of profits as dividends to investors. 3 types: equity REIT: own shares of property and generate rev buy rent mortgage REIT: own the mortgage, receive principle and payments, even lend money to mortgage holders hybrid: combo of equity and mortgage

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.

initial public offering (IPO)

A corporation's first sale of common stock to the public. See new issue market; public offering.

earnings per share (EPS)

A corporation's net income available for common stock divided by its number of shares of common stock outstanding. EPS = ( Net income - dividends on preferred stock )/ average outstanding shares

guardian

A court-appointed fiduciary who manages the assets of a minor or an incompetent for that person's benefit. See fiduciary.

stop limit order

A customer order that becomes a limit order when the market price of the security reaches or passes a specific price. See limit order; stop order.

market maker

A dealer willing to accept the risk of holding a particular security in its own account to facilitate trading in that security. See make a market.

debenture

A debt obligation backed by the issuing cor- poration's general credit. Syn. unsecured bond.

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. it is a bond secured by a mortgage or pool of mortgages. backed by real estate holdings and real property. in the case of default, mortgage bond holders have a claim to the underlying property and could sell it off to compensate for default.

subordinated debenture

A debt obligation, backed by the general credit of the issuing corporation, that has claims to interest and principal subordinated to ordinary debentures and all other liabilities. See de- benture.

secured bond

A debt security backed by identifiable as- sets set aside as collateral. In the event that the issuer defaults on payment, the bondholders may lay claim to the collateral. See debenture.

corporate bond

A debt security issued by a corporation. A corporate bond typically has a par value of $1,000, its interest is taxable, and it has a term maturity. corporation The most common form of business orga- nization, 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.

industrial development bond (IDB)

A debt security issued by a municipal authority, which uses the pro- ceeds to finance the construction or purchase of facili- ties 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. Syn. industrial revenue bond.

municipal bond

A debt 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. Syn. municipal security.

agency issue

A debt security issued by an authorized agency of the federal government. Such an issue is backed by the issuing agency itself, not by the full faith and credit of the U.S. government (except GNMA issues). See government security.

zero-coupon bond

A debt security usually issued at a deep discount from face value. The bond pays no interest; rather, it may be surrendered at maturity for its full face value. The duration of a zero-coupon bond is equal to its maturity.

convertible bond

A debt security, usually in the form of a debenture, that can be exchanged for equity securi- ties of the issuing corporation at specified prices or rates. See debenture.

Section 457 Plan

A deferred compensation plan set up under Section 457 of the tax code that may be used by employees of a state, political subdivision of a state, and any agency or instrumentality of a state. This plan may also be offered to employees of certain tax- exempt organizations (hospitals, charitable organiza- tions, unions, and so forth), but NOT churches. Even independent contractors may be covered under these plans. non -qualified tax advantaged deferred compensation retirement plan. eligible employees are allowed to make salary deferral contributions to 457 plan. Earnings grow on tax deferred basis and contributions are not taxed until assets are distributed from the plan. contributions are tax and deduct from taxable income

longevity annuity

A deferred income annuity that gen- erally does not begin 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. typically RMDs begin at 70 1/2.

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 could make use of the information to reap illicit profits. The preferred term today is informa- tion barriers. See Insider Trading and Securities Fraud Enforcement Act of 1988.

suitability

A determination made by an agent as to whether a particular security matches a customer's objectives and financial capability. The agent must have enough information about the customer to make this judgment.

dividend

A distribution of a corporation's earnings. Divi- dends may be in the form of cash, stock, or property. The board of directors must declare all dividends. See cash dividend; dividend yield; property dividend.

secondary distribution

A distribution, with a prospec- tus, that involves securities owned by major stock- holders (typically founders or principal owners of a corporation). The sale proceeds go to the sellers of the stock, not to the issuer. this is the opposite of a primary distribution, because the issuer does not get the proceeds of the sale, the seller of the stock get it.

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. See diversified common stock fund; mutual fund.

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. See full power of attorney; limited power of attorney.

customer statement

A document showing a cus- tomer's trading activity, positions, and account bal- ance. The SEC requires that customer statements be sent quarterly, but customers generally receive them monthly.

exchange privilege

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. Syn. conversion privilege.

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 market- able. See convertible bond; convertible preferred stock.

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 indepen- dent certified public accountant.

partnership

A form of business organization in which two or more individuals manage the business and are equally and personally liable for its debts.

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.

employee stock options

A form of employee com- pensation where the employing corporation makes available the opportunity for employees to acquire the issuer's stock. There are two forms: nonqualified (NSOs) and incentive (ISOs). NSO - you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option ISO - employee stock option with a tax benefit that when exercised it isn't necessary to pay ordinary income tax. instead the options are taxed at a capital gains rate.

Savings Incentive Match Plan for Employees

A form of employer sponsored IRA for businesses that have 100 or fewer employees who earned $5,000 or more during the preceding calendar year. In addition, the employer cannot currently have another retire- ment plan. emmployer can choose to make a mandatory 2% retirement account contribution to tall employees or an optional matching of 3%. max employee contribution is 12,000 annually.

tenants in common (TIC)

A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate. Syn. tenants in common. See joint tenants with right of survivorship.

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 exclu- sively by husbands and wives. See tenants in common. tenants in common = there is some sort of split ownership of assets within the joint account, and after one dies, the portion belonging to the deceased does not transfer to the other account holders but to the estate or wherever the deceased specified it to go.

constant dollar plan

A formula method of investing that attempts to maintain a fixed dollar, rather than ratio, amount in a specific asset class. Periodically, the account is reviewed and the specified asset class is either sold or purchased in order to get to the fixed dollar level.

constant ratio plan

A formula method of investing that contemplates maintaining a fixed ratio, rather than dollar amount, between specific asset classes in the portfolio. Periodically, the account is reviewed and the specified asset class is either sold or purchased in order to get to the fixed ratio level.

balance sheet equation

A formula stating that a corporation's assets equal the sum of its liabilities plus shareholders' equity.

forward contract

A forward contract is a direct com- mitment between one buyer and one seller for a spe- cific 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. forward contracts are used by parties who want to hedge the volatility inherent in the underlying asset. volatility in commodities pricings are hedged by forward contracts volatility in currency rates are also hedged by forward contracts

hedge fund

A fund that can use one or more alterna- tive 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 ar- bitrage. These funds tend to have very high minimum investment requirements.

cyclical industry

A fundamental analysis term for an in- dustry that is sensitive to the business cycle and price changes. Most cyclical industries produce durable goods, raw materials, and heavy equipment.

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.

standardized contract

A futures contract in which all the contract terms are set by the exchange except for price.

recession

A general economic decline lasting from six to 18 months (at least two consecutive quarters of declining or negative DGP growth).

Federal Home Loan Bank (FHLB)

A government- regulated organization that operates a credit reserve system for the nation's savings and loan institutions.

yield curve

A graphic representation of the actual or projected yields of fixed-income securities in rela- tion to their maturities. In most cases, the securities of a single issuer are plotted over varying maturities. See flat yield curve; inverted yield curve.

NASD 5% markup policy

A guideline for reasonable markups, markdowns, and commissions for second- ary over-the-counter transactions. According to the policy, all commissions on broker transactions and all markups or markdowns on principal transactions should equal 5% or should be fair and reasonable for a particular transaction. Syn. markup policy.

bank holding company

A holding company whose primary asset is a commercial bank. See holding company.

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.

inelasticity

A lack of responsiveness on the part of con- sumers and producers to a change in prices. See elas- ticity.

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. Syn. block sale.

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.

auction market

A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an auction market. Syn. double auction market.

arbitrage

A legal strategy that generates a guaranteed profit from a transaction. A common form of arbitrage is the simultaneous purchase and sale of the same se- curity in different markets at different prices to lock in a profit. This is not considered market manipulation.

proxy

A limited power of attorney from a stockholder au- thorizing another person to vote on stockholder issues according to the first stockholder's instructions. To vote on corporate matters, a stockholder must either attend the annual meeting or vote by proxy.

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.

passive loss

A loss incurred through a rental property, limited partnership, or other enterprise in which the individual is not actively involved. Passive losses can be used to offset passive income only, not wage or portfolio income. See passive income.

growth style investing

A management style that attempts to find stocks with positive earnings momen- tum. These stocks typically sell at the upper end of their 52-week price range, have high P/E ratios and lower than average dividend payout ratios. See value style investing.

value style investing

A management style that looks for stocks currently selling at distressed prices that have solid underlying fundamentals. These stocks typically sell at the lower end of their 52-week price range and have low P/E ratios and higher than aver- age dividend payout ratios. See growth style investing.

Dow Jones Transportation Average (DJTA)

A mar- ket indicator composed of 20 transportation stocks. See average; Dow Jones Composite Average; Dow Jones Industrial Average; Dow Jones Utilities Aver- age.

bear market

A market in which prices of a certain group of securities are falling or are expected to fall. See bull market.

bull market

A market in which prices of a certain group of securities are rising or will rise. See bear market.

Dow Jones Utilities Average (DJUA)

A market indicator composed of 15 utilities stocks. See average; Dow Jones Composite Average; Dow Jones Industrial Average; Dow Jones Transportation Average.

Dow Jones Composite Average (DJCA)

A market indicator composed of the 65 stocks that make up the Dow Jones Industrial, Transportation, and Utilities Averages. See average; Dow Jones Industrial Average; Dow Jones Transportation Average; Dow Jones Utili- ties Average.

Treasury bill

A marketable U.S. government debt security with a maturity of less than one year. Treasury bills are issued through a competitive bidding process at a discount from par; they have no fixed interest rate. Syn. T-bill.

Treasury bond

A marketable, fixed-interest U.S. gov- ernment debt security with a maturity of more than 10 years. Syn. T-bond.

Treasury note

A marketable, fixed-interest U.S. govern- ment debt security with a maturity of between 2 and 10 years. Syn. T-note.

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. Syn. pipe- line theory.

beta

A means of measuring the co-movement of the return of a security or a portfolio of securities to the return on 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. Syn. beta coefficient.

coincident indicator

A measurable economic fac- tor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy. Examples include nonagricultural employ- ment, personal income, and industrial production. See lagging indicator; leading indicator.

lagging indicator

A measurable economic factor that changes after the economy has started to follow a particular pattern or trend. Lagging indicators are be- lieved to confirm long-term trends. Examples include average duration of unemployment, corporate profits, and labor cost per unit of output. See coincident indi- cator; leading indicator.

leading indicator

A measurable economic factor that changes before the economy starts to follow a particu- lar 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. See coincident indicator; lagging indicator. examples include: bond yields, number of jobless claims, durable good orders.

working capital

A measure of a corporation's liquid- ity—that is, its ability to transfer assets into cash to meet current short-term obligations. It is calculated by subtracting total current liabilities from total current assets.

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. Syn. working capital ratio. current ratio = current assets / current liabililities

dividend payout ratio

A measure of a corporation's policy of paying cash dividends, calculated by divid- ing the dividends paid on common stock by the net income available for common stockholders. The ratio is the complement of the retained earnings ratio. percentage of earning paid out through dividends dvidend payout ratio = yearly dividend per share / earnings per share

return on equity

A measure of a corporation's profit- ability, specifically its return on assets, calculated by dividing after-tax income by tangible assets.

margin of profit ratio

A measure of a corporation's relative profitability. It is calculated by dividing the operating profit by the net sales. Syn. operating profit ratio; profit margin. tells you how much profit each unit of sales can provide

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.

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 defla- tion.

book value per share

A measure of the net worth of each share of common stock is calculated by subtract- ing intangible assets and preferred stock from total net worth, then dividing the result by the number of shares of common outstanding. Syn. net tangible assets per share.

standard deviation

A measurement of a security's or a portfolio's total risk. The greater the standard devia- tion, the more the security's returns deviate from its average return, hence indicating greater volatility. See total risk.

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.

modern portfolio theory (MPT)

A method of choos- ing investments that focuses on the importance of the relationships among all of 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. this is a method to assign various portfolio allocations for an investor to maximize return while still keeping in mind the risk tolerance of the investor.

fundamental analysis

A method of evaluating securi- ties by attempting to measure the intrinsic value of a particular stock. Fundamental analysts study the over- all economy, industry conditions, and the financial condition and management of particular companies. See technical analysis. the point is to use micro/macro economic principles to come up with a true value for the stock to see if it is under/over valued.

technical analysis

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value. See chartist; fundamental analysis.

aggressive investment strategy

A method of portfolio allocation and management aimed at achieving maximum return. Aggressive investors place a high percentage of their investable assets in equity securities and a far lower percentage in safer debt securities and cash equivalents, and they pursue aggressive policies including margin trading, arbitrage, and option trading. See balanced invest- ment strategy; defensive investment strategy.

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 compa- nies, DPPs, or REITs, and cash equivalents.

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.

prudent expert rule

A modern application of the prudent man rule to those with a fiduciary responsibil- ity over qualified plans coming under the jurisdiction of ERISA. This is an ERISA that dictates that those in charge of a defined contribution retirement plan must use "care, skill, prudence and diligence".

expansionary policy

A monetary policy that increases the money supply, usually with the intention of lower- ing interest rates and combating deflation. expense ratio A ratio for comparing a mutual fund's efficiency by dividing the fund's expenses by its net assets.

quick asset ratio

A more stringent test of liquidity than the current ratio. It is computed by taking the current assets, less the inventory, and dividing by the current liabilities. Syn. acid test ratio. this is used to measure a company's off short-term liquidity, and measures a company's ability to meet its short-term obligations with it most liquid assets. quick ratio = (current assets - inventories)/current liabilities = (cash and equivalents + marketable securities + accounts receivable) / current liabilities.

collateralized mortgage obligation (CMO)

A mortgage-backed corporate security. These issues attempt to return interest and principal at a predeter- mined rate.

general obligation bond (GO)

A municipal debt is- sue backed by the full faith, credit, and taxing power of the issuer for payment of interest and principal. Syn. full faith and credit bond. See revenue bond. it is backed by credit and taxing power of the issuing jurisdiction, and NO COLLATERAL is used

revenue bond

A municipal debt issue whose interest and principal are payable only from the specific earn- ings of an income-producing public project.

front-end load

A mutual fund commission or sales fee that is charged at the time shares are purchased. The load is added to the share's net asset value when calculating the public offering price.

level load

A mutual fund sales fee charged annually and based on the net asset value of a share. See back-end load; Class C share; front-end load. leverage Using borrowed capital to increase investment return. Syn. trading on the equity. aka 12b-1 fee, annual fee that is used to pay for distribution and marketing costs for as long as the investor holds the funds, these are unlike one time front end (Class A shares) or back-end (Class B shares), these are considered (Class C). Typically 12b-1 fees are pegged to 0.25% of the NAV (the limite to be classified as no-load fund), however legally the limit is 1%.

net asset value (NAV)

A mutual fund share's value, as calculated once a day on the basis of the closing market price for each security in the fund's portfolio. It is computed by deducting the fund's liabilities from the portfolio's total assets and dividing this amount by the number of shares outstanding. See mutual fund.

municipal bond fund

A mutual fund that invests in municipal bonds and operates either as a unit investment trust or as an open-end fund. The fund's objective is to maximize federally tax-exempt income. See mutual fund; unit investment trust. municipal note A short-term municipal security issued in anticipation of funds from another source.

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 net 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. See mutual fund. it invests in short term (less than 1 year) high quality, liquid debt, monetary instruments, commercial paper (270 days) treasury bills (less than one year) the funds have relatively low returns, low risk, highly liquid, and no load

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. See growth fund; mutual fund.

income fund

A mutual fund that seeks to provide stable current income by investing in securities that pay interest or dividends. See mutual fund.

tax-exempt bond fund

A mutual fund whose in- vestment objective is to provide maximum tax-free income. It invests primarily in municipal bonds and short-term debt. Syn. tax-free bond fund.

U.S. government and agency bond fund

A mutual fund whose investment objective is to provide current income while preserving safety of capital through investing in securities backed by the U.S. Treasury or issued by a government agency.

preferred stock fund

A mutual fund whose investment objective is to provide stable income with minimal capital risk. It invests in income-producing instru- ments such as preferred stock. See bond fund.

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. See mutual fund.

special situation fund

A mutual fund whose objective is to capitalize on the profit potential of corporations in nonrecurring circumstances, such as those undergo- ing reorganizations or being considered as takeover candidates.

no-load fund

A mutual fund whose shares are sold without a commission or sales charge. The investment company distributes the shares directly. See mutual fund; net asset value; sales load.

balanced fund

A mutual fund whose stated invest- ment 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. See mutual fund.

American depositary receipt (ADR)

A negotiable certificate representing a given number of shares in a foreign corporation. It is issued by a domestic bank. ADRs are bought and sold in the American securities markets, and are traded in English and U.S. dollars. Syn. American depositary share (ADS).

Securities Investor Protection Corporation (SIPC)

A nonprofit membership corporation created by an act of Congress to protect clients of brokerage firms that are forced into bankruptcy. Membership is composed of all brokers and dealers registered under the Securities Exchange Act of 1934, all members of national securities exchanges, and most FINRA mem- bers. SIPC provides brokerage firm customers up to $500,000 coverage for cash and securities held by the firms (although cash coverage is limited to $250,000).

deferred compensation plan

A nonqualified retire- ment plan whereby the employee defers receiving current compensation in favor of a larger payout at retirement (or in the case of disability or death).

contraction

A period of general economic decline, one of the business cycle's four stages. See business cycle.

expansion

A period of increased business activity throughout an economy; one of the four stages of the business cycle. Syn. recovery. See business cycle.

deflation

A persistent and measurable fall in the general level of prices. See inflation. The contraction in the supply of circulated money within an economy. During deflation, purchasing power of currency and wages are higher than they otherwise would have been. decreases in money supply, government spending, consumer demand, and business investment lead to deflation usually occurs during economic depression when there are lower levels of demand and high levels of unemplyoment fed reserve counteracts deflation by injection money in the money supply

inflation

A persistent and measurable increase in the general level of prices. See deflation.

solicitor

A person either contracted or employed by an investment adviser for the purpose of bringing in advisory business. If an employee, registration as an IAR is required. If contracted, the person must not be statutorily disqualified from registration and is subject to the terms of a written agreement between the IA and the solicitor.

executor

A person given fiduciary authorization to man- age the affairs of a decedent's estate. An executor's authority is established by the decedent's last will.

fiduciary

A person legally appointed and authorized to hold assets in trust for another person and manage those assets for that person's benefit.

trustee

A person legally appointed to act on a benefi- ciary's behalf.

institutional investor

A person or an organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treat- ment 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.

nominee

A person or company whose name is given as having title to a stock, real estate, and so forth, but who is not the actual owner. See street name. typically this is the broker who has nominee status with the account and makes stock transactions easier

transfer agent

A person or corporation responsible for recording the names and holdings of registered secu- rity owners, seeing that certificates are signed by the appropriate corporate officers, affixing the corporate seal, and delivering securities to the new owners.

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 advan- tages to the donor. See Uniform Gift to Minors Act.

nondiversification

A portfolio management strategy that seeks to concentrate investments in a particular industry or geographic area in hopes of achieving higher returns. See diversification.

fractional share

A portion of a whole share of stock. Mutual fund shares are frequently issued in fractional 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.

debit spread

A position established when the premium paid for the option bought exceeds the premium received for the option sold. See credit spread.

credit spread

A position established when the premium received for the option sold exceeds the premium paid for the option bought. See debit spread.

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.

tombstone advertisement

A printed advertisement that is used to generate interest in a securities offering. The text is limited to basic information about the of- fering, such as the name of the issuer, type of security, names of the underwriters, and where a prospectus is available. A tombstone ad is not considered to be an offering of the subject security.

confirmation

A printed document that states the trade date, 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.

registration by coordination

A process that allows a security to be sold in a state. It is available to an issuer that files for the security's registration under the Securities Act of 1933 and files duplicates of the regis- tration documents with the state Administrator. The state registration becomes effective at the same time the federal registration statement becomes effective as long as paperwork is on file with the Administrator for the required period, which ranges from 10 to 20 days depending on the state. the objective of the registration by coordination is to have simultaneous registration of the offering at the SEC and in the states where the offering is to be made.

registration by qualification

A process that allows a security to be sold in a state. It is available to an issuer who files for the security's registration with the state Administrator, meets minimum net worth, disclosure, and other requirements, and files appropriate registration fees. The state registration becomes effective when the Administrator so orders. Registration by qualification is generally the final method of registration if a security cannot be registered another way.

depression

A prolonged period of general economic decline.

intangible asset

A property owned that is not physical, such as a formula, a copyright, or goodwill. See good- will. Examples include corporate IP, patents, trademarks, copyrights, business methodologies, goodwill, brand recognition.

anti-dilutive covenant

A protective clause found in most convertible issues (preferred stock or debentures) that adjusts the conversion rate for stock splits and/ or stock dividends. This ensures that the holder of the convertible will not suffer a dilution in value.

call protection

A provision in a bond indenture stat- ing that the issue is noncallable for a certain period (e.g., 5 years or 10 years) after the original issue date. See call provision.

S safe harbor

A provision in a regulatory scheme that provides protection against legal action if stated procedures are followed. In this exam, it may ap- ply in three different cases: (1) Section 28(e) of the Securities Exchange Act of 1934 describes those research and brokerage activities that may be received by an investment adviser in exchange for directed brokerage transactions; (2) Section 404c of ERISA describes what a fiduciary of a qualified plan must do to minimize personal responsibility; and (3) top-heavy 401(k) concerns are minimized if the employer covers all employees with immediate vesting. See soft-dollar compensation; top heavy. this deals with anti-discrimination within retirement savings plan like a 401k plan. A safe harbor 401k plan helps businesses pass these antidiscriminatory tests from the IRS by employing some sort of matching program for example, for every contribution an emplpyee makes, the employer matches 5%. this is smart move when the retirement plan adoption schedule is top heavy, meaning it favors the key executives.

Federal National Mortgage Association (FNMA)

A publicly held corporation that purchases conventional mortgages and mortgages from government agen- cies, including the Federal Housing Administration, Department of Veterans Affairs, and Farmers Home Administration. Syn. Fannie Mae.

Federal Home Loan Mortgage Corporation (FHLMC)

A publicly traded corporation that pro- motes the nationwide secondary market in mortgages by issuing mortgage-backed pass-through debt certifi- cates. Syn. Freddie Mac.

QLAC

A qualified longevity annuity contract. If certain limits prescribed by the IRS are met, RMDs do not have to include the value of these contracts until age 85. This is a type of deferred annuity funded by an investment from qualified retirement plan or IRA.

defined contribution plan

A qualified retirement plan that specifies the amount of money that the employer will contribute annually to the plan. 401k - typical employee defined contribution plan 403b - public institution (teachers etc..) defined contribution plan 457 - state officials defined contribution plan thrift savings plan - federal government and military

defined benefit plan

A qualified retirement plan that specifies the total amount of money that the employee will receive at retirement.

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. Syn. HR-10 plan. See individual retirement account.

unit of beneficial interest

A redeemable share in a unit investment trust, representing ownership of an undivided interest in the underlying portfolio. Syn. share of beneficial interest. See unit investment trust.

dilution

A reduction in earnings per share of common stock. Dilution occurs through the issuance of addi- tional shares of common stock and the conversion of convertible securities. See anti-dilutive covenant.

reverse split

A reduction in the number of a corpora- tion's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares remains the same. See stock split.

remainderman

A remainderman is the person who inherits or is entitled under the law to inherit property upon termination of the estate of the former owner. Usually, this occurs due to the death or termination of the former owner's life estate.

pattern

A repetitive series of price movements on a chart used by a technical analyst to predict future movements of the market.

balance sheet

A report of a corporation's financial condition at a specific time.

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 $5,500 ($6,500 for those 50 and older). 4 types of IRAs Traditional: contributions are tax deductible from income tax, however Roth: contributions are not tax deductible, but eligible distributions are tax free, therefore you contribute with after tax dollars, but can get out of capital gains tax SIMPLE: for small business and self-emloyed individuals, unlike SEP, the SIMPLE allow employees to make contributions and employers is required to make contributions. All contributions are tax deductible. SEP (simplified employee pension iras); for self employeed individuals, independent contractors , free lancers. A business owner can set up SEP for his employees and deduct the contributions from business income and potentially lower his tax rate for business income. employees are not allowed to contribute to the accoutns, also when they withdraw, the withdrawals are taxed as income.

contributory plan

A retirement plan to which both the employee and the employer make contributions. See noncontributory plan.

noncontributory plan

A retirement plan to which only the employer makes contributions. See contributory plan.

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.

warrant

A security that gives the holder the right to pur- chase securities from the warrant issuer at a stipulated subscription price. Warrants are usually long-term instruments, with expiration dates years in the future.

secondary offering

A sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings; the underwriting proceeds are paid to the stockholders rather than to the corporation. Typically, such an offering occurs when the founder of a business (and perhaps some of the original financial backers) determine that there is more to be gained by going public than by staying private. The offering does not increase the number of shares of stock outstanding. See secondary distribu- tion. it is the issuance of new stock from a company that has already made its initial public offering (IPO). these secondary offerings are issued to fuel growth, but dilute holdings. dilutive seoncdary offerings: copmany create an places new share on the market thus diluting exisitng shares, and potentially reducing stock price non dilutive seondary offerings: do not dilute shares held by existing shareholder because no new shares are created. the sale of new share are given up by majority share holders looking to diversify their holdings and is a typical play after the lock up period has expired and they wish to diversify their holdings.

collateral trust bond

A secured bond backed by stocks or bonds of another issuer. The collateral is held by a trustee for safekeeping. Syn. collateral trust certificate.

chartist

A securities analyst who uses charts and graphs of the past price movements of a security to predict its future movements. Syn. technician. See technical analysis.

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.

exempt security

A security exempt from the registra- tion requirements (although not from the antifraud requirements) of the Securities Act of 1933 or the Uniform Securities Act. Examples include U.S. gov- ernment securities and municipal securities.

security market index

A security market index is used to represent the performance of an asset class, security market, or segment of a market. They are usually cre- ated as portfolios of individual securities, which are referred to as the constituent securities of the index. An index has a numerical value that is calculated from the market prices (actual when available, or estimated) of its constituent securities at a point in time. An index return is the percentage change in the index's value over a period of time. Popular examples are the S&P 500 and the Russell 2000.

right

A security representing a stockholder's entitlement to the first opportunity to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued for a short time only, after which they expire. Syn. subscription right; subscription right certificate.

pass-through certificate

A security representing an interest in a pool of conventional, Veterans Admin- istration, Farmers Home Administration, or other agency mortgages. The pool receives the principal and interest payments, which it passes through to each certificate holder. Payments may or may not be guar- anteed. See Federal National Mortgage Association; Government National Mortgage Association. (Ginnie Mae) only GSE that insures the full payment of interest/principal when mortgage bond holders invest in these instruments they receive a pass-through certificate by which the pool GSEs (government sponsored enterprises) will distribute or pass -through the principal and/or interest payments from mortgage holders to the certificate holders.

debt security

A security representing an investor's loan to an issuer, such as a corporation, a 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. See equity security.

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; and ■ put and call options on equity securities.

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 purchas- ers. Transfer of ownership is recorded by entering the change on the books or electronic files. See coupon bond.

cash equivalent

A security that can be readily con- verted into cash. Examples include Treasury bills, certificates of deposit, and money market instruments and funds.

senior security

A security that grants its holder a prior claim to the issuer's assets over the claims of another security's holders. For example, a bond is a senior security over common stock.

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.

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. See equity; preferred stock.

redeemable security

A security that the issuer redeems upon the holder's request. Examples include shares in an open-end investment company and Treasury notes. This is associated with the idea of redemption which means that the investors' principal is returned for some fixed income, stock, or mutual fund vehicle.

investment-grade security

A security to which the rating services (e.g., Standard & Poor's and Moody's) have assigned a rating of BBB/Baa or above.

Municipal Securities Rulemaking Board (MSRB)

A self-regulatory organization that regulates the issu- ance and trading of municipal securities. The Board functions under the Securities and Exchange Com- mission's supervision; it has no enforcement powers. See Securities Amendments Act of 1975.

spousal IRA

A separate individual retirement account established for a spouse with little or no earned income. Contributions to the account made by the working spouse grow tax deferred until withdrawal.

commission

A service charge an agent assesses in return for arranging a security's purchase or sale. A commis- sion must be fair and reasonable, considering all the relevant factors of the transaction. Syn. sales charge. See markup.

Federal Reserve Board (FRB)

A seven-member group that directs the operations of the Federal Reserve Sys- tem. The President appoints board members, subject to Congressional approval.

unit

A share in the ownership of a direct participation program that entitles the investor to an interest in the program's net income, net loss, and distributions.

note

A short-term debt security, usually maturing in five years or less. See Treasury note.

bridge loan

A short-term loan made to bridge the gap until permanent financing is arranged.

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. Syn. statement of intention.

S corporation

A small business corporation that meets certain requirements and is taxed as a partnership while retaining limited liability. Syn. Subchapter S corporation. 100 shareholder or less. The S Corp can pass income directly to shareholders and avoid double taxation, however it must be domestic and only 1 class of stock.

gross income

All income of a taxpayer, from whatever source derived.

Monte Carlo simulation

A statistical method to deter- mine the return profile of a security or portfolio that recreates potential outcomes by generating random values on the basis of the risk and return characteris- tics of the securities themselves.

regional exchange

A stock exchange that serves the financial community in a particular region of the country. These exchanges tend to focus on securities issued within their regions, but also offer trading in NYSE and Nasdaq-listed securities. This typically is associated with international exchanges like London Stock Exchange.

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.

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. See over the counter.

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.

Securities Information Processor (SIP)

A system that consolidates quote and trade data for U.S. stocks.

fixed asset

A tangible, physical property used in the course of a corporation's everyday operations, includ- ing buildings, equipment, and land.

progressive tax

A tax that takes a larger percentage of the income of high-income earners than that of low- income earners. An example is the graduated income tax. See regressive tax.

regressive tax

A tax that takes a larger percentage of the income of low-income earners than that of high- income earners. Examples include gasoline tax and cigarette tax. See progressive tax.

support level

A technical analysis term describing the bottom of a stock's historical trading range. See resis- tance level.

resistance level

A technical analysis term describing the top of a stock's historical trading range. See sup- port level.

volume of trading theory

A technical analysis theory holding that the ratio of the number of shares traded to total outstanding shares indicates whether a market is strong or weak.

consumption

A term used by economists to refer to the purchase by household units of newly produced goods and services.

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 pass- ing sentence in a trial.

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 accelerat- ing rate. That is positive earnings momentum. Used by those following a growth style of portfolio manage- ment.

efficient market theory

A theory based on the premise that the stock market processes information effi- ciently. The theory postulates that, as new informa- tion 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. Syn. Efficient market hy- pothesis. this theory believes that it is impossible to beat the market because stock market efficienct cause existing share prices to always incorporate and reflect all relevant information. the theory holds that you make more money by assuming more riskyness in the investment.

holding period

A time period signifying how long the owner possesses a security. It starts the day after a purchase and ends on the day of the sale.

price-earnings ratio (PE)

A tool for comparing the prices of different common stocks by assessing how much the market is willing to pay for a share of each corporation's earnings. It is calculated by dividing the current market price of a stock by the earnings per share. Syn. earnings multiplier.

moving average chart

A tool used by technical ana- lysts 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).

trendline

A tool used by technical analysts to trace a security's movement by connecting the reaction lows in an upward trend or the rally highs in a downward trend.

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.

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 it into another CD. These are insured up to $250,000 by the FDIC and are considered the best method of preservation of capital. See negotiable certificate of deposit.

agency transaction

A transaction in which a broker- dealer acts for the accounts of others by buying or selling securities on behalf of customers. Syn. agen- cy basis. See agent; broker; principal transaction.

principal transaction

A transaction in which a broker- dealer either buys securities from customers and takes them into its own inventory or sells securities to customers from its inventory. See agency transaction; agent; broker; dealer; principal.

exempt transaction

A transaction that does not trigger a state's registration and advertising requirements un- der the Uniform Securities Act. Examples of exempt transactions include: ■ nonissuer transactions in outstanding securities (normal market trading); ■ transactions with financial institutions; ■ unsolicited transactions; and ■ private placement transactions. No transaction is exempt from the Uniform Securities Act's antifraud provisions.

testamentary trust

A trust created as a result of in- structions from a deceased's last will and testament.

living trust

A trust created during the lifetime of the grantor; also known as an inter vivos trust.

simple trust

A trust that accumulates income and dis- tributes it to its beneficiaries on an annual basis. Simple trust must distribute income as opposed to complex which do not.

complex trust

A trust that accumulates income over time and is not required to make scheduled distribu- tions to its beneficiaries.

revocable trust

A trust that can be altered or canceled by the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries.

irrevocable trust

A trust that cannot be altered or canceled by the grantor at any time.

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 sub- ject to federal estate tax. See generation skipping trust.

QTIP trust

A trust that is funded with qualified termi- nable interest property, meaning that the spouse's in- terest in the property terminates upon his death; also known as a Q trust, C trust, or current income trust. Enables grantor to provide for surviving spouse, while still maintaining control of how the trus'ts assets are distributed once th surviving spouse dies. This is a irrevocable trust that individuals who have children from another marriage commonly use. Then after death of the spouse, the assets can be rerouted to the children from the original marriage, for example.

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. grantor trust rules offer individuals a certain degree of tax protection because tax rates are generally more favorable to individuals than they are to trusts.

marital trust

A trust that seeks to pass property to a survivor spouse while taking advantage of the marital deduction; also known as an A trust. income generated by the assets goes to the surviving spouse. three types of marital trusts: general power of appointment, QTIP trust, and estate trust. Basically the marital trust is a way to skip probate (legally reassigning assets based on will) and a way to harness "unlimited marital deduction" tax benefits.

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 (e.g., 6, 6, and 6)].

callable bond

A type of bond issued with a provision al- lowing the issuer to redeem the bond before maturity at a predetermined price.

incentive stock option

A type of employee stock op- tion. 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. See nonqualified stock option.

nonqualified stock option

A type of employee stock option. When NSOs are exercised, the difference be- tween the current market price at the time of exercise and the strike price is reported as wages on the tax returns of the employer and the employee. See incen- tive stock option.

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. See call price; preferred stock.

dividend growth model

A valuation method which takes into consideration dividend per share and its 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. Syn. DGM.

Standard & Poor's Composite Index of 500 Stocks (S&P 500)

A value-weighted index that offers broad coverage of the securities market. It is composed of 400 industrial stocks, 40 financial stocks, 40 public utility stocks, and 20 transportation stocks. The index is owned and compiled by Standard & Poor's Cor- poration. See index; Standard & Poor's Corporation; Standard & Poor's 100 Stock Index.

capital stock

All of a corporation's outstanding pre- ferred stock and common stock, listed at par value.

wash trade

A wash trade occurs when a customer enters a purchase order and a sale order for the same security at the same time. It is done to create a false appear- ance of activity in a security. This is a prohibited practice.

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 U.S. govern- ment. Syn. Ginnie Mae.

limited power of attorney

A written authorization for someone other than an account's beneficial owner to make certain investment decisions regarding trans- actions in the account. See discretion; full power of attorney; durable power of attorney.

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. See limited power of attorney; durable power of attorney.

brochure supplement

A written disclosure statement containing information about certain of an invest- ment adviser's supervised persons. This disclosure is usually accomplished by the delivery of Form ADV Part 2B to most clients and prospective clients.

brochure

A written disclosure statement that invest- ment advisers must provide to most clients and prospective clients. The Form ADV Part 2A may be used for this purpose.

capital asset

All tangible property, including securities, real estate, and other property, held for the long term.

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. See In- vestment Company Act of 1940.

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 re- pealed the dividend exclusion for individual investors.

preliminary prospectus

An abbreviated prospectus that is distributed while the SEC is reviewing an issuer's registration statement. It contains all of the es- sential facts about the forthcoming offering except the underwriting spread, final public offering price, and date on which the shares will be delivered. Syn. red herring. However, it does NOT include key details of the issue such as prince, and number of share offered. Its purpose is to declare use of the proceeds from the offering, market potential for product/service, financial statements, management personnel and major shareholder details, pending litigation, and solicit expressions of interest in the prospective issue.

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.

corporate account

An account held in a corporation's name. The corporate agreement, signed when the ac- count is opened, specifies which officers are authorized to trade in the account. In addition to standard mar- gin account documents, a corporation must provide a copy of its charter and bylaws authorizing a margin account.

custodial account

An account in which a custodian enters trades on behalf of the beneficial owner, often a minor. See custodian.

discretionary account

An account in which the cus- tomer has given the agent authority to enter transac- tions at the representative's discretion.

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. Syn. special cash account.

joint account

An account in which two or more individuals possess some form of control over the ac- count 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. See tenants in common; joint tenants with right of survivorship.

partnership account

An account that empowers the individual members of a partnership to act on the behalf of the partnership as a whole.

accumulation unit

An accounting measure used to determine an annuitant's proportionate interest in the insurer's separate account during an annuity's accumulation (deposit) stage. See accumulation stage; separate account.

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. See average basis; last in, first out. helps get rid of inventory before it becomes obselete also helps address inflation by selling older products at the current market price

last in, first out (LIFO)

An accounting method used to assess a corporation's inventory in which it is assumed that the last goods acquired are the first to be sold. The method is used to determine cost basis for tax purposes; the IRS designates last in, first out as the or- der 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. See average basis; first in, first out. in periods of rising prices, LIFO creates higher costs and lowers net income, which also lowers taxable income. Likewise, in periods of falling prices, LIFO creates lower costs and increases net income, which also increases taxable income. its all based on how the market is dictating cost structure of the underlying inventory. In a given time if prices are increasing for inventory, then say item 1 cost 10$ item 2 cost 15 item 3 cost 20, then by LIFO, we sell item 3 then 2 then 1 so the costs will be inflated becuase the underlying cost of inventory is capturing the most expensive things first due to LIFO accounting, so when inflation is occuring LIFO will typically help increase cost of inventory which will decrease the overall taxble income. Opposite is true in a falling market.

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. See first in, first out; last in, first out.

BRIC

An acronym referring to investments in Brazil, Rus- sia, India, and China

sector rotation

An active portfolio management tech- nique that attempts to take advantage of the fact that different sectors of the economy rise and fall in the business cycle at different times. Rotating from one to the other at the right times can lead to investment success. Syn. Sector rotating. See active management style.

testimonial

An endorsement of an investment or service by a celebrity or public opinion influencer. The use of testimonials by investment advisers is prohibited.

alternative minimum tax (AMT)

An alternative 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. See tax preference item.

Maloney Act

An amendment enacted in 1938 to broaden Section 15 of the Securities Exchange Act of 1934. Named for its sponsor, the late Sen. Francis Ma- loney 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. See National Association of Securi- ties Dealers, Inc. Maloney Act created the National Association of Securities Dealers to oversee OTC market, which is now a part of FINRA

tax credit

An amount that can be subtracted from a tax liability, often in connection with real estate develop- ment, energy conservation, and research and develop- ment programs. Every dollar of tax credit reduces the amount of tax due, dollar for dollar. See deduction.

deferred annuity

An annuity contract that delays pay- ment of income, installments, or a lump sum until the investor elects to receive it.

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. Syn. investment bank.

tax-sheltered annuity (TSA)

An annuity contract that entitles the holder to exclude all contributions from gross income in the year they are made. Taxes payable on the earnings are deferred until the holder withdraws funds at retirement. TSAs are available pri- marily through a 403(b) plan to employees of public schools, church organizations, and other tax-exempt organizations. Syn. tax-deferred annuity.

I immediate annuity

An annuity contract that provides for monthly payments to begin immediately after deposit of the invested funds. Payments usually com- mence within 30 to 60 days. See deferred annuity.

joint life with last survivor

An annuity payout option that covers two or more people, with annuity pay- ments continuing as long as one of the annuitants remains alive.

selling away

An associated person engaging in private securities transactions without the employing broker- dealer's knowledge and consent. This violates the NASAA Policy on prohibited practices.

general partnership (GP)

An association of two or more entities formed to conduct a business jointly. The partnership does not require documents for for- mation, and the general partners are jointly and sever- ally liable for the partnership's liabilities. See limited partnership. all partners agree to share in all assets, profits, and financial and legal liabilities of a business.

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. See flow-through; general partnership.

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. See limited trading authorization.

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. See full trading authorization.

supply-side theory

An economic theory holding that bolstering an economy's ability to supply more goods is the most effective way to stimulate economic growth. Supply-side theorists advocate income tax reduction insofar as this increases private investment in corporations, facilities, and equipment. supply side theory - targets businesses and believes that increased production dirves economic growth. Factors of production are entrpreneurship capital labor and land. Fiscal policy focuses on tax curts and degregulation keynesian theory - targets consumers, stating that demand in the driving force of economic growth. Fiscal policy focuses on government spending within infrastructure, umemployment benefits, and education. monetarist theory - believes that money supply is the most significant determinant of rate of economic growth and the behavior of business cycle. Policy includes Fed open market operations.

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. therefore this gives way to FOMC open market ops, this line of thinking was largely attributed to Milton Friedman.

OTC Link

An electronic inter-dealer quotation system that displays quotes from broker-dealers for many over-the-counter securities. Formerly known as the Pink Sheets, OTC Link does not require companies whose securities are quoted on its systems to meet any listing requirements.

OTC Bulletin Board (OTCBB)

An electronic quotation system for equity securities that are not listed on a national exchange or included in the Nasdaq system. These are not federal covered securities and generally require registration with both the SEC and the states.

tax preference item

An element of income that receives favorable tax treatment. The item must be added to taxable income when computing alternative minimum tax. Tax preference items include acceler- ated depreciation on property, research and develop- ment costs, intangible drilling costs, tax-exempt inter- est on municipal private purpose bonds, and certain incentive stock options. See alternative minimum tax.

profit-sharing plan

An employee benefit plan estab- lished and maintained by an employer whereby the employees receive a share of the business's profits. The money may be paid directly to the employees or deferred until retirement. A combination of both ap- proaches is also possible.

no-par stock

An equity security issued without a stated value.

convertible preferred stock

An equity security that can be exchanged for common stock at specified prices or rates. Dividends may be cumulative or non- cumulative. See cumulative preferred stock; noncumu- lative preferred stock; preferred stock.

noncumulative preferred stock

An equity security that does not have to pay any dividends in arrears to the holder. See cumulative preferred stock; preferred stock.

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. See noncu- mulative preferred stock; preferred stock.

preferred stock

An equity security that represents ownership in a corporation. It is issued with a stated dividend, which must be paid before dividends are paid to common stockholders. It generally carries no voting rights. See callable preferred stock; cumulative preferred stock.

rating

An evaluation of a corporate or municipal bond's relative safety, according to the issuer's ability to repay principal and make interest payments. Bonds are rated by various organizations, such as Standard & Poor's and Moody's. Ratings range from AAA or Aaa (the highest) to C or D, which represents a company in default.

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.

pegging

An illegal form of market manipulation that attempts to keep the price of a subject security from falling. It is used by those with a long position. it seems that pegging is the opposite of capping, because capping intends to keep a securities price low, whereas pegging intends to keep a securities price stable/high (typically associated with puts) capping = practice of selling large amounts of a commodity or security close to options expiry date to prevent rise in market price, which is an attempt to keep stock's price low by placing selling pressure on it. (typically associated with calls)

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. See pegging.

capital appreciation

An increase in an asset's market price.

stock split

An increase in the number of a corporation's outstanding shares, which decreases its stock's par value. The market value of the total number of shares remains the same. The proportional reductions in or- ders held on the books for a split stock are calculated by dividing the stock's market price by the fraction that represents the split.

ask

An indication by a trader 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. Syn. offer. See bid; public offering price; quotation.

bid

An indication by an investor, a trader, or a dealer of a willingness to buy a security; the price at which an investor can sell to a broker-dealer. See offer; public offering price; quotation.

settlor

An individual or organization that gifts assets to a beneficiary by transferring fiduciary duty to a third-party trustee that will maintain the assets for the benefit of the beneficiaries. Syn. grantor, trustor.

trustor

An individual or organization that gifts assets to a beneficiary by transferring fiduciary duty to a third-party trustee that will maintain the assets for the benefit of the beneficiaries. Syn. settlor, grantor.

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. Syn. settlor, trustor. grantor is person who create the trusts and supplies assets in the trust. if grantor is part of trust it is called a grantor trust, also if he/she is not then it is called a non-grantor trust.

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.

personal income (PI)

An individual's total earnings derived from wages, passive business enterprises, and investments. See disposable income.

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.

custodian

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best inter- ests of another. Mutual funds have custodian banks responsible for safeguarding certificates and perform- ing clerical duties.

fixed annuity

An insurance contract in which the insur- ance company makes fixed dollar payments to the an- nuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal. Syn. fixed dollar annuity; guaranteed dollar annuity.

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 purposes of computing book value per share.

balance of payments

An international accounting record of all transactions made by one particular country with others during a certain period; it com- pares the amount of foreign currency the country has taken in with the amount of its own currency it has paid out. See balance of trade.

performance-based fee

An investment advisory fee based on a share of capital gains on, or capital ap- preciation of, client assets. A fee that is based upon a percentage of assets that the IA manages is not a performance-based fee. This fee may only be charged to certain high net worth clients.

underwriter

An investment banker that works with an issuer to help bring a security to the market and sell it to the public.

unit investment trust (UIT)

An investment com- pany that sells redeemable shares in a professionally selected portfolio of securities. It is organized under a trust indenture, not a corporate charter.

exchange traded fund

An investment company origi- nally 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. ETFs may be purchased on margin and sold short. Although most ETFs still track indexes, there are a number of ETFs that are actively managed. Syn. ETF.

mutual fund

An investment company that continu- ously 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 the net asset value. Each mu- tual fund's portfolio is invested to match the objective stated in the prospectus. Syn. open-end investment company; open-end management company. See bal- anced fund; contractual plan; net asset value.

closed-end investment company

An investment company that issues a fixed number of shares in an ac- tively managed portfolio of securities. The shares may be of several classes; they are traded in the secondary marketplace, either 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. Syn. publicly traded fund; closed-end management company. See mutual fund.

management company

An investment company that trades various types of securities in a portfolio in accordance with specific objectives stated in the prospectus. See closed-end management company; diversified management company; mutual fund; non- diversified management company.

regulated investment company

An investment company to which Subchapter M of the Internal Revenue Code grants special status that allows the flow-through of tax consequences on a distribution to shareholders. If 90% of its income is passed through to the shareholders, the company is not subject to tax on this income. This is particularly applicable to most REITs., however can really be anything. The purpose of the RIC is to avoid double taxation in which both the investment company and it indivdual investor would be taxed on the income and profits generated by the company. Qualifications: 90% of its income from capital gains, 50% of company's total assets must be in the form of cash, cash equivalents or securities.

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. See long hedge; selling a hedge; short hedge.

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.

nonaccredited investor

An investor not meeting the net worth requirements of Regulation D. Nonac- credited investors are counted for purposes of the 35-investor limitation for Rule 506(b) Regulation D private placements. See accredited investor; private placement; Regulation D.

bear

An investor who acts on the belief that a security or the market is falling or will fall. See bull.

bull

An investor who acts on the belief that a security or the market is rising or will rise. See bear.

call buyer

An investor who pays a premium for an op- tion contract and receives, for a specified time, the right to buy the underlying security at a specified price. See call writer; put.

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.

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 commit- ment to buy.

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.

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. See Rule 147. Because the offering doe snot include more than one state, it does not fall under the jurisdiction of the Securities and Exchange Commission and no need for registration with SEC.

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.

bond

An issuing company's or government's legal obliga- tion to repay the principal of a loan to bond investors at a specified future date. Bonds are usually issued with par or face values of $1,000, representing the amount of money borrowed. The issuer promises to pay a per- centage of the par value as interest on the borrowed funds. The interest payment is stated on the face of the bond at issue.

primary offering

An offering in which the proceeds of the underwriting go to the issuing corporation, agency, or municipality. The issuer seeks to increase its capitalization either by selling shares of stock, rep- resenting ownership, or by selling bonds, representing loans to the issuer. Syn. primary distribution. A synonym to this is IPO.

private placement

An offering of new issue securities that complies with Regulation D of the Securities Act of 1933. According to Regulation D, a security gener- ally is not required to be registered with the SEC if it is offered to no more than 35 nonaccredited investors or to an unlimited number of accredited investors. See Regulation D.

Administrator

An official or agency that administers a state's securities laws.

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. See opening purchase.

all or none order (AON)

An order that instructs the floor broker to execute the entire order in one trans- action; if the order cannot be executed in its entirety, it is allowed to expire.

limit order

An order that instructs the broker-dealer to buy a specified security below a certain price or to sell a specified security above a certain price. These orders are entered either for the day or good-til-canceled (GTC). See stop limit order; stop order.

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.

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.

good-til-canceled order (GTC)

An order that is left on the specialist's book until it is either executed or canceled. Syn. open order.

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.

market order

An order to be executed immediately at the best available price. A market order is the only or- der that guarantees execution. Syn. unrestricted order.

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.

sell stop order

An order to sell a security that is entered at a price below the current market price and that is triggered when the market price touches or goes through the sell stop price. sell stop order - on the sale side, has a trigger which is not necessarily what the executed value sell limit order - attempt to maximize profits, sell limit order mean price is set at a pre-determined price or better. buy limit order - investor sets a limit or maximum price point that he is willing to spend and the purchase of secrutiy can happen only at limit point or lower. The point is to minimize the amount of dollars spend on the security.

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 Inter- mediate Credit Banks, and Banks for Cooperatives. See Federal Intermediate Credit Bank.

restricted security

An unregistered, nonexempt security acquired either directly or indirectly from the issuer, or an affiliate of the issuer, in a transaction that does not involve a public offering. See holding period; Rule 144.

negotiable certificate of deposit (CD)

An unsecured promissory note issued with a minimum face value of $100,000. It evidences a time deposit of funds with the issuing bank and is guaranteed by the bank. considered a short term vehicle with maturities from 2 weeks to 1 year. interest usually paid at maturity or instrument is purchased at a discount to its face value due to its large size, mostly corporations buy/large institutional investors use them as a way to invest in low-risk, low-interest security

commercial paper

An unsecured, short-term promisso- ry 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.

earnings multiplier

Another term for the price-to-earn- ing (PE) ratio. The earnings multiplier is the price of the stock divided by its earnings per share. it tells you how much investors are willing to pay for the stock relative to the company's earnings. The PE ratio indicates teh dollar amount an investor can expect to invest in a company in order to receive one dollar of that company's earnings. P/E ratio = price of share / Earnings per share

basis

Another term for yield to maturity (e.g., this bond is selling at a 5.78 basis).

wrap fee program

Any advisory program under which a specified fee or fees not based directly upon trans- actions in a client's account is charged for invest- ment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and the execution of cli- ent transactions. The exclusion from the definition of investment adviser available under both state and federal law to broker-dealers is not in effect for those offering wrap fee programs.

material information

Any fact that could affect an investor's decision to trade a security.

investment objective

Any goal a client hopes to achieve through investing. Examples include current income, capital growth, and preservation of capital.

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. protects the author/authors of financial reports from any errors, omissions, and oversights that may be contained in the document.

advertisement

Any notice, circular, letter, or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, that offers (1) any analysis, report, or publication concern- ing 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; or (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 or sell; or (3) any other investment advisory service with regard to securities.

stock exchange

Any organization, association, or group of persons that maintains or provides a marketplace in which securities can be bought and sold. Examples include the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE).

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.

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.

insider

Any person who possesses or has access to mate- rial nonpublic information about a corporation. Insid- ers include directors, officers, and stockholders who own more than 10% of any class of equity security of a corporation.

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.

federal covered adviser

As defined by the NSMIA of 1996, either an investment adviser registered with the SEC or excluded from the definition of invest- ment 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.

accredited investor

As defined in Rule 501 of Regulation D, any institution or individual meet- ing minimum net worth requirements for the purchase of securities qualifying under the Regu- lation D registration exemption. An individual accredited investor is generally accepted to be one who, individually or with spouse, has a net worth, excluding the net equity in the primary residence, of $1 million or more, or has had an annual income of $200,000 or more in each of the two most recent years (or $300,000 jointly with a spouse), and who has a reasonable expectation of reaching the same income level in the current year.

person

As defined in securities law, an individual, cor- poration, partnership, association, fund, joint stock company, unincorporated organization, trust, govern- ment, or political subdivision of a government. There are two types of persons: a natural person: human being a legal person: everything else even entities

Roth 401(k)

As with a Roth IRA, contributions are not tax deductible, but qualified withdrawals are free from income tax. There are no earnings limits in order to participate, but it is required that distributions begin no later than age 70½. Roth 401k : an employer sponsored investment saving account that is funded with after-tax money to the contribution limit. traditional 401ks are funded with pre tax dollars, but withdrawals are taxed. the withdrawals are non taxable as long as account has been held for 5 years, or the withdrawal was the result of a disability, death or the account holder reached the age of 59.5.

tranche A class of bonds.

Collateralized mortgage obliga- tions are structured with several tranches of bonds that have various maturities.

Securities and Exchange Commission (SEC)

Com- mission created by Congress to regulate the securities markets and protect investors. It is composed of five commissioners appointed by the President of the United States with the advice and consent of the Senate. The SEC enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Invest- ment Company Act of 1940, and the Investment Advisers Act of 1940.

equity

Common and preferred stockholders' owner- ship interests in a corporation. See common stock; preferred stock.

algorithmic trading

Computerized trading using propri- etary 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 trad- ing is not executing 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 United States is currently being driven by algorithmic trading. Also known as high-frequency trading.

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.

Securities Act of 1933

Federal legislation requiring the full and fair disclosure of all material information about the issuance of new securities. Syn. Act of 1933; Full Disclosure Act; New Issues Act; Prospectus Act; Trust in Securities Act; Truth in Securities Act.

Telephone Consumer Protection Act of 1991 (TCPA)

Federal legislation restricting the use of telephone lines for solicitation purposes. A company soliciting sales via telephone, facsimile, or email must disclose its name and address to the called party and must not call any person who has requested not to be called.

Securities Amendments Act of 1975

Federal legislation that established the Municipal Securities Rulemaking Board.

Securities Exchange Act of 1934

Federal legislation that established the Securities and Exchange Com- mission. The act aims to protect investors by regulat- ing the exchanges, the OTC market, the extension of credit by the Federal Reserve Board, broker-dealers, insider transactions, trading activities, client accounts, and net capital. Syn. Act of 1934; Exchange Act.

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. See fiscal year.

agency cross transaction

For an advisory client, a transaction in which a person acts as an invest- ment 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 advi- sory client and for another person on the other side of the transaction.

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, ad- ditional investments are permitted.

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.

Roth IRA

Funded with after-tax contributions, but, if qualified, withdrawals are tax-free. There are earnings limits but no required distributions at age 70½. eligibility depends on income. typically this is qualified. This is a form of the individual retirement plan and bears many similarities to tradition IRA, except for the taxation policy. Roth IRA are made with after tax dollars but the the withdrawals are funded with after tax dollars.

futures

Futures contracts are exchange-traded obliga- tions for a specific commodity. A buyer goes long, or establishes a long position, and is obligated to take de- livery 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 com- modity to deliver. Futures may be highly leveraged. futures markets are highly speculative by taking guesses on the future price movement of the underlying commodity, but due to liquidity and set structure, futures can be traded easily. however forwards contracts are different, the forward contracts are still based on an underlying commodity however, the are more more illiquid.

risk-free rate

Generally refers to the interest rate of 90- day U.S. Treasury bills.

adjusted gross income (AGI)

Gross income from all sources minus certain adjustments to income, such as deductible contributions to an IRA and net capital losses. It is basically the amount of income that will be subject to tax. See tax liability.

gross margin

Gross margin is the operating PROFIT OF BUSINESS BEFORE INTEREST AND TAXES. It is computed by subtracting the cost of goods sold (COGS) from the company's sales (or revenues). Gross margin is fre- quently expressed as a percentage, called the margin of profit. The calculation is the gross margin divided by the sales (revenues). For example, a company has sales of $5 million and COGS of $3.5 million result- ing in a gross margin of $1.5 million and a margin of profit of 30% ($1.5 million / $5 million).

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.

passive management style

In a perfectly efficient market, investors should use a passive investment strategy (i.e., buying a broad market index of stocks and holding it) because active investment strate- gies will underperform due to transactions costs and management fees. However, to the extent that market prices are inefficient, active investment strategies can generate positive risk-adjusted returns. See active management style. this investment style aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. this is to avoid fees and drag on performance that frequent trading may pose.

spread

In a quotation, the difference between a security's bid and ask prices.

disgorge(ment)

In legal usage, the forced giving up of profits made through illegal activity, most commonly insider trading.

liquidation priority

In the case of a corporation's liqui- dation, 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, unse- cured liabilities (debentures) and general creditors; 5, subordinated debt; 6, preferred stockholders; and 7, common stockholders.

earned income

Income derived from active participa- tion 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. See portfolio income; unearned income.

unearned income

Income derived from investments and other sources not related to employment services. Examples of unearned income include interest from a savings account, bond interest, and dividends from stock. See earned income; passive income; portfolio income.

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.

selling dividends

Inducing customers to buy mutual fund shares by implying that an upcoming distribution will benefit them. This practice is illegal.

12b-1 asset-based fees

Investment Company Act of 1940 provision that allows a mutual fund to collect a fee for the promotion or sale of or another activity connected with the distribution of its shares. This fee will not exceed .75%.

impersonal investment advice

Investment advisory services that do not purport to meet the objectives or needs of specific individuals or accounts.

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. See security market index.

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.

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 after- math 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 subsid- iary of the private exchange operator Intercontinental Exchange, or ICE.

prudent investor rule

Legally known as the Uniform Prudent Investors Act of 1992 (UPIA). A modern adaptation of the prudent man rule, which, as a result of the development of modern portfolio theory, ap- plies the standard of prudence to the entire portfolio rather than to individual investments. It requires the fiduciary to measure risk with respect to return. 1) Prudence will be applied to the entire portfolio 2)extension of permission to the trustee to delegate management functions 3) other changes were made to the initial Prudent Investor Act

Uniform Transfers to Minors Act (UTMA)

Legis- lation adopted in most states that permits a gift of money or securities to be given to a minor and held in a custodial account that an adult manages for the minor's benefit until the minor reaches a certain age (not necessarily the age of majority). Income and capital gains transferred to a minor's name are usu- ally taxed at the minor's rate. However, just as with UGMA, if the child is under a specified age and has unearned income above a certain level, those earnings are taxed at the parent's rate. See Uniform Gift to Minors Act.

Investment Advisers Act of 1940

Legislation gov- erning who must register with the SEC as an invest- ment adviser. See investment adviser. 1)what kind of advice is offered 2) how the individual is paid for their advice/method of compensation, and 3)whether or not the lion's share of the advisor's income is generated by providing investment advice (the primary professional function).

Insider Trading and Securities Fraud Enforce- ment Act of 1988

Legislation that defines what constitutes the illicit use of nonpublic information in making securities trades and the liabilities and penal- ties that apply. Syn. Insider Trading Act. See Chinese Wall; insider.

Uniform Gift to Minors Act (UGMA)

Legislation that permits a gift of money or securities to be given to a minor and held in a custodial account that an adult manages for the minor's benefit. Income and capital gains transferred to a minor's name are usually taxed at the minor's rate. However, if the child is under a specified age and has unearned income above a certain level, those earnings are taxed at the parent's rate. See Uniform Transfers to Minors Act.

investment constraints

Limitations or restrictions that are specific to the adviser's client. Investment con- straints include, among others, liquidity needs, time horizon, and personal ethical choices (no tobacco or alcohol stocks).

inside information

Material information that has not been disseminated to or is not readily available to the general public.

MRD

Minimum required distribution. See required mini- mum distribution. This applies to SEP, or SIMPLE IRA owners and qualified plan participants must begin withdrawing from retirement accounts by April 1 following the year they reach age 70.5.

Uniform Securities Act (USA)

Model legislation for securities industry regulation at the state level. Each state may adopt the legislation in its entirety or it may adapt it (within limits) to suit its needs.

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 U.S. exchanges.

remuneration

Money paid for work performed or a service provided.

cash dividend

Money paid to a corporation's stockhold- ers out of the corporation's current earnings or ac- cumulated profits. The board of directors must declare all dividends.

soft-dollar compensation

Noncash compensation re- ceived by an investment adviser from a broker-dealer, generally in exchange for directed brokerage trans- actions. Must always be disclosed and should come under the safe harbor provisions of Section 28(e). See safe harbor.

pecuniary

Of or relating to money, such as operating for pecuniary profit.

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 a substantial rise and indicates a market reversal. A head and shoulders bottom (an inverted head and shoulders) indicates a market advance.

Federal Intermediate Credit Bank (FICB)

One of 12 banks that provide short-term financing to farmers as part of the Farm Credit System.

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. See quotation; stock quote.

self-regulatory organization (SRO)

One of eight organizations accountable to the SEC for the enforce- ment of federal securities laws and the supervision of securities practices within an assigned field of jurisdiction. For example, the National Association of Securities Dealers regulates the over-the-counter market; the Municipal Securities Rulemaking Board supervises state and municipal securities; and certain stock exchanges, such as the New York Stock Ex- change and the Chicago Board Options Exchange, act as self-regulatory bodies to promote ethical conduct and standard trading practices.

profitability ratio

One of several measures of a corpora- tion's relative profit or income in relation to its sales. See margin of profit ratio; return on equity. these include: profit margin - such as gross margin which measure how much a company can mark up sales above COGS, operating margin gives percentage of sales left after covering additional op. ex. pretax margin chow profitability after non-operating expenses, net profit margin = company ability to generate earnings after taxes return on assets - refers to amount of earnings from sales after all costs, expenses and taxes return on equity - concerns the company's equity holder the most, it measure the ability of earning return on their equity investment

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 corpora- tion'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. Syn. debt ratio.

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. delta measures speed how fast an options price changes as underlying stock price changes gamma measure how fast the options price accelerates with underlying stock price changes, larger gamma means more volatility

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.

theta

One of the 4 Greeks used by options analysts. An option's theta is a measurement of the option's time decay. The theta measures the rate at which op- tions lose their value, specifically the time value, as the expiration date draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day.

vega

One of the 4 Greeks used by options analysts. An option's vega is a measure of the impact of changes in the underlying volatility on the option price. Specifi- cally, the vega of an option expresses the change in the price of the option for every 1% change in under- lying volatility.

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. See bond rating; Standard & Poor's Corporation.

Black-Scholes

One of the most popular options pricing models. Appears frequently on the exam as an incor- rect choice.

North American Securities Administrators Association

Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

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. financial risk See credit risk.

security

Other than an insurance policy or a fixed annu- ity, any piece of securitized paper that can be traded for value. Under the Act of 1934, this includes any note, stock, bond, investment contract, debenture, certificate of interest in a profit-sharing or partner- ship agreement, certificate of deposit, collateral trust certificate, preorganization certificate, option on a security, or other instrument of investment commonly known as a security.

hypothecation

Pledging to a broker-dealer securities bought on margin as collateral for the margin loan. See rehypothecation.

Qualified Domestic Relations Orders (QDROs)

Premature distributions that are taken pursuant to a qualified domestic relations order, or QDRO, are exempt from the 10% penalty. A QDRO is a court-issued order that gives someone the right to an individual's qualified plan assets, typically an ex- (or soon-to-be-ex-) spouse, and the QDRO is usually is- sued in the course of divorce proceedings or to satisfy child support obligations. A QDRO applies only to assets in a qualified employer plan; it would not be applicable to an IRA or a SEP. QDRO is a court order that recognizes ex spouse is entitled to receive predefined portion of individuals retirement plan. QDRO has no jurisdiction over non-qualified plan. When distribution foes to ex-spouse, the ex-spouse is responsible for any taxes incurred when the money is distributed.

stock certificate

Printed evidence of ownership in a corporation.

equity financing

Raising money for working capital or for capital expenditures by selling common or pre- ferred stock to individual or institutional investors. In return for the money paid, the investors receive own- ership interests in the corporation. See debt financing.

Chicago Stock Exchange

Registered stock exchange located in Chicago's downtown "loop." Referred to with the initials CHX.

refunding

Retiring an outstanding bond issue before maturity by using money from the sale of a new debt offering.

risk-adjusted return

Return from a security adjusted for the market risk associated with it. Usually mea- sured by the Sharpe Ratio. involves investment and benchmark comparison. 5 methods; alpha, beta, r-squared, standard dev, and sharpe ratio It is important compared risk adjusted return metrics with each other and not against different metrics

risk tolerance

Risk tolerance is an investor's ability and willingness to lose some or all of the original invest- ment in exchange for greater potential returns. An aggressive investor, or one with a high risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve the original investment.

Rule 144

SEC rule requiring that persons who hold control or restricted securities may sell them only in limited quantities, and that all sales of restricted stock by control persons must be reported to the SEC by fil- ing a Form 144, Notice of Proposed Sale of Securities. See control security; restricted security. The rule regulates transactions with restricted, unregistered and control securities. These types of securities typically are aqcuired in unregistered, private sales or constitute a control stake in an issuing company. 5 rules for sale of 144 securities: Rule 1) holding period must be met Rule 2) Adequate public information about company must be available Rule 3) If selling party is an affiliate of the company he cannote resell more thatn 1% of the total outstanding shares during any 3 onth period. Rule 4) normal trading contions apply to any trade must be met Rule 5) SEC requires an affiliated seller to file a proposed sale notice if the sale value exceeds $50,000.

Rule 147

SEC rule that provides exemption from the registration statement and prospectus requirements of the 1933 Act for securities offered and sold exclu- sively intrastate. Rules: -company must be incorporated in the tate in which it if offering the securities -company must carry out a significant portion of its business in that state, which is defined as at least 80% of operations -the company must only sell the securities to individuals residing in the state of incorporation.

ADS

See American depositary receipt. (in the US) a negotiable certificate of title to a number of shares in a non-US company that are deposited in an overseas bank.

ADR

See American depositary receipt. An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange.

CBOE

See Chicago Board Options Exchange.

CHX

See Chicago Stock Exchange.

CPI

See Consumer Price Index.

Pension Reform Act

See Employee Retirement Income Security Act of 1974. Protection of retirement assets that required qualified plans to follow fiduciary rules so plan's assets are not misused.

Freddie Mac

See Federal Home Loan Mortgage Corpo- ration.

FNMA

See Federal National Mortgage Association.

Fannie Mae

See Federal National Mortgage Association.

FOMC

See Federal Open Market Committee.

FRB

See Federal Reserve Board.

Insider Trading Act

See Insider Trading and Securities Fraud Enforcement Act of 1988. Increase the liabilitiy penalties to all involved parties of insider trading.

HR-10 plan

See Keogh plan. pension plan available to self employeed individuals/ unincorporated businesses it gives retirement plans for self-employeed people and unincorporated businesses. keoghs are consired qualified by the IRS, type 1: defined-benefit plan: states annual benefits at retirement, which are based on salary and years of employment type 2: defined contribution plan (aka HR-10): contributions are made on a regular basis up to a limit. There are profit sharing plans, as well as money purhcase plans

LEAPS

See Long-term Equity Anticipation Securities.

Nasdaq

See National Association of Securities Dealers Automated Quotation System.

NASD

See National Association of Securities Dealers, Inc.

NASAA

See North American Securities Administrators Association.

bulletin board

See OTC Bulletin Board.

Pink Sheets

See OTC Link. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refer to OTC trading.

Q trust

See QTIP trust.

S.I.M.P.L.E. Plan

See Savings Incentive Match Plan for Employees. Retirement plan that may be established by employers, including self-employed individuals (sole proprietorship and partnerships). for the benefit of their employees. Allows eligible employees to contribute part of their pretax compensation to the plan. This is a non-qualified plan.

Act of 1933

See Securities Act of 1933.

Full Disclosure Act

See Securities Act of 1933. This refers to the idea that publically traded companies must release and provide for the free exchange of all material facts that are relevant to their ongoing business operations both parties to tell the whole truth about any material issue pertaining to the transaction.

Act of 1934

See Securities Exchange Act of 1934.

AGI

See adjusted gross income.

agency basis

See agency transaction. A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms.

call feature

See call provision.

publicly traded fund

See closed-end investment com- pany. ETF - open ended investment company, who owns underlying shares and divides ownership of those assets into shares. Sharehodlers do not directly own or have any direct claim to the underlying investment. however, unlike mutual fund the prices of ETF shift throughout the day. Closed End Fund - like a mutual fund, but raises fixed amount of capital through an initial public offering, the fund is then structured, listed and traded like a stock on the exchange. Unlike open end funds (which are priced only once at the end of the day), closed end funds are traded and priced throughout the day.

collateral trust certificate

See collateral trust bond.

CMO

See collateralized mortgage obligation.

conversion rate

See conversion ratio.

default risk

See credit risk.

DNI

See distributable net income.

DRIP

See dividend reinvestment plan.

covered security

See federal covered security.

FOK

See fill-or-kill order.

trading authorization

See full trading authorization; limited trading authorization.

GDP

See gross domestic product. total dollar value of all goods and services produced over a specific time period, often referred to as the size of the economy.

junk bond

See high yield bond.

industrial revenue bond (IRB)

See industrial develop- ment bond.

IPO

See initial public offering.

LLC

See limited liability company.

open-end investment company

See mutual fund.

CD

See negotiable certificate of deposit.

face value

See par.

PE ratio

See price-earnings ratio.

PE

See price-earnings ratio. tells us how expensive the stock is relative to its earnings. how much an investor is willing to pay per dollar of company earnings.

inflation risk

See purchasing power risk. Idea is that the interest you receive on on a particular security is at a rate (eg 4%), however inflation is at 2%, therefore inflation is chipping 2% away. Only Treasury Inflation Protection Bonds (TIPS) protect against this risk.

QTP

See qualified tuition program. These are also called 529 Plan, and provide tax advantages for saving and paying for higher education. Two major types: prepaid tuition and saving plans. prepaid allows pan holder to pay for beneficiary's tuition and fees at designated institutions in advance. savings plans are tax advantaged investment vehicles (IRAs) earnings from 529 plan are exempt from federal taxes, dsitributions not used for qualified educational expenses are subject to taxes and a 10% fee (except death and disability). 529 contributions do not reduce federal income tax burden, however there are tax deduction and credits for 529 contributions.

RMD

See required minimum distribution.

earned surplus

See retained earnings. it is the percentage of net earning not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt Retained Earnings= Beginning RE + Net Income - Dividends

industry fund

See sector fund = a fund that invest solely in businesses that operate in a particular industry or sector of the economy.

index

See security market index.

designated market maker (DMM)

See specialist. firm/invidiual - obligated to maintain fair and orderly markets for an assigned set of listed firms. they charge commisions and fees

wash sale

Selling a security at a loss for tax purposes and, within 30 days before or after, purchasing the same or a substantially identical security. The IRS disallows the claimed loss.

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.

repurchase agreement

Sometimes just referred to as a REPO, this is widely used in the money market where the seller of a security agrees to buy it back (repur- chase it) at a higher price (the imputed interest rate).

specialist

Stock exchange member who stands ready to quote and trade certain securities either for his own account or for customer accounts. The specialist's role is to maintain a fair and orderly market in the stocks for which he is responsible. Syn. designated market maker, DMM.

large-cap

Stocks with a market capitalization of $10 billion or more.

mid-cap

Stocks with a market capitalization of $2 billion to $10 billion.

small-cap

Stocks with a market capitalization of $300 million to $2 billion.

quick ratio

Syn. acid test ratio, quick ratio.

acid test

Syn. acid test ratio. = current assets- stocks / liabilities

distributable net income (DNI)

Taxable income from a trust that determines the amount of income that may be taxable to beneficiaries.

street name

Term used in the industry to refer to cus- tomer securities held in the name of the broker-dealer as nominee.

Regulation T

The Federal Reserve Board regulation that governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities. Regulation T currently sets the loan value of marginable securities at 50% and the payment deadline at two days beyond regular way settlement. Syn. Reg. T.

monetary policy

The Federal Reserve Board's actions that determine the size and rate of the money supply's growth, which in turn affect interest rates. See fiscal policy. fiscal policy deal with government adjusting its spending levels and taxes to monitor/ influence a nations economy. it is credited to John Maynard Keynes. However, it is important to understand that Keynes' policy advocates government deficit spending, which is one component of fiscal policy, however, the part that deals with taxation falls under supply side economics (which is reagans policy)

Form 1041

The IRS form used by estates and trusts to report their income for tax purposes.

Form 706

The IRS form used for the computation of es- tate tax. It must be filed within nine months of death unless an extension has been obtained.

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.

Form D

The SEC form required to be filed when engag- ing in a Regulation D private placement.

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.

Sharpe ratio

The Sharpe ratio measures the risk adjusted return of an investment. It is calculated by dividing the excess return of an asset over the 90-day Treasury bill rate by its standard deviation. It measures the reward per unit of risk so the higher the ratio, the better. Sharpe Ratio = mean portfolio return - risk-free rate / std dev. of portfolio return

Internal Revenue Service (IRS)

The U.S. government agency responsible for collecting most federal taxes and for administering tax rules and regulations.

Form 709

The United States Gift (and Generation- Skipping Transfer) Tax Return is filed on Form 709.

Wilshire 5000

The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. As of the date of printing, it includes some 3,700 issues.

solvency

The ability of a corporation both to meet its long-term fixed expenses and to have adequate money for long-term expansion and growth. this could potentially be in contrast with the acid test ratio.

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. See soft-dollar compensation.

profitability

The ability to generate a level of income and gain in excess of expenses.

separate account

The account that holds funds paid by variable annuity contract holders. The funds are kept separate from the insurer's general account and are invested in a portfolio of securities that match the contract holders' objectives. See accumulation unit; annuity.

GAAP

The acronym for generally accepted accounting principles, the standard method used in the United States by professional accountants.

FINRA

The acronym for the Financial Industry Regula- tory Authority, the result of the cooperative effort of NASD and the NYSE to harmonize regulation in the securities industry.

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 un- less otherwise indicated.

indenture

The agreement between a lender and a bor- rower 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 some- times called the deed of trust.

realized gain

The amount a taxpayer earns when he sells an asset. See unrealized gain. realized gain - when the profit margin on an asset is actually in hand because the asset was sold, this different from unrealized gain because unrealized gain means that a profit exists on paper but is not actually executed. Ie) the stock if sold today would make a profit (realized gain) however it is not yet sold. These concepts apply directly to realized and unrealized loss. This also has implications on taxes because unrealized gain is a way to place tax burden somewhere else. This is because depending on if asset is sold after a year it will qualify for capital gains, also if you wan to move tax burden to another year then you can sell it on after Jan 1 of the proceeding year.

sales load

The amount added to a mutual fund share's net asset value to arrive at the offering price. See mu- tual fund; net asset value; no-load fund.

time value

The amount an investor pays for an option above its intrinsic value; it reflects the amount of time left until expiration. The amount is calculated by subtracting the intrinsic value from the premium paid. See intrinsic value.

unrealized gain

The amount by which a security ap- preciates in value before it is sold. Until it is sold, the investor does not actually possess the sale proceeds. See realized gain.

net worth

The amount by which assets exceed liabilities.

risk premium

The amount in excess of the risk-free rate demanded by investors to compensate for the additional risks inherent in the specific security being described. the return om excess of the risk free rate that an investment is expected to yield. it is a form of risk compensation.

retained earnings

The amount of a corporation's net income that remains after all dividends have been paid to preferred and common stockholders. Syn. earned surplus; reinvested earnings. re = INITIAL Retained Earning + Net Income - Dividends where net income = total revenue - total expenses

position

The amount of a security either owned (a long position) or owed (a short position) by an individual or a dealer. Dealers take long positions in specific se- curities to maintain inventories and thereby facilitate trading.

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. See equity; initial margin requirement; Regulation T. Reg T states = an ivnestor may borrow up to 50% of the purchase price of securities that can be bought using loan from broker or dealer, other 50% must be funded with cash.

tax liability

The amount of tax payable on earnings, usu- ally calculated by subtracting standard and itemized deductions and personal exemptions from adjusted gross income, then multiplying by the tax rate. See ad- justed gross income.

partnership management fee

The amount payable to the general partners of a limited partnership, or to other persons, for managing the day-to-day partner- ship operations. Syn. program management fee; property management fee.

required minimum distribution (RMD)

The amount that traditional and SEP IRA owners and qualified plan participants must begin withdrawing from their retirement accounts by April 1 following the year they reach age 70½. Exceptions apply to those covered under a qualified plan who are still employed. RMD amounts must then be distributed by December 31 that year and each subsequent year. however the exception is that with an QTIP program, the RMD are pushed back 15 years.

bond yield

The annual rate of return on a bond invest- ment. Types of yield include nominal yield, cur- rent 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. See current yield; nominal yield.

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 pur- chase price. See current yield; dividend. dividend yield = dividend (annual) / stock purchase price

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. See bond yield. current yield = annual cash flow (coupon) / market price

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. See limited power of attorney.

arithmetic mean

The average of a set of numbers, such as annual returns on an investment.

open-market operations

The buying and selling of securities (primarily government or agency debt) by the Federal Open Market Committee to effect control of the money supply. These transactions increase or decrease the level of bank reserves available for lend- ing. while open market operations is the most common tool the Fed uses to implement and control monetary policy in US, it also uses discount rate and reserve requirements. expansionary policy = when FOMC wants to decrease federal funds rate by buying gov bonds from individuals or organizations therefore increasing the overal cash that commerical banks have available to lend. this generallt tends to decrease interest rates, including federal funds rate, which leads to less saving (because of reduced interest rates) and more spending = fuels economy lower unemployment aids inflation. contractionary policy = when FOMC looks to increase the fedral funds rate and slow the ecconomy. The Fed will then sell gov bonds to individuals and institutions, therefore deceasing the amonut of money left for commerical bank to lend. this will lead to increse interest rates and increases federal funds rate, poeple will tend to save more moeny and therefore inflation halts as does economic growth..

Federal Reserve System

The central bank system of the United States. Its primary responsibility is to regu- late the flow of money and credit. The system includes 12 regional banks, 24 branch banks, and hundreds of national and state banks. Syn. Fed.

interest

The charge for the privilege of borrowing money, usually expressed as an annual percentage rate.

commingling

The combining by a brokerage firm of one customer's securities with another customer's securi- ties and pledging them as joint collateral for a bank loan; unless authorized by the customers, this violates SEC Rule 15c2-1.

capital structure

The composition of long-term funds (equity and debt) a corporation has as a source for financing. See capitalization.

exercise price

The cost per share at which an option or a warrant holder may buy or sell the underlying security. Syn. strike price.

maturity date

The date on which a bond's principal is repaid to the investor and interest payments cease. See par; principal.

effective date

The date the registration of an issue of securities becomes effective, allowing the underwrit- ers to sell the newly issued securities to the public and confirm sales to investors who have given indications of interest.

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.

payment date

The day on which a declared dividend is paid to all stockholders owning shares on the record date.

filing date

The day on which an issuer submits to the SEC the registration statement for a new securities issue.

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 U.S. government are considered to have virtually no credit risk. Note: credit risk only refers to debt securi- ties—common stock has no credit risk because there is no debt obligation to the owner. Syn. default risk; financial risk.

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.

discount

The difference between the lower price paid for a security and the security's face amount at issue.

markup

The difference between the lowest current offer- ing price among dealers and the higher price a dealer charges a customer.

IRA transfer

The direct reinvestment of retirement as- sets 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 cus- todian to the new plan custodian. See also individual retirement account; IRA rollover.

par value

The dollar amount assigned to a security by the issuer. For an equity security, par value is usually a small dollar amount that bears no relationship to the security's market price. For a debt security, par value is the amount repaid to the investor when the bond ma- tures, usually $1,000. Syn. face value; principal; stated value. See capital surplus; discount bond; premium bond.

parity price of common

The dollar amount at which a common stock is equal in value to its corresponding convertible security. It is calculated by dividing the convertible security's market value by its conversion ratio.

parity price of convertible

The dollar amount at which a convertible security is equal in value to its corresponding common stock. It is calculated by multiplying the market price of the common stock by its conversion ratio.

conversion price

The dollar amount of a convertible security's par value that is exchangeable for one share of common stock.

dividends per share

The dollar amount of cash divi- dends paid on each common share during one year.

par

The dollar amount the issuer assigns to a security. For an equity security, par is usually a small dollar amount that bears no relationship to the security's market price. For a debt security, par is the amount repaid to the investor when the bond matures, usually $1,000. Syn. face value; principal; stated value. See capital surplus; maturity date.

liquidity

The ease with which an asset can be converted to cash in the marketplace. A large number of buy- ers and sellers and a high volume of trading activity provide high liquidity.

trough

The end of a period of declining business activity throughout the economy, one of the four stages of the business cycle. See business cycle.

peak

The end of a period of increasing business activity throughout the economy, one of the four stages of the business cycle. Syn. prosperity. See business cycle.

portfolio manager

The entity responsible for investing a mutual fund's assets, implementing its investment strategy, and managing day-to-day portfolio trading. Syn. fund manager.

issuer

The entity, such as a corporation or municipality, that offers or proposes to offer its securities for sale.

correlation

The extent to which two or more securities or portfolios move together. The correlation coeffi- cient 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 the two securities.

default

The failure to pay interest or principal promptly when due.

fiscal policy

The federal tax and spending policies set by Congress or the President. These policies affect tax rates, interest rates, and government spending in an effort to control the economy. See monetary policy. this theory based on john maynard keynes (keynesian economics) stating governments can influence macroeconomic productivity levels by increasing or decreasing TAX / Public SPENDING. fiscal policy (mediated by the government) works in conjunction with monetary policy (mediated by central bank) to address nations economy.

principal office and place of business

The firm's executive office from which the firm's officers, part- ners, or managers direct, control, and coordinate the activities of the firm.

Schedule K-1

The form supplied by a partnership, LLC, or S corporation to owners indicating their propor- tionate share of income/loss to be reported on their Form 1040 tax returns. this form is particularly used to report incomes, losses and dividends of a partnership.

new account form

The form that must be filled out for each new account opened with a brokerage firm. The form specifies, at a minimum, the account owner, trading authorization, payment method, and types of securities appropriate for the customer.

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.

Farm Credit Administration (FCA)

The government agency that coordinates the activities of the banks in the Farm Credit System. See Farm Credit System. federally chartered financial institutions designed to provide credit-related services to the agricultural and farming sectors of the economy.

Federal Deposit Insurance Corporation (FDIC)

The government agency that provides de- posit insurance for member banks and prevents bank and thrift failures. does not insure securities

appreciation

The increase in an asset's value.

Form 1065

The information return filed by a partner- ship or LLC. Because income and losses flow through to owners, the entity pays no tax.

federal funds rate

The interest rate charged by one institution lending federal funds to another.

discount rate

The interest rate charged by the 12 Federal Reserve Banks for short-term loans made to member banks.

nominal yield

The interest rate stated on the face of a bond that represents the percentage of interest the issuer pays on the bond's face value. Syn. coupon rate; stated yield. See bond yield.

prime rate

The interest rate that commercial banks charge their prime or most creditworthy customers, generally large corporations.

balance of trade

The largest component of a coun- try's balance of payments; it concerns the export and import of merchandise (not services). Debit items in- clude 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. See balance of payments.

registration statement

The legal document that discloses all pertinent information concerning an of- fering of a security and its issuer. It is submitted to the SEC (and/or the Administrator) in accordance with the requirements of the Securities Act of 1933 and/or the Uniform Securities Act, and it forms the basis of the final prospectus distributed to investors. Filed under a form S-1 which is the initial registration form for new securities required by the SEC for public companies. Part I of the registration statement is the prospectus Part II (not required in the prospectus) recent sales of unregisered securities, exhibits, and financial statement schedules.

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. Syn. prospectus. this comes after the preliminary prospectus (red herring prospectus) and includes all information that the preliminary prospectus plus the quantity and pricing of offering

Internal Revenue Code (IRC)

The legislation that de- fines tax liabilities and deductions for U.S. taxpayers.

short-term capital loss

The loss incurred on the sale of a capital asset that has been owned for 12 months or less. See capital gain; capital loss; short-term capital gain.

capital loss

The loss incurred when a capital asset is sold for a price lower than the purchase price. See capital gain; long-term loss.

long-term loss

The loss realized on the sale of a capital asset that has been owned for more than 12 months. See capital gain; capital loss; long-term gain.

volatility

The magnitude and frequency of changes in the price of a security or commodity within a given period.

secondary market

The market in which securities are bought and sold subsequent to their being sold to the public for the first time. See new issue market.

gross domestic product (GDP)

The market value of all final goods and services produced within a coun- try 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.

capital surplus

The money a corporation receives in excess of the stated value of stock at the time of first sale. Syn. paid-in capital; paid-in surplus. See par.

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.

convexity

The most accurate way of indicating a debt security's sensitivity to changes in interest rates.

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. See average; Dow Jones Industrial Average.

Dow Jones Industrial Average (DJIA)

The most widely used market indicator, composed of 30 large, actively traded issues of industrial stocks.

National Association of Securities Dealers Auto- mated Quotation System (Nasdaq)

The nation- wide electronic quotation system for up-to-the-second on approximately 3,100 over-the-counter stocks trade information. Sometimes referred to as the Nasdaq Stock Market. All securities traded here are federal covered as defined in the NSMIA of 1996.

blue-sky laws

The nickname for state regulations gov- erning 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."

market capitalization

The number of outstanding shares multiplied by the current market price. Classed as large-cap, mid-cap, small-cap and micro-cap.

conversion ratio

The number of shares of common stock per par value amount that the holder would receive for converting a convertible bond or preferred share. Syn. conversion rate.

optimal portfolio

The optimal portfolio under modern portfolio theory assumes that investors seek a portfolio of assets that minimizes risks while offering the high- est possible return.

effective tax rate

The overall rate paid on a taxpayer's total taxable income. It will always be less than the marginal tax rate. See marginal tax rate.

reserve requirement

The percentage of depositors' money that the Federal Reserve Board requires a com- mercial bank to keep on deposit in the form of cash or in its vault. Syn. reserves.

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.

accumulation stage

The period during which con- tributions are made to an annuity account. See ac- cumulation unit; distribution stage.

taxable gain

The portion of a sale or distribution of mutual fund shares subject to taxation.

call risk

The potential for a bond to be called before maturity, leaving the investor without the bond's current income. Because this is more likely to occur during times of falling interest rates, the investor may not be able to reinvest his principal at a comparable rate of return. call writer An investor who receives a premium and takes on, for a specified time, the obligation to sell the underlying security at a specified price at the call buyer's discretion. See call buyer; put.

systematic risk

The potential for a security to decrease in value owing to its inherent tendency to move together with all securities of the same type. Neither diversification nor any other investment strategy can eliminate this risk. Systematic risks are sometimes referred to as external risk factors because they take place outside of the company being analized. See mar- ket risk, unsystematic risk.

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. See systematic risk. change that investment loses value becuase of a factor that affedts all investments in market. This systematic risk = changes in fcators have risk for all securities. ie_ natural disastor, wars, terrorist attacks, and changes in diversification Market risk because of its systematic nature, cannot be diversified against.

nonsystematic risk

The potential for an unforeseen event to affect the value of a specific investment. Examples of such events include strikes, natural di- sasters, poor management decisions, introductions of new product lines, and attempted takeovers. This risk is diversifiable. Syn. unsystematic risk. See systematic risk.

unsystematic risk

The potential for an unforeseen event to affect the value of a specific investment. Examples of such events include strikes, natural disas- ters, poor management decisions, introductions of new product lines, and attempted takeovers. This risk is diversifiable. Unsystematic risks are sometimes re- ferred to as internal risk factors because they deal with risk arising from the events taking place within the company Syn. nonsystematic risk. See systematic risk.

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. See time value.

liquidity risk

The potential that an investor might not be able to sell an investment when desired without adverse price disruption. Syn. marketability risk. 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. Syn. standardized option. usually the rule is that the smaller the size of the security, the larger the liquidity risk

purchasing power risk

The potential that, because of inflation, a certain amount of money will not pur- chase as much in the future as it does today. Syn. infla- tion risk. Purchase power expresses money's value by the amount of good and services it can buy. Inflation reduces purchase power. This is typically measured against CPI.

tergiversation

The practice of continually changing one's mind, attitude, or opinion.

side-by-side management

The practice of manag- ing accounts that are charged performance-based fees while at the same time managing accounts that are not charged performance-based fees.

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. See current market value.

foreign exchange rate

The price of one country's currency in terms of another currency. Syn. exchange rate.

quotation

The price or bid a market maker or broker- dealer offers for a particular security. Syn. quote. See ask; bid; bond quote; stock quote.

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. coupon yield See nominal yield.

underwriting

The procedure by which investment bankers channel investment capital from investors to corporations and municipalities that are issuing securities.

long-term gain

The profit earned on the sale of a capital asset that has been owned for more than 12 months. See capital gain; capital loss; long-term loss.

return on investment (ROI)

The profit or loss result- ing from a security transaction, often expressed as an annual percentage rate. ROI = (gain from investment - cost of investment) / cost of investment

operating income

The profit realized from one year of operation of a business. Gross income (which equals revenue - COGS) - operating expenses and depreciation.

short-term capital gain

The profit realized on the sale of an asset that has been owned for 12 months or less. See capital gain; capital loss; short-term capital loss.

capital gain

The profit realized when a capital asset is sold for a higher price than the purchase price. See capital loss; long-term gain.

front running

The prohibited practice of entering an or- der for the benefit of a firm or a securities professional before entering customer orders. broker receives large order from client, quickly buys shares of same stock, then inputs clients large order, and this will drive up share price, and then he can sell his shares.

reverse churning

The prohibited practice of parking assets that will only be traded infrequently in a fee- based advisory account.

participation

The provision of the Employee Retire- ment Income Security Act of 1974 requiring that all employees in a qualified retirement plan be covered within a reasonable time of their dates of hire.

Regulation D

The provision of the Securities Act of 1933 that exempts from registration offerings sold in private placements. Rule 506(b) limits the sale to a maximum of 35 non-accredited investors during a 12-month period with no advertising permitted, while Rule 506(c) permits advertising but requires that all purchasers be accredited investors. See private placement. The purpose of this is to allow smaller companies to raise capital through the sale of equity of debt securities without having to register their securities with the SEC.

investor

The purchaser of an asset or security with the intent of profiting from the transaction.

tax-equivalent yield

The rate of return a taxable bond must earn before taxes in order to equal the tax- exempt earnings on a municipal bond. This number varies with the investor's tax bracket. TEY = tax free municipla bond yield / (1- tax rate)

yield to call (YTC)

The rate of return on a bond that ac- counts for the difference between the bond's acquisi- tion cost and its proceeds, including interest income, calculated to the earliest date that the bond may be called by the issuing corporation. See bond yield.

yield to maturity (YTM)

The rate of return on a bond that accounts for the difference between the bond's acquisition cost and its maturity proceeds, including interest income. See bond yield.

yield

The rate of return on an investment, usually expressed as an annual percentage rate. See current yield; dividend yield; nominal yield.

marginal tax rate

The rate of taxation on any addition- al taxable income received. It is sometimes referred to as the tax on the "next" dollar or the "last" dollar of income. See effective tax rate.

operating ratio

The ratio of operating expenses to net sales; the complement to the margin of profit ratio. shows the efficiency of a company's management by comparing op expenses to net sales. smaller the ratio, the better an organization is able to generate profit if revenue decreases.

debt-to-equity ratio

The ratio of total long-term debt to total stockholders' equity; it is used to measure leverage.

IRA rollover

The reinvestment of assets that an indi- vidual 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 rein- vested is taxed as ordinary income. See also individual retirement account; IRA transfer.

federal funds

The reserves of banks and certain other institutions greater than the reserve requirements or excess reserves. These funds are available immedi- ately.

redemption

The return of an investor's principal in a security, such as a bond, preferred stock, or mutual fund shares. By law, redemption of mutual fund shares must occur within seven days of receiving the inves- tor's request for redemption.

residual claim

The right of a common stockholder to corporate assets in the event that the corporation ceases to exist. A common stockholder may claim assets only after the claims of all creditors and other security holders have been satisfied.

National Association of Securities Dealers, Inc. (NASD)

The self-regulatory organization for the over-the-counter market. NASD was organized under the provisions of the 1938 Maloney Act. See Maloney Act, FINRA.

interest rate risk

The risk associated with investments relating to the sensitivity of price or value to fluctua- tion in the current level of interest rates; also, the risk that involves the competitive cost of money. This term is generally associated with bond prices, but it applies to all investments. In bonds, prices carry inter- est risk because if bond prices rise, outstanding bonds will not remain competitive unless their yields and prices adjust to reflect the current market. IE) if bond holder has a $1000 bond with 4% interest, and new bonds are issued at 5%, this will devalue the price of thebond holder's bond. However, if prevailing interest rate in 2% a few years later, this will increase the value of the 1000$ bond with 4% interest to above 1000$.

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. Syn. unsystematic risk.

political risk

The risk that an investment's returns could suffer as a result of political changes or instability in a country such as from a change in government, orderly or not, nationalization of industries, or military con- trol. This type of "geopolitical" risk increase given the length of time of the investment.

regulatory risk

The risk that changes in regulations may negatively affect the operations of a company. This primarily deals with the changes in law and regulations that will materially impact a security, business, sector or market.

alpha

The risk-adjusted returns that a portfolio man- ager 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 the 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 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 portfo- lio should have returned 10.5% for taking extra risk. It actually returned 22% over the risk-free rate giving us an alpha of 11.5.

short sale

The sale of a security that the seller does not own, or any sale consummated by the delivery of a security borrowed by or for the account of the seller.

public offering

The sale of an issue of common stock, either by a corporation going public or by an offering of additional shares. See initial public offering.

new issue market

The securities market for shares in privately owned businesses that are raising capital by selling common stock to the public for the first time. Syn. primary market. See initial public offering; secondary market. this is the market of IPOs. which involves the underwriting of te newly issued shares via an investment bank.

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. treasury bills (mature less than a year) treasury notes (2-10 years) < capital market debt instrument treasury bonds (10-30years) < capital market debt instrument

underlying securities

The securities that are bought or sold when an option, right, or warrant is exercised.

OTC market

The security trading system in which broker-dealers negotiate directly with one another rather than through an auction on an exchange floor. The trading takes place over computer and telephone networks that link brokers and dealers around the world. Both listed and OTC securities, as well as municipal and U.S. government securities, trade in the OTC market. Dealers act as market makers in the OTC markets, by quoting prices at which they will buy and sell a security or currency. Trades can be made in the market without others being aware of the transaction, therefore are much less transparent and subject to less regulation. OTC markets are primarily used to trade bonds, currencies, derivatives, and structured products. OTC's also have options called exotic options

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 securi- ties. In contrast, the money market is the raising of short-term capital such as Treasury bills and commer- cial paper.

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. legislative risk The potential for an investor to be ad- versely affected by changes in investment or tax laws.

Chicago Board Options Exchange (CBOE)

The self-regulatory organization with jurisdiction over all writing and trading of standardized options and related contracts listed on that exchange. Also, the first national securities exchange for the trading of listed options.

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 divi- dends on it. Syn, DDM.

net investment income

The source of an investment company's dividend payments. It is calculated by subtracting the company's operating expenses from the total dividends and interest the company receives from the securities in its portfolio. income received from investments assets like bonds stocks and mutual funds, loans (less related expenses) individual tax rate on net investment income depends on if it is interest income, dividend, or capital gains.

total capitalization

The sum of a corporation's long- term debt, stock accounts, and capital in excess of par.

capitalization

The sum of a corporation's long-term debt, stock, and surpluses. Syn. invested capital. See capital structure.

disposable income (DI)

The sum that people divide between spending and personal savings. See personal income.

income statement

The summary of a corporation's revenues and expenses for a specific fiscal period.

Form 1120 and 1120S

The tax returns filed by corpo- rations. The "S" is for an S corporation.

qualified tuition program

The technical name for Section 529 Plans. Syn. QTP.

top heavy

The term used to describe a 401(k) plan that offers a disproportionate benefit to key employees. Top-heavy testing must be done on an annual basis unless the plan qualifies as a safe harbor 401(k). See safe harbor.

oversubscribed

The term used to describe a new security issue where the demand for the shares greatly exceeds the available supply. The issues usually ap- preciate rapidly on the first day of trading and failure to properly allocate them is a prohibited practice.

over the counter (OTC)

The term used to describe a security traded through the telephone-linked and computer-connected OTC market rather than through a stock exchange. See OTC market.

fiscal year

The term used to describe an accounting year that ends other than December 31st (calendar year accounting). See calendar year.

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 op- tion when the stock is selling below the exercise price. See at-the-money; intrinsic value; out-of-the-money.

out-of-the-money

The term used to describe an option that has no intrinsic value, such as a call option when the stock is selling below the exercise price or a put option when the stock is above the exercise price.

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. See short.

short

The term used to describe the selling of a security, contract, or commodity that the seller does not own. For example, an investor who borrows shares of stock from a broker-dealer and sells them on the open market is said to have a short position in the stock. See long.

Keynesian economics

The theory that active govern- ment intervention in the marketplace is the best method of ensuring economic growth and stability. this deals primarily with government spending. This is in contrast to supply side economics (trickle down- reagan) which deals with tax cuts to boost economy.

supply

The total amount of a good or service available for purchase by consumers. See demand.

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. Port- folio valuations occur at least once per business day. Mutual funds transacted during the trading day will receive the end of day NAV as their transaction price. Mutual funds transacted after the market's close will receive the next day's forward price.

adjusted basis

The value attributed to an asset or se- curity that reflects any deductions taken on, or capi- tal 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.

NAV per share

The value of a mutual fund share, calcu- lated by dividing the fund's total net asset value by the number of shares outstanding.

current market value (CMV)

The worth of the securi- ties in an account. The market value of listed securi- ties is based on the closing prices on the previous busi- ness day. Syn. long market value. See market value.

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. Syn. call feature.

enjoined

This term includes being subject to a manda- tory injunction, prohibitory injunction, preliminary injunction, or a temporary restraining order issued by a court of competent jurisdiction.

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 sizeable demand appears.

time horizon

Time horizon is the expected number of months, years, or decades over which the invest- ments will be made to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because that investor can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager's college education would likely take on less risk because of the shorter time horizon.

sell

To convey ownership of a security or another asset for money or value. This includes giving or delivering a security with or as a bonus for a purchase of securi- ties, a gift of assessable stock, and selling or offering a warrant or right to purchase or subscribe to another security. Not included in the definition is a bona fide pledge or loan or a stock dividend if nothing of value is given by the stockholders for the dividend. Syn. sale.

make a market

To stand ready to buy or sell a particu- lar security as a dealer for its own account. A market maker accepts the risk of holding the position in the security. See market maker.

speculation

Trading a security with a higher than average risk in return for a higher than average profit potential. The trade is effected solely for the purpose of profiting from it and not as a means of hedging or protecting other positions.

conversion parity

Two securities, one of which can be converted into the other, of equal dollar value. A con- vertible security holder can calculate parity to help decide whether converting would lead to gain or loss.

Eurodollar

U.S. currency held in banks outside the United States.

qualified person

Under both state and federal law, a client for whom an investment adviser may charge performance-based fees. Currently, the requirements are a minimum net worth of $2 million or at least $1 million in AUM with that adviser.

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 U.S. 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 placements). Nasdaq small caps are not federally covered no aunnities, insurance, retirement plans, commodities or futures contracts

guaranteed security

Under the Uniform Securities Act, the term guaranteed means guaranteed BY A THIRD PARTY as to payment of principal, interest, or divi- dends, but not capital gains. Something like ginnie mae

active management style

Unlike the passive style, analysts believe 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 underweight- ing industries based on the current phase of the business cycle. See passive management style; sector rotation.

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 a prior hearing.

investment policy statement

Used by those admin- istering employee benefit plans to set out the objec- tives, policies, investment selections, and monitoring procedures for the plan. May also be used by invest- ment advisers to determine policies to be followed with their clients.

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.

median

When viewing a series of values, such as portfo- lio returns, the number that has as many occurrences above as below. A measure of central tendency.

mode

When viewing a series of values, the one that occurs the most frequently. A measure of central tendency.

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). Referred to as the spread between the highest bid price and the lowest ask price amourn various market makers of a particular security.

demand deposit Demand deposit (DDA)

refers to a type of account held at banks and financial institu- tions that may be withdrawn at any time by the cus- tomer. The majority of such demand deposit accounts are checking accounts, although many now include savings accounts in the definition as well.