Accommodative monetary policy
Federal Reserve System policy to increase the amount of money available to banks for lending. See: Monetary policy.
Accountant's opinion
A signed statement from an independent public accountant after examination of a firm's records and accounts. The opinion may be unqualified or qualified. See: Qualified opinion.
Accredited investor
Refers to a wealthy investor (net worth >$million or annual income >$200,000) who does not count to the maximum of 35 people allowed to invest in a private limited partnership.
Accretion (of a discount)
In portfolio accounting, a straight-line accumulation of capital gains on a discount bond in anticipation of receipt of par at maturity.
Accrual bond
A bond on which interest accrues but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.
Accrued discount
Interest that accumulates on savings bonds from the date of purchase until the date of redemption or final maturity, whichever comes first. Series A, B, C, D, E, EE, F, I, and J are discount or accrual bonds, meaning principal and interest are paid when the bonds are redeemed. Series G, H, HH, and K are current-income bonds, and the semiannual interest paid to their holders is not included in accrued discount.
Accrued interest
Applies mainly to convertible securities. Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. At the time of sale, the buyer pays the seller the bond's price plus "accrued interest," calculated by multiplying the coupon rate by the fraction of the coupon period that has elapsed since the last payment. (If a bondholder receives $40 in coupon payments per bond semiannually and sells the bond one-quarter of the way into the coupon period, the buyer pays the seller $10 as the latter's proportion of interest earned.)
Accrued market discount
The rise in the market value of a discount bond as it approaches maturity (when it is redeemable at par) and not because of falling market interest rates.
Accumulated Benefit Obligation (ABO)
An approximate measure of the liability of a pension plan in the event of a termination at the date the calculation is performed. Related: Projected benefit obligation.
Accumulated dividend
A dividend that has reached its due date, but is not paid out. See: Cumulative preferred stock.
Acquisition
When a firm buys another firm.
Active Management
The pursuit of investment returns in excess of a specified benchmark.
A-D
Advance-Decline, or measurement of the number of issues trading above their previous closing prices less the number trading below their previous closing prices over a particular period. As a technical measure of market breadth, the steepness of the AD line indicates whether a strong bull or bear market is under way.
Adjustable rate
Applies mainly to convertible securities. Refers to interest rate or dividend that is adjusted periodically, usually according to a standard market rate outside the control of the bank or savings institution, such as that prevailing on Treasury bonds or notes. Typically, such issues have a set floor or ceiling, called caps and collars that limits the adjustment.
Adjustable-rate mortgage (ARM)
A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps.
Adjustable-rate preferred stock (ARPS)
Publicly traded issues that may be collateralized by mortgages and MBS
Advance Computerized Execution System (ACES)
Refers to the Advance Computerized Execution System, run by Nasdaq. ACES automates trades between order entry and market maker firms that have established trading relationships with each other. Securities are designated as specified for automatic execution.
Advance funded pension plan
A pension plan in which funds are set aside in advance of the date of retirement.
Advance refunding
In the context of municipal bonds, refers to the sale of new bonds (the refunding issue) before the first call date of old bonds (the issue to be refunded). The refunding issue usually specifies a rate lower than the issue to be refunded, and the proceeds are invested, usually in government securities, until the higher-rate bonds become callable. See: Refunding escrow deposits.
Affiliated person
An individual who possesses enough influence and control in a corporation as to be able to alter the actions of the corporation.
After-hours dealing or trading
Securities trading after regular trading hours on organized exchanges.
Aftermarket
See: Secondary market.
Agency
In context of general equities, buying or selling for the account and risk of a customer. Generally, an agent, or broker, acts as intermediary between buyer and seller, taking no financial risk personally or as a firm, and charging a commission for the service. The broker represents a customer buyer/seller to a customer seller/buyer and does not act as principal for the firm's own trading account. Antithesis of principal. See: Dealer.
Agency bank
A form of organization commonly used by foreign banks to enter the US market. An agency bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank. It is also the financial institution that issues ADRs to the general market.
Agency pass-throughs
Mortgage pass-through securities whose principal and interest payments are guaranteed by government agencies, such as the Government National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and Federal National Mortgage Association(Fannie Mae).
Agency securities
Securities issued by federally related institutions and U.S. government-sponsored entities. Such agencies were created to reduce borrowing costs for certain sectors of the economy, such as agriculture.
Agent
The decision-maker in a principal-agent relationship.
AIMR Performance Presentation Standards Implementation Committee
The Association for Investment Management and Research (AIMR) Performance Presentation Standards Implementation Committee is charged with the responsibility to interpret, revise, and update the AIMR Performance Presentation Standards (AIMR-PPS(TM) for portfolio performance presentations.
All or none order (AON)
Used in context of general equities. A limited price order that is to be executed in its entirety or not at all (no partial transaction), and thus is testing the strength/conviction of the counterparty. Unlike an FOK order, an AON order is not to be treated as cancelled if not executed as soon as it is represented in the trading crowd, but instead remains alive until executed or cancelled. The making of "all or none" bids or offers in stocks is prohibited, and the making of "all or none" bids or offers in bonds is subject to the restrictions of Rule 61. AON orders are not shown on the specialist's book because they cannot be traded in pieces. Antithesis of any-part-of order. See: FOK order.
Alpha
Measure of risk-adjusted performance. An alpha is usually generated by regressing the security or mutual fund's excess return on the S&P 500 excess return. The beta adjusts for the risk (the slope coefficient). The alpha is the intercept. Example: Suppose the mutual fund has a return of 25%, and the short-term interest rate is 5% (excess return is 20%). During the same time the market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The expected excess return given the risk is 2 x 9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 basis points. Alpha is also known as the Jensen Index. Related: Risk-adjusted return.
American Depository Receipt (ADR)
Certificates issued by a US depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR "Unsponsored" ADRs do not receive such assistance. ADRs are subject to the same currency, political, and economic risks as the underlying foreign share. Arbitrage keeps the prices of ADRs and underlying foreign shares, adjusted for the SDR/ordinary ratio essentially equal. American depository shares (ADS) are a similar form of certification.
American-style option
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.
Amortization
The repayment of a loan by installments.
Annual fund operating expenses
For investment companies, the management fee and "other expenses," including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are also included.
Annual percentage rate (APR)
The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%.
Annual percentage yield (APY)
The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.01^12 -1).
Annual rate of return
There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, we sometimes multiply this by 12 to express an annual rate of return. This is often called the annual percentage rate (APR). The annual percentage yield (APY), includes the effect of compounding interest.
Annualized gain
If stock X appreciates 1.5% in one month, the annualized gain for that stock over a twelve month period is 121.5% = 18%. Compounded over the 12 month period, the gain is (1.015)^12 -1 = 19.6%.
Annuity
A regular periodic payment made by an insurance company to a policyholder for a specified period of time.
Annuity certain
An annuity that pays a specific amount on a monthly basis for a set amount of time.
Annuity due
An annuity with n payments, where the first payment is made at time t = 0, and the last payment is made at time t = n - 1.
Annuity factor
Present value of $1 paid for each of t periods.
Arbitrage
The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist, but, arbitrage opportunities are often precluded because of transactions costs.
Arbitrage Pricing Theory (APT)
An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments. The APT implies that there are multiple risk factors that need to be taken into account when calculating risk-adjusted performance or alpha.
Ask
This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted offer at which an investor can buy shares of stock; also called the offer price.
Asked price
In context of general equities, price at which a security or commodity is offered for sale on an exchange or in the OTC Market.
Asked to bid/offer
Used in context of general equities. Usually a seller (buyer) looking to aggressively sell (buy) stock, usually asking for a capital commitment from an investment bank.
Asset
Any possession that has value in an exchange.
Asset allocation mutual fund
A mutual fund that rotates among stocks, bonds, and money market securities to maximize return on investment and minimize risk.
Asset-backed security
A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate.
Asset classes
Categories of assets, such as stocks, bonds, real estate, and foreign securities.
Asset/equity ratio
The ratio of total assets to stockholder equity.
Asset/liability management
The task of managing the funds of a financial institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities. Also called surplus management.
Asset swap
An interest rate swap used to alter the cash flow characteristics of an institution's assets in order to provide a better match with its liabilities.
At-the-money
An option is at the money if the strike price of the option is equal to the market price of the underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at the money.
Authorized shares
Number of shares authorized for issuance by a firm's corporate charter.
Automated bond system (ABS)
The computerized system that records bids and offers for inactively traded bonds until they are cancelled or executed on the NYSE.
Automated Clearing House (ACH)
A collection of 32 regional electronic interbank networks used to process transactions electronically with a guaranteed one-day bank collection float.
Automated Customer Account Transfer (ACAT)
For transfers of securities from a non-equity trading account to your equity trading account with your broker.
Automated Order System (AOS)
Investment banks, computerized order entry system that sends single order entries to DOT (Odd-Lot) or to investment banks, floor brokers on the exchange. See: Round lot, GTC orders.
Automated Pit Trading (APT)
Introduced in 1989, APT is the LIFFE screen-based trading system that replicates the open outcry method of trading on screen. APT is used to extend the trading day for the major futures contracts as well as to provide a daytime trading environment for non-floor trading products.
Average maturity
The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average maturity.
Away from the market
In context of general equities, out of line with the inside market at this time, such as when a bid on a limit order is lower or the offer price is higher than the current market price for the security; held by the specialist for later execution unless FOK. Antithesis of in-line.
B2B
An Internet strategy of dealing directly with businesses, rather than consumers, i.e. business to (2) business.
Back up
(1) When bond yields rise and prices fall, the market is said to backup. (2) An investor who swaps out of one security into another of shorter current maturity is said to back up.
Back-end load fund
A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated length of time, such as one year. The commission decreases, the longer the investor holds the shares. The formal name for the back-end load is the contingent deferred sales charge, or CDSC
Balance of payments
A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.
Balance of trade
Net flow of goods (exports minus imports) between two countries.
Balanced mutual fund
This is a fund that buys common stock, preferred stock, and bonds. The same as a balanced fund.
Bank anticipation notes (BAN)
Notes issued by states and municipalities to obtain interim financing for projects that will eventually be funded long term through the sale of a bond issue.
Banker's acceptance
A short-term credit investment created by a nonfinancial firm and guaranteed by a bank as to payment. Acceptances are traded at discounts to face value in the secondary market. These instruments have been a popular investment for money market funds. They are commonly used in international transactions.
Barbell strategy
A fixed income strategy in which the maturity's of the securities included in the portfolio are concentrated at two extremes.
Basis point
In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage point of yield in bonds equals 100 basis points. Basis points also are used for interest rates. An interest rate of 5% is 50 basis points higher than an interest rate of 4.5%. Sometimes referred to as BPS, BIPS, and pronounced "Bips"
Bear CD
A bear CD pays the holder a fraction of any fall in a given market index.
Bear market
Any market in which prices exhibit a declining trend. For a prolonged period, usually falling by 20% or more.
Bear spread
Applies to derivative products. Strategy in the options market designed to take advantage of a fall in the price of a security or commodity, usually executed by buying a combination of calls and puts on the same security at different strike prices in order to profit as the security's price falls.
Bearer bond
Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.
Beneficiary
Term used to refer to the person who receives the benefits of a trust or the recipient of the proceeds of a life insurance policy.
Beta
The measure of an asset's risk in relation to the market (for example, the S&P500) or to an alternative benchmark or factors. Roughly speaking, a security with a beta of 1.5, will have move, on average, 1.5 times the market return. [More precisely, that stock's excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).] According to asset pricing theory, beta represents the type of risk, systematic risk, that cannot be diversified away. When using beta, there are a number of issues that you need to be aware of: (1) betas may change through time; (2) betas may be different depending on the direction of the market (i.e. betas may be greater for down moves in the market rather than up moves); (3) the estimated beta will be biased if the security does not frequently trade; (4) the beta is not necessarily a complete measure of risk (you may need multiple betas). Also, note that the beta is a measure of comovement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market.
Bid
The price a potential buyer is willing to pay for a security. Sometimes also used in the context of takeovers where one corporation is bidding for (trying to buy) another corporation. In trading, we have the bid-ask spread which is the difference between what buyers are willing to pay and what sellers are asking for in terms of price.
Bid-asked spread
The difference between the bid and the asked prices.
Black-Scholes option-pricing model
A model for pricing call options based on arbitrage arguments. Uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the expected standard deviation of the stock return. Developed by Fischer Black and Myron Scholes in 1973.
Blind trust
A trust in which a fiduciary third party has total discretion to make investments on behalf of a beneficiary while the beneficiary is uninformed about the holdings of the trust.
Block trade
A large trading order, defined on the New York Stock Exchange as an order that consists of 10,000 shares of a given stock or at a total market value of $200,000 or more.
Blue-chip company
Used in the context of general equities. Large and creditworthy company. Company renowned for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Gilt-edged security.
Blue-sky laws
State laws covering the issue and trading of securities.
Board of Governors of the Federal Reserve System
The managing body of the Federal Reserve System, set which policies on bank practices and the money supply.
Bond
Bonds are debt and are issued for a period of more than one year. The US government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.
Bond discount
The difference by which a bond's market price is lower than its face value. The antithesis of a bond premium, which prevails when the market price of a bond is higher than its face value. See: Original issue discount.
Bond equivalent yield
Bond yield calculated on an annual percentage rate method. Differs from annual effective yield.
Bond fund
A mutual fund that emphasizes income—consistent with risk, rather than growth—by investing in corporate, municipal, or US government debt obligations, or some combination of them.
Bond rating
A rating based on the possibility of default by a bond issuer. The ratings range from AAA (highly unlikely to default) to D (in default). See: Rating, investment grade.
Book to bill
In the context of general equities, high-technology industry's demand to supply ratio of orders on a firm's book to number of orders filled. Measures who the company has more orders than it can deliver (>1), equal amounts (=1), or less (<1). This monthly figure is of major interest to investors/ traders in the high-technology sector.
Book value
A company's total assets minus intangible assets and liabilities, such as debt. A company's book value might be higher or lower than its market value.
Book-entry securities
System in which securities are not represented by paper certificates but are maintained in computerized records at the Fed in the names of member banks, which in turn keep computer records of the securities they own as well as those they are holding for customers. In the case of other securities where a book-entry has developed, certificates reside in a central clearinghouse or by another agent. These securities do not move from holder to holder.
Bootstrap
Term used to describe the start-up of a company with very little capital.
Brady bonds
Bonds issued by emerging countries under a debt reduction plan.
Breadth
The percentage of assets or stocks advancing relative to those unchanged or declining. Also the number of independent forecasts available per year. A stock picker forecasting returns to 100 stocks every quarter exhibits a breadth of 400, assuming each forecast is independent (based on separate information).
Broker
An individual who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders. Also, person who acts as an intermediary between a buyer and seller, usually charging a commission. A "broker" who specializes in stocks, bonds, commodities, or options acts as an agent and must be registered with the exchange where the securities are traded. Antithesis of dealer.
Bull
An investor who thinks the market will rise. Related: Bear.
Bull market
Any market in which prices are in an upward trend.
Bull spread
A spread strategy in which an investor buys an out-of-the-money put option, financing it by selling an out-of-the money call option on the same underlying security.
Bullet strategy
A fixed income strategy in which a portfolio is constructed so that the maturity's of its securities are highly concentrated at one point on the yield curve.
Burn rate
Used in venture capital financing to refer to the rate at which a startup company expends capital to finance overhead costs prior to the generation of positive cash flow.
Business cycle
Repetitive cycles of economic expansion and recession. The official peaks and troughs of the US cycle are determined by the National Bureau of Economic Research in Cambridge, MA.
Business risk
The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.
Busted convertible
Related: Fixed income equivalent. Mainly applies to convertible securities. Convertible bond selling essentially as a straight bond. Assuming the issuer is "money good," or will continue to meet credit obligations, such issues can be highly attractive since the price makes virtually no allowance for the bond's call on the common stock, although such issues usually carry high premiums.
Butterfly spread
Applies to derivative products. Complex option strategy that involves selling two calls and buying two calls on the same or different markets, with several maturity dates. One of the options has a higher exercise price and the other has a lower exercise price than the other two options. The payoff diagram resembles the shape of a butterfly.
on them.
Buy limit order
A conditional trading order that indicates a security may be purchased only at the designated price or lower. Related: Sell limit order.
Buy on margin
Borrowing to buy additional shares, using the shares themselves as collateral.
Buying power
The amount of money available to buy securities, determined by adding the total cash held in brokerage accounts and the amount that could be spent if securities were margined to the limit.
Bypass trust
An irrevocable trust that is designed to pay trust income (and principal, if needed) to an individual's spouse for the duration of the spouse's lifetime. The bypass trust is not part of the beneficiary spouse's estate and is not subject to federal estate taxes upon his/her death.
CUSIP
See: Committee on Uniform Securities Identification Procedures
Call
An option that gives the holder the right to buy the underlying futures contract.
Call date
A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond for a specified call price.
Call feature
Part of the indenture agreement between the bond issuer and buyer describing the schedule and price of redemption's prior to maturity.
Call option
An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to holders to redeem the bond or share of preferred stock before its scheduled maturity date.
Call price
The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date.
Call protection
A feature of some callable bonds that establishes an initial period when the bonds may not be called.
Call provision
An embedded option granting a bond issuer the right to buy back all or part of an issue prior to maturity.
Callable
Applies mainly to convertible securities. Redeemable by the issuer before the scheduled maturity under specific conditions and at a stated price, which usually begins at a premium to par and declines annually. Bonds are usually called when interest rates fall so significantly that the issuer can save money by issuing new bonds at lower rates.
Capital asset pricing model (CAPM)
An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the assets systematic risk. Theory was invented by William Sharpe (1964) and John Lintner (1965).
Capital gain
When a stock is sold for a profit, the capital gain is the difference between the net sales price of the securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.
Capital loss
The difference between the net cost of a security and the net sales price, if the security is sold at a loss.
Capital market
The market for trading long-term debt instruments (those that mature in more than one year).
Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio. The line represents the risk premium you earn for taking on extra risk. Defined by the capital asset pricing model.
Capital structure
The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities.
Capitalization
The debt and/or equity mix that funds a firm's assets.
Capitalized
Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year.
Cash
The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and banker's acceptances. Cash equivalents on balance sheets include securities that mature within 90 days (e.g., notes).
Cash and equivalents
The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.
Cash earnings
A firm's cash revenues less cash expenses, which excludes the costs of depreciation.
Cash-equivalent items
Examples include Treasury bills and Banker's Acceptances.
Cash flow
In investments, cash flow represents earnings before depreciation, amortization, and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations by real estate and other investment trusts) is important because it indicates the ability to pay dividends.
Cash flow from operations
A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses that are deducted in calculating net income.
Cash markets
Also called spot markets, these are markets that involve the immediate delivery of a security or instrument. Related: Derivative markets.
Certificate of deposit (CD)
Also called a time deposit this is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. A CD has a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years.
Certificates of Amortized Revolving Debt (CARD)
Pass-through securities backed by credit card receivables.
Certificates of Automobile Receivables (CAR)
Pass-through securities backed by automobile loan receivables.
Certificateless municipals
Municipal bonds with one certificate which is valid for the entire issue, and having no individual certificates, easing transactions. See: Book-entry securities.
Certified Financial Planner (CFP)
A person who has passed examinations accredited by the Certified Financial Planner Board of Standards, showing that the person is able to manage a client's banking, estate, insurance, investment, and tax affairs.
Certified financial statements
Financial statements that include an accountant's opinion.
Certified Public Accountant (CPA)
An accountant who has met certain standards, including experience, age, and licensing, and passed exams in a particular state.
Chapter 7 Proceedings
Provisions of the Bankruptcy Reform Act under which the debtor firm's assets are liquidated by a court because reorganization would fail to establish a profitable business.
Chapter 11 Proceedings
Provisions of the Bankruptcy Reform Act under which the debtor firm is reorganized by a court because the estimated value of the reorganized firm exceeds the expected proceeds from its liquidation.
Charitable remainder trust
An irrevocable trust that pays income to a designated person or persons until the grantor's death, when the income is passed on to a designated charity. A charitable lead trust by contrast allows the charity to receive income during the grantor's life, and the remaining income to pass to designated family members upon the grantor's death.
Chartered Financial Analyst (CFA)
An experienced financial analyst who has passed examinations in economics, financial accounting, portfolio management, security analysis, and standards of conduct given by the institute of Chartered Financial Analysts.
Chicago Board Options Exchange (CBOE)
A securities exchange created in the early 1970s for the public trading of standardized option contracts. Primary place stock options, foreign currency options, and index options (S&P 100, 500, and OTC 250 index)
Chicago Board of Trade (CBOT)
The largest futures exchange in the US, and was a pioneer in the development of financial futures and options.
Chicago Mercantile Exchange (CME)
A not-for-profit corporation owned by its members. Its primary functions are to provide a location for trading futures and options, to collect and disseminate market information, to maintain a clearing mechanism, and to enforce trading rules. Applies to derivative products. Primary place futures (OTC 250 industrial stock price index, S& P 100 and 500 index) and futures options (S&P 500 stock index) are traded.
Chinese wall
Communication barrier between financiers at a firm (investment bankers) and traders. This barrier is erected to prevent the sharing of inside information that bankers are likely to have.
Churning
Excessive trading of a client's account in order to increase the broker's commissions.
Circuit breakers
Measures instituted by exchanges to stop trading temporarily when the market has fallen by a certain percentage in a specified period. They are intended to prevent a market free fall by permitting buy and sell orders to rebalance.
Clearinghouse
An adjunct to a futures exchange through which transactions executed on its floor are settled by a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and the adequate
Closed-end fund
An investment company that sells shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund.
Closed fund
A mutual fund that is no longer issuing shares, mainly because it has grown too large.
Closely held
A corporation whose voting stock is owned by only a few shareholders.
Closely held company
A company who has a small group of controlling shareholders. In contrast, a widely-held firm has many shareholders. It is difficult or impossible to wage a proxy battle for any closely-held firm.
CMO REIT
A very risky type of Real Estate Investment Trust investing in the residual cash flows of Collateralized Mortgage Obligation (CMOs). CMO cash_flows are derived from the difference between the rates paid by the mortgage loan holders
Collar
An upper and lower limit on the interest rate on a floating-rate note (FRN) or an adjustable-rate mortgage (ARM).
Collateralized mortgage obligation (CMO)
A security backed by a pool of pass-through rates , structured so that there are several classes of bondholders with varying maturities, called tranches. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Related: mortgage pass-through security.
Commercial paper
Short-term unsecured promissory notes issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.
Commingling
In the context of securities, this involves mixing customer-owned securities with brokerage firm-owned securities. This process is referred to as rehypothecation, which is the use of customers' collateral to secure their loans. This is legal with customer consent, although some securities and collateral must be kept separately.
Commission
The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or their dollar value. In 1975, deregulation led to the establishment of discount brokers, who charge lower commissions than full service brokers. Full service brokers offer advice and usually have a staff of analysts who follow specific industries. Discount brokers simply execute a client's order and usually do not offer an opinion on a stock. Also known as a round-turn.
Committee on Uniform Securities Identification Procedures (CUSIP)
Committee that assigns identifying numbers and codes for all securities. These "CUSIP" numbers and symbols are used when recording all buy or sell orders.
Commodity
A commodity is food, metal, or another fixed physical substance that investors buy or sell, usually via futures contracts.
Commodity futures contract
An agreement to buy a specific amount of a commodity at a specified price on a particular date in the future, allowing a producer to guarantee the price of a product or raw material used in production.
Common stock
Securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. Units of ownership of a public corporation with junior status to the claims of secured/unsecured creditors, bondholders and preferred shareholders in the event of liquidation.
Compound Annual Growth Rate
Best defined by example. If you invest $100 today and make 5% in the first year and reinvest ($105) and make 8% in the second year, the compound annual growth rate is 6.489%. The calculation is $100x1.05x1.08=$113.4 which is what you end up with at the end of year two. The average return is [square root(113.4/100) -1]= 0.06489 or 6.489%. Note 1. If we had three compounding periods we would take the cubic root (power of 1/3). Note 2. If we had invested at exactly 6.489 in both periods, we get $100x1.06489x1.06489=$113.4. Note 3. The example is directed to a return - but CAGR could be applied to earnings growth, GDP growth, etc.
Compound interest
Interest paid on previously earned interest as well as on the principal.
Comptroller of the Currency
A government official, appointed by the president, who keeps control over all national banks, and receives reports from the banks at least quarterly, to be published in newspapers.
Conforming loans
Mortgage loans that meet the qualifications of Freddie Mac or Fannie Mae, which are bought from lenders and issued as pass-through securities.
Consumer durables
Consumer products that are expected to last three years or more, such as an automobile or a home appliance.
Consumer goods
Goods not used in production but, bought for personal or household use such as food, clothing, and entertainment.
Consumer Price Index
The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of US inflation. The US Department of Labor publishes the CPI every month.
Contrarian
An investment style that leads one to buy assets that have performed poorly and sell assets that have performed well. There are two possible reasons this strategy might work. The first is a mean-reversion argument; that is, if the asset has deviated from its usual level, it should eventually return to that usual level. The second reason has to do with overreaction. Investors might have overreacted to bad news sending the asset price lower than it should be.
Convertible bond
General debt obligation of a corporation that can be exchanged for a set number of common shares of the issuing corporation at a prestated conversion price.
Convertible preferred stock
Preferred stock that can be converted into common stock at the option of the holder. See also: participating convertible preferred stock.
Convex
Curved, as in the shape of the outside of a circle. Usually referring to the price/required yield relationship for option-free bonds.
Convexity
Property that a curve is above a straight line connecting two end points. If the curve falls below the straight line, it is called concave.
Corporate bonds
Debt obligations issued by corporations.
Correlation
Statistical measure of the degree to which the movements of two variables (stock/option/convertible prices or returns) are related. See: Correlation coefficient.
Cost basis
The original price of an asset, used to determine capital gains.
Cost of carry
Out-of-pocket costs incurred while an investor has an investment position. Examples include interest on long positions in margin account, dividend lost on short margin positions, and incidental expenses. Related: Net financing cost.
Coupon
The periodic interest payment made to the bondholders during the life of the bond.
Coupon bond
A bond featuring coupons that must be presented to the issuer in order to receive interest payments.
Coupon payments
A bond's interest payments.
Coupon rate
In bonds, notes, or other fixed income securities, the stated percentage rate of interest, usually paid twice a year.
Covered call
A short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.
Covered interest arbitrage
Occurs when a portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges the resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.
Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying. Related: Naked strategies
Covered option
Option position that is offset by an equal and opposite position in the underlying security. Antithesis of naked option.
Covered put
A put option position in which the option writer also is short the corresponding stock or has deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the option writer's risk because money or stock is already set aside. In the event that the holder of the put option decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put option.
Credit balance
The surplus in a cash account with a broker after purchases have been paid for, plus the extra cash from the sale of securities.
Covered position
Use of an option in a trading strategy in the underlying asset is already owned.
Credit quality
A measure of the likelihood of default. Rating agencies assign letter designations such as AAA, AA, and so forth.
Credit rating
An evaluation of an individual's or company's ability to repay obligations or its likelihood of not defaulting See: Creditworthiness.
Credit watch
A warning by a bond rating firm indicating that a company's credit rating may change after the current review is concluded.
Cross
Securities transaction in which the same broker acts as agent for both sides of the trade; a legal practice only if the broker first offers the securities publicly at a price higher than the bid.
Cross hedging
Applies to derivative products. Hedging with a futures contract that is different from the underlying being hedged. Use of a hedging instrument different from the security being hedged. Hedging instruments are usually selected to have the highest price correlation to the underlying.
Cumulative preferred stock
Preferred stock whose dividends accrue, should the issuer not make timely dividend payments. Related: Non-cumulative preferred stock.
Current account
Net flow of goods, services, and unilateral transactions (gifts) between countries.
Current assets
Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than 1 year.
Current liabilities
Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
Current ratio
Indicator of short-term debt-paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.
Current yield
For bonds or notes, the coupon rate divided by the market price of the bond.
CUSIP number
Unique number given to a security to distinguish it from other stocks and registered bonds. See: Committee on Uniform Securities Identification Procedures.
Custodian
Either (1) a bank, agent, trust company, or other organization responsible for safeguarding financial assets, or (2) the individual who oversees the mutual fund assets of a minor's custodial account.
Cyclical stock
Stock that tends to rise quickly when the economy turns up and fall quickly when
Daily price limit
The level at which many commodity, futures, and options markets are allowed to rise or fall in a day. Exchanges usually impose a daily price limit on each contract.
Date of record
Date on which holders of record in a firm's stock ledger are designated as the recipients of either dividends or stock rights.
Dated date
The date one uses to calculate accrued interest on various debt instruments, specifically bonds.
Dates convention
Treating cash flows as being received on exact dates-date 0, date 1, and so forth-as opposed to the end-of-year convention.
Day order
In the context of general equities, request from a customer to either buy or sell stock, that, if not canceled or executed the day it is placed, expires automatically. All orders are day orders unless otherwise specified. Traders often make calls before the opening to check for renewals.
Day trading
Establishing and liquidating the same position or positions within one day's trading.
Dealer
An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). Individual or firm acting as a principal in a securities transaction. Principals are market makers in securities, and thus trade for their own account and risk. Antithesis of broker. See: Agency.
Dealer market
Where trader's specializing in particular commodities buy and sell assets for their own accounts.
Debenture
Any debt obligation backed strictly by the borrower's integrity, e.g. an unsecured bond. A debenture is documented in an indenture.
Debt/equity ratio
Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity.
Debt service
Interest payment plus repayments of principal to creditors (retirement of debt).
Debt service coverage
The ratio of cash flow available to the borrower to the annual interest and principal payments on a loan or other debt.
Debt-service coverage ratio
Earnings before interest and income taxes, divided by interest expense plus the quantity of principal repayments divided by one minus the tax rate.
Deep-discount bond
A bond issued with a very low coupon or no coupon that sell at a price far below par value. A bond that has no coupon is called a zero-coupon bond.
Default
Failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture.
Default premium
A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.
Default risk
The risk that an issuer of a bond may be unable to make timely principal and interest payments. Also referred to as credit risk (as gauged by commercial rating companies).
Deferred interest bond
A bond that pays interest at a later date, usually in one lump sum, effectively reinvesting interest earned over the life of the bond. See: Zero coupon bond.
Deferred taxes
A non-cash expense that provides a source of free cash flow. Amount allocated during the period to cover tax liabilities that have not yet been paid.
Defined benefit plan
A pension plan obliging the sponsor to make specified dollar payments to qualifying employees. The pension obligations are effectively the debt obligation of the plan sponsor. Related: Defined contribution plan
Defined contribution plan
A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan
Deflation
Decline in the prices of goods and services. Antithesis of inflation.
Delisting
Removal of a company's security from listing on an exchange because the firm has not abided by specific regulations.
Delivery versus payment
A transaction in which the buyer's payment for securities is due at the time of delivery (usually to a bank acting as agent for the buyer) upon receipt of the securities. The payment may be made by bank wire, check, or direct credit to an account.
Depository Trust Company (DTC)
DTC is a user-owned securities depository that accepts deposits of eligible securities for custody, executes book-entry deliveries and records book-entry pledges of securities in its custody, and provides for withdrawals of securities from its custody. Central securities repository where stock and bond certificates are exchanged. Most of these exchanges now take place electronically, and few paper certificates actually change hands. The DTC is a member of the Federal Reserve System and is owned by most of the brokerage houses on Wall Street and the NYSE
Depreciation
A non-cash expense that provides a source of free cash flow. Amount allocated during the period to amortize the cost of acquiring long-term assets over the useful life of the assets.
Depression
Period when excess aggregate supply overwhelms aggregate demand, resulting in falling prices, unemployment problems, and economic contraction.
Derivative
A financial contract whose value is based on, or "derived" from, a traditional security (such as a stock or bond), an asset (such as a commodity), or a market index.
Devaluation
A decrease in the spot price of a currency. Often initiated by a government announcement.
Diamonds
Units of interest in the diamonds trust, a unit investment trust that serves as an index to the Dow Jones Industrial Average in that its holdings consist of the 30 component stocks of the Dow.
Dilution
Diminution in the proportion of income to which each share is entitled.
Direct placement
Selling a new issue not by offering it for sale publicly, but by placing it with one of several institutional investors.
Direct stock-purchase programs
Investors purchase securities directly from the issuer.
Dirty price
Bond price including accrued interest, i.e., the price paid by the bond buyer.
Dirty stock
A stock that fails to fulfill prerequisites to attain good delivery status.
Discount
Convertible: Difference between
gross parity and a given convertible price. Most often invoked when a
redemption is expected before the next coupon payment, making it liable for
accrued interest. Antithesis of premium.
General: Information that has already been taken into account and is built into
a stock or market.
Straight equity: Price lower than that of the last sale or inside market.
Discount bond
Debt sold for less than its principal value. If a discount bond pays no coupon, it is called a zero coupon bond.
Discount rate
The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.
Discount securities
Non-interest-bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., US Treasury bills.
Discount window
Facility provided by the Fed enabling member banks to borrow reserves against collateral in the form of governments or other acceptable paper.
Diversification
Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.
Dividend
A portion of a company's profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.
Dividend payout ratio
Percentage of earnings paid out as dividends.
Dividend rate
The fixed or floating rate paid on preferred stock based on par value.
Dividend Reinvestment Plan (DRP)
Automatic reinvestment of shareholder dividends in more shares of a company's stock, often without commissions. Some plans provide for the purchase of additional shares at a discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the long term using dollar cost averaging. The DRP is usually administered by the company without charges to the holder.
Dividend yield (Funds)
Indicated yield represents return on a share of a mutual fund held over the past 12 months. Assumes fund was purchased a year ago. Reflects effect of sales charges (at current rates), but not redemption charges.
Dividend yield (Stocks)
Indicated yield represents annual dividends divided by current stock price.
Dogs of the Dow
T 10 stocks of the 30 on the Dow Jones Industrial Average with the most depressed prices and consequently the highest yields. The investor buying these stocks speculates that they will bounce back over a one-year period.
Dollar-weighted rate of return
Also called the internal rate of return; the interest rate that makes the present value of the cash flows from all the subperiods in an evaluation period plus the terminal market value of the portfolio equal to the initial market value of the portfolio.
Domestic bonds
Bonds issued and traded within the internal market of a country and denominated in the currency of that country.
Domestic corporation
A corporation that is conducting business and is based in the country in which it is established, as opposed to a foreign corporation.
Double auction market
Systems by which listed securities are bought and sold through brokers on the securities exchanges, as distinguished from the OTC market, where trades are negotiated. Unlike the conventional auction with one auctioneer and many buyers, double auction markets consist of many sellers and many buyers.
Double witching day
A trading day when of two related classes of options and futures expire, resulting in a variety of arbitrage strategies to close out positions.
Dow Jones Industrial Average
The best known US index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including, stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest US companies are performing. There are hundreds of investment indexes around the world for stocks, bonds, currencies, and commodities.
Dow Theory
Used in the context of general equities. Technical theory that a major trend in the stock market must be confirmed by simultaneous movement of the Dow Jones Industrial Average and the Dow Jones Transportation Average to new highs or lows.
Downtick
Move down in a particular stock. On U.S. stock exchanges, you cannot sell a stock short on a downtick.
Due diligence
An internal audit of a target firm by an acquiring firm. Offers are often made contingent upon resolution of the due diligence process.
Duration
A common gauge of the price sensitivity of a fixed income asset or portfolio to a change in interest rates.
Duration matching strategy
An immunization technique that matches asset duration with the duration of the liabilities.
Dutch auction
Auction in which the lowest price necessary to sell the entire offering becomes the price at which all securities offered are sold. This technique has been used in Treasury auctions. Often used in risk arbitrage. Auction system in which the price of an item (stock) is gradually lowered until it meets a responsive bid (government T-bills) or offer (corporate repurchase) and is sold. In a corporate repurchase, a range of prices is set by the company within which shareholders are invited to tender their shares. The tender offer is open for a specific period of time (i.e., 20 days), and the quantity of stock to be purchased is stated as well, subject to proration if more shares are tendered than can be legally purchased under the stated terms (often an additional amount equal to 20% of outstanding shares can be purchased). The price paid is that at which the amount stated to be purchased can be sold. Compare to double auction system.
Earnings
Net income for the company during a period.
Earnings before interest after taxes (EBIAT)
A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of interest plus cash income taxes. Equivalent to EBIT minus cash taxes.
Earnings before interest and, taxes (EBIT)
A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of interest and income taxes.
Earnings before interest, taxes, and depreciation (EBITD)
A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of interest and income taxes. Depreciation expenses are not included in the costs.
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of interest and income taxes. Depreciation and amortization expenses are not included in the costs.
Earnings before taxes (EBT)
A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of income taxes.
Earnings momentum
An increase in the earnings per share growth rate from one reporting period to the next.
Earnings per share (EPS)
A company's profit divided by its number of outstanding shares. If a company earning $2 million in one year had $2 million shares of stock outstanding, its EPS would be $1 per share. In calculating EPS, the company often uses a weighted average of shares outstanding over the reporting term.
EDGAR
The Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.
Effective annual interest rate
An annual measure of the time value of money that fully reflects the effects of compounding.
Effective duration
The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsiveness of a bond's price-taking into account that expected cash flows will change as interest rates change due to the embedded option.
Effective tax rate
The net rate a taxpayer pays on income that includes all forms of taxes. It is
Efficient frontier
The combinations of securities portfolios that maximize expected return for any level of expected risk, or that minimizes expected risk for any level of expected return. Pioneered by Harry Markowitz.
Efficient Market Hypothesis
States that all relevant information is fully and immediately reflected in a security's market price, thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis exist: weak form (stock prices reflect all information on past prices), semistrong form (stock prices reflect all publicly available information), and strong form (stock prices reflect all relevant information including insider information).
Efficient portfolio
A portfolio that provides the greatest expected return for a given level of risk (i.e., standard deviation), or, equivalently, the lowest risk for a given expected return.
Elasticity of demand and supply
The degree of buyers' responsiveness to price changes. Elasticity is measured as the percent change in quantity divided by the percent change in price. A large value (greater than 1) of elasticity indicates sensitivity of demand to price, e.g., luxury goods. Goods with a small value of elasticity (less than 1) have a demand that is insensitive to price, e.g., food.
Embedded option
An option that is part of the structure of a bond that gives either the bondholder or the issuer the right to take some action against the other party, as opposed to a bare option, which trades separately from any underlying security.
Emerging markets fund
A mutual fund that invests primarily in countries with developing economies (that is, those that are becoming industrialized). Emerging markets funds tend to be more volatile than domestic stock funds due to currency fluctuation and political instability. Consequently, fund prices can fluctuate dramatically.
Employee Retirement Income Security Act (ERISA)
The law that regulates the operation of private pensions and benefit plans.
Employee stock fund
A firm-sponsored program that enables employees to purchase shares of the firm's common stock on a preferential basis.
Employee stock ownership plan (ESOP)
A company contributes to a trust fund that buys stock on behalf of employees.
Endowment
Gift of money or property to a specified institution for a specified purpose.
Equity
Ownership interest in a firm. Also, the residual dollar value of a futures trading account, assuming its liquidation is at the going trade price. In real estate, dollar difference between what a property could be sold for and debts claimed against it. In a brokerage account, equity equals the value of the account's securities minus any debit balance in a margin account. Equity is also shorthand for stock market investments.
Euro
Originally for a deposit outside one's home country but in the home country currency. This terminology is confusing now since the new European currency unit, also called the Euro, was introduced on January 1, 1999.
Euro CDs
CDs issued by a US bank branch or foreign bank located outside the US Almost all Euro CDs are issued in London.
Eurodollar obligations
Certificates of deposit issued in US dollars by foreign banks and foreign branches of US banks.
Eurobond
A bond that is (1) underwritten by an international syndicate, (2) issued simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country.
Eurodollar
Refers to a certificate of deposit in US dollars in a bank that is not located in the US Most of the Eurodollar deposits are in London banks, but Eurodeposits may be anywhere other than the US Similarly, a Euroyen or Euro DM deposit represents a CD in yen or DM outside Japan and Germany, respectively.
European Central Bank (ECB)
Bank created to monitor the monetary policy of the 11 countries that have converted to the Euro from their local currencies. The 11 countries are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
European option
Option that may be exercised only at the expiration date. Related: American option.
European Union (EU)
An economic association of European countries founded by the Treaty of Rome in 1957 as a common market for six nations. It was known as the European Community until January 1, 1994 and currently comprises 15 European countries. Its goals are a single market for goods and services without any economic barriers, and a common currency with one monetary authority.
Ex-dividend
This literally means "without dividend." The buyer of shares when they are quoted ex-dividend is not entitled to receive a declared dividend. It is the interval between the record date and the payment date during which the stock trades without its dividend-the buyer of a stock selling ex-dividend does not receive the recently declared dividend. Antithesis of cum dividend (with dividend).
Exchange rate
The price of one country's currency expressed in another country's currency.
Exchange Traded Funds
Also known as ETF. A basket of stocks similar to an index mutual fund. However, there are a number of important differences between ETFs and mutual funds. The ETF can be traded within the day, they can be shorted, purchased on margin and there even exists options on some ETFs.
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Expense ratio
The percentage of the assets that are spent to run a mutual fund (as of the last annual statement). This includes expenses such as management and advisory fees, overhead costs, and 12b-1 (distribution and advertising) fees. The expense ratio does not include brokerage costs for trading the portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of Additional Information (SAI). The SAI is available to shareholders on request. Neither the expense ratio nor the SAI includes the transactions costs of spreads, normally incurred in unlisted securities and foreign stocks. These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an Operating Expense Ratio (OER).
Expiration
The time an option contract lapses.
model, and the simple autoregressive model.
Fair market price
Amount at which an asset would change hands between two parties, that both have knowledge of the relevant facts. Also referred to as market price.
Fair value
In the context of futures, the equilibrium price for futures contracts. Also called the theoretical futures price, which equals the spot price continuously compounded at the cost of carry rate for some time interval. More generally, fair value for any asset simply refers to the perception that it is neither underpriced (too cheap) nor overpriced (too expensive).
Fairness opinion
An investment banker's professional opinion as to the price an acquiring firm is offering in a takeover or merger.
Family of funds
Different mutual funds offered by one investment company.
Fast market
Excessively rapid trading in a specific security that causes a delay in the electronic updating of its last sale and market conditions, particularly in options.
Federal agency bond
Fixed-income security issued by a government agency such as FNMA.
Federal agency securities
Securities issued by corporations and agencies created by the US government, such as the Federal Home Loan Bank Board and Ginnie Mae.
Federal Agricultural Mortgage Corporation (Farmer Mac)
A federal agency chartered in 1988 to provide a secondary market for farm mortgage loans.
Federal Deposit Insurance Corporation (FDIC)
A federal institution that insures bank deposits.
Federal funds rate
The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction of US interest rates. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate.
Federal Home Loan Banks
The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-ŕ-vis member commercial banks.
Federal Housing Administration (FHA)
Federally sponsored agency chartered in 1934 whose stock is currently owned by savings institutions across the United States. The agency buys residential mortgages that meet certain requirements, sells these mortgages in packages, and insures the lenders against loss.
Federal Housing Finance Board (FHFB)
US government agency chartered in 1989 to assume the responsibilities formerly held by the Federal Home Loan Bank system.
Federal National Mortgage Association (Fannie Mae)
A publicly owned, government-sponsored corporation chartered in 1938 to purchase mortgages from lenders and resell them to investors. Known by the nickname Fannie Mae, it packages mortgages backed by the Federal Housing Administration, but also sells some nongovernment-backed mortgages.
Federal Open Market Committee (FOMC)
The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System.
Federal Reserve Bank
One of the 12 member banks constituting the Federal Reserve System that is responsible for overseeing the commercial and savings banks of its region to ensure their compliance with regulation.
Federal Reserve Board (FRB)
The seven-member governing body of the Federal Reserve System, which is responsible for setting reserve requirements, and the discount rate, and making other key economic decisions.
Federal Reserve notes
Issues by the US government to the public through the Federal Reserve Banks and their member banks. They represent money owed by the government to the public. Currently, the item "Federal Reserve notes amounts outstanding" consists of new series issues. The Federal Reserve note is the only class of currency currently issued.
Federal Reserve System
The monetary authority of the US, established in 1913, and governed by the Federal Reserve Board located in Washington, D.C. The system includes 12 Federal Reserve Banks and is authorized to regulate monetary policy in the US as well as to supervise Federal Reserve member banks, bank holding companies, international operations of US banks, and US operations of foreign banks.
Fedwire
A wire transfer system for high-value payments operated by the Federal Reserve System.
Fee-based compensation
Payment to a financial adviser of a set hourly rate, or an agreed-upon percentage of assets under management, for a financial plan. When the plan is implemented, the adviser may also receive commission on some or all of the investment products purchased, which would be fee-and-commission compensation.
Fee-only compensation
Payment to a financial adviser of a set hourly rate, or an agreed-upon percentage of assets under management, for a financial plan.
Fiduciary
One who must act for the benefit of another party.
Financial Accounting Standards Board (FASB)
Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP).
Financial intermediaries
Institutions that provide the market function of matching borrowers and lenders or traders.
Financial planning
Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against that plan.
Fiscal year (FY)
Accounting period covering 12 consecutive months over which a company determines earnings and profits. The fiscal year serves as a period of reference for the company and does not necessarily correspond to the calendar year.
Fixed asset
Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition.
Fixed annuities
Contracts in which an insurance company or issuing financial institution pays a fixed dollar amount of money per period.
Fixed exchange rate
A country's decision to tie the value of its currency to another country's currency, gold (or another commodity), or a basket of currencies.
Fixed income instruments
Assets that pay a fixed dollar amount, such as bonds and preferred stock.
Float
Currency: Exchange rate policy that
does not limit the range of the market rate.
Equities: Number of shares of a corporation that are outstanding and available
for trading by the public, excluding insiders or restricted stock on a
when-issued basis. A stock's volatility is inversely correlated to its float.
Floater
A bond whose interest rate varies with the interest rate of another debt instrument, e.g., a bond that has the interest rate of the Treasury bill +.25%.
Floating debt
Short-term debt that is renewed and refinanced constantly to fund capital needs of a firm or institution.
Floating exchange rate
A country's decision to allow its currency value to change freely. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market.
Floor broker
Member of an exchange who is an employee of a member firm and executes orders, as agent, on the floor of the exchange for clients.
Floor trader
A stock exchange member who generally trades only for his own account or for an account controlled by him, or who has such a trade made for him. Also referred to as a "local."
Flower bond
Government bonds that when owned at the time of death are acceptable at par in payment of federal estate taxes.
Form 8-K
The form required by the SEC when a publicly held company incurs any event that might affect its financial situation or the share value of its stock.
Form 4
The form required by the SEC for a change in the holdings of an individual owning 10% or more of the outstanding stock or in the holdings of a company officer.
Form T
The form required by the NASD to report equity transactions after the market's regular hours.
Form 10-K
A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information.
Form 3
A form required by the SEC and the stock exchange from all holders of 10% or more of a company's stock and all directors and officers, which details securities owned.
Forward contract
A contract that specifies the price and quantity of an asset to be delivered on in the future. Forward contracts are not standardized and are not traded on organized exchanges
Forward delivery
A transaction in which the settlement will occur on a specified date in the future at a price agreed upon on the trade date.
Forward interest rate
Interest rate fixed today on a loan to be made at some future date.
Freddie Mac (Federal Home Loan Mortgage Corporation)
A Congressionally chartered corporation that purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and securities these mortgages for sale in the capital markets.
Free cash flows
Cash not required for operations or
for reinvestment. Often defined as earnings before interest (often obtained
from the operating income line on the income statement) less capital
expenditures less the change in working capital. In terms of a formula:
Free cash flows =
Sales (Revenues from operations)
- COGS (Cost of goods sold-labor, material, book depreciation)
- SG&A (Selling, general administrative costs)
EBIT (Earnings before interest and taxes or Operating Earnings)
- Taxes (Cash taxes)
EBIAT (Earnings before interest after taxes)
+ DEP (Book depreciation)
- CAPX (Capital expenditures)
- ChgWC (Change in working capital)
C (Free cash flows)
There is an issue as to whether you want to define the FCFs to the firm as a
whole (the cash flow to all of its security holders), or the FCFs only to the
firm's equity holders. For firm valuation, you want the former; for stock
valuation you want the latter.
To value the firm, calculate the stream of FCFs to the firm and discount this stream by the firm's WACC (Weighted average cost of capital). This will give you the value of a levered firm, including the tax benefits of debt financing. Alternatively, you can discount the firm's FCFs by its unlevered cost of capital and add separately the present value of the tax benefits.
To value the firm's equity, you can either take the above number and subtract the market value of all outstanding debt (liabilities) or you can calculate the FCFs to the firm's equity holders and discount this stream by the firm's levered equity cost of capital. [Definition and discussion courtesy of Professor Michael Bradley.]
Front-end load
The fee applied to an investment at the time of initial purchase, e.g., on a mutual fund purchased from a broker or mutual fund company.
Front running
Entering into options or futures contracts with advance knowledge of a block transaction that will influence the price of the underlying security to capitalize on the trade. This practice is expressly forbidden by the SEC.
Full faith-and-credit obligations
The security pledges for larger municipal bond issuers, such as states and large cities that have diverse funding sources.
Fully diluted earnings per shares
Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.
Fund assets
The total value of a portfolio's securities, cash, and other holdings, minus any outstanding debts.
Fund family
Set of funds with different investment objectives offered by one management company. In many cases, investors may move their assets from one fund to another within the family at little or no cost.
Fund of funds
A mutual fund or hedge fund that invests in other funds.
Fund manager
The person whose responsibility it is to oversee the allocation of the pool of money invested in a particular mutual fund. The fund manager is charged with investing the money to attain the returns and level of risk of the mutual fund investors.
Fundamental analysis
Security analysis that seeks to detect misvalued securities through an analysis of the firm's business prospects. Research often focuses on earnings, dividend prospects, expectations for future interest rates, and risk evaluation of the firm. Antithesis of technical analysis. In macroeconomic analysis, information such as interest rates, GNP, inflation, unemployment, and inventories is used to predict the direction of the economy, and therefore the stock market. In microeconomic analysis, information such as balance sheet, income statement, products, management, and other market items is used to forecast a company's imminent success or failure, and hence the future price action of the stock.
Funded pension plan
A pension plan in which all liabilities, including payments to be made to pensioners in the immediate future, are completely funded.
Futures contract
A legally binding agreement buy or sell a commodity or financial instrument in a designated future month at a price agreed upon today by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option because an option is the right to buy or sell, while a futures contract is the promise to actually make a transaction. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying investment.
Futures market
A market where contracts for future delivery of a commodity or a security are bought or sold.
Futures option
An option on a futures contract. Related: Options on physicals.
Futures price
The price at which parties to a futures contract agree to transact upon the settlement date.
Future value
The amount of cash at a specified date in the future that is equivalent in value to a specified sum today.
General account
Federal Reserve Board's term for a margin account provided to a customer by a brokerage firm. Governed by Regulation T of the FED.
General obligation bonds
Municipal securities secured by the issuer's pledge of its full faith, credit, and taxing power.
Ginnie Mae pass-through
A security guaranteed by the Government National Mortgage Association that is backed by a collection of mortgages, in which the investor receives the interest and principal payments of participating homeowners.
Glass-Steagall Act
1933 legislation prohibiting commercial banks to own, underwrite, or deal in corporate stock and corporate bonds.
Global bonds
Bonds designed to qualify for immediate trading in any domestic capital market and in the Euromarket.
Global fund
A mutual fund that can invest anywhere in the world, including the U.S.
Going private
When publicly owned stock in a firm is replaced with complete equity ownership by a private group. The firm is delisted on stock exchanges and can no longer be purchased in the open markets.
Going public
When a private company first offers shares to the public market and investors. See: IPO.
Gold standard
An international monetary system in which currencies are defined in terms of their gold content, and payment imbalances between countries are settled in gold. It was in effect from about 1870 to 1914.
Golden parachute
Compensation paid to top-level management by a target firm if a takeover occurs.
Good 'til cancelled order (GTC)
An order to buy or sell stock that is good until you execute or cancel it. Brokerages usually set a limit of 30-60 days, at which the G.T.C. order expires if not restated. (Different from a day order.)
Government National Mortgage Association (Ginnie Mae)
A wholly owned U.S. government corporation within the Department of Housing & Urban Development. Ginnie Mae guarantees the timely payment of principal and interest on securities issued by approved servicers that are collateralized by FHA-issued, VA-guaranteed, or Farmers Home Administration (FmHA)-guaranteed mortgages.
Gross domestic product (GDP)
The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S. residents and corporations overseas.
Group of Eight (G-8)
The G-7 countries plus Russia.
Group of Five (G-5)
The five leading countries (France, Germany, Japan, the U.K., and the U.S.) that meet periodically to achieve some cooperative effort on international economic issues. When currency issues are discussed, the monetary authorities of these nations hold the meeting.
Group of Seven (G-7)
The G-5 countries plus Canada and Italy.
Group of Ten
A group of the ten major industrialized countries whose mission is to create a more stable world economic trading environment through monetary and fiscal policies. The ten are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States.
Growth fund
A mutual fund that invests primarily in stocks with a history of and future potential for capital gains.
Growth and income fund
A mutual fund that invests primarily in stocks with a history of capital gains (growth) and consistent dividend payments (income).
Growth manager
A money manager who seeks to buy stocks that typically sell at relatively high P/E ratios due to high earnings growth, with the expectation of continued high or higher earnings growth.
Guaranteed investment contract (GIC)
A pure investment product in which a life company agrees, for a single premium, to pay at a maturity date the principal amount of a predetermined annual crediting (interest) rate over the life of the investment.
Guaranteed Mortgage Certificates (GMC)
First issued by Freddie Mac in 1975, G.M.C.s, like PCs, represent undivided interest in specified conventional whole loans and participations previously
Hard dollars
Actual separate payments made by a customer for services, including research, provided by a brokerage firm. Antithesis of soft dollars.
Head & shoulders
In technical analysis, a pattern that results where a stock price reaches a peak and declines; rises above its former peak and again declines; and rises a third time but not to the second peak, and then again declines. The first and third peaks are shoulders, while the second peak is the formation's head. Technical analysts generally consider a head and shoulders formation to be a very bearish indication.
Hedge
A transaction that reduces the risk of an investment.
Hedge fund
A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks according to a valuation model.
Hedge ratio (delta)
For options, ratio between the change in an option's theoretical value and the change in price of the underlying stock at a given point in time. For convertibles, percentage of a convertible bond representing the number of underlying common shares sold against the shares into which bonds are convertible. If a preferred is convertible into 2000 common shares, a 75% hedge ratio would be short (long) 1500 common for every 1000 preferred long (short). See: Delta.
Hedged portfolio
A portfolio consisting of a long position in the stock and a long position in the put option on the stock, so as to be riskless and produce a return that equals the risk-free interest rate.
Hedging
A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss.
High-grade bond
A bond with Triple-A or Double-A rating in Standard & Poor's, or Moody's rating system.
High-yield bond
See: Junk bond
Holding company
A corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.
Horizon matching strategy
An income immunization strategy that cash-matches over the next few years and duration-matches the rest.
Hostile takeover
A takeover of a company against the wishes of the current management and the board of directors by an acquiring company or raider.
Housing bond
Bonds issued by a local housing authority to finance housing projects.
Hybrid security
A convertible security whose optioned common stock is trading in a middle range, causing the convertible security to trade with the characteristics of both a fixed income security and a common stock instrument.
I-bonds
Treasury savings bonds with a 30-year maturity indexed to account for inflation.
Identified shares
Stock or mutual fund whose purchase date and price may be identified for capital gains and tax purposes when shares sold.
Illiquid
In the context of finance. absence of cash flow needed to fulfill financial debts and meet obligations. In the context of investments, describes a lightly traded investment such as a stock or bond that is not easily converted into cash.
Imbalance of orders
Used for listed equity securities. Too many market orders of one kind-buy or to sell or limit orders to buy up or sell down, without matching orders of the opposite kind. An imbalance usually follows a dramatic event such as a takeover, research recommendation, or death of a key executive, or a government ruling that will significantly affect the company's business. If it occurs before the stock exchange opens, trading in the stock is delayed. If it occurs during the trading day, the specialist halts and then suspends trading (with floor governor's approval) until enough matching orders can be found to make an orderly market.
Immunization
The construction of an asset and a liability match that benefits from offsetting changes in value.
In between
Used in the context of general equities. Priced higher than the bid price but lower than the offer price. See: In the middle
In-the-money
A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in the money by $0.50 an ounce. Related: Put. Related: deep-in-the-money. Antithesis of out-of-the-money.
In play
Often used in risk arbitrage. Company that has become the target of a takeover, and whose stock has now become a speculative issue.
Income beneficiary
One who receives income from a trust.
Income fund
A mutual fund that seeks to provide to liberal current income from investments.
Independent auditor
A certified public accountant operating outside the company who can provide an accountant's opinion.
Index
Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Indexes measure the ups and downs of stock, bond, and some commodities markets, in terms of market prices and weighting of companies the index.
Index arbitrage
An investment/trading strategy that exploits divergences between actual and theoretical futures prices. An example is the simultaneous buying (selling) of stock index futures (i.e., S&P 500) while selling (buying) the underlying stocks of that index, capturing as profit the temporarily inflated basis between these two baskets. Often, the point at which profitability exists is expressed at the block call as the number of points the future must be over or under the underlying basket for an arbitrage opportunity to exist. See: Program trading.
Index fund
Investment fund designed to match the returns on a stock market index. Mutual fund whose portfolio matches that of a broad-based index such as the S&P 500 and whose performance therefore mirrors the market as represented by that index.
Index futures
A futures contract on an index (such as a foreign stock index) in the futures market.
Index swap
A swap of a market index for some other asset, such as a stock-for-stock or debt-for-stock swap.
Indexed bond
Bond whose payments are linked to an index, e.g., the consumer price index.
Indicated dividend
Total amount of dividends that would be paid on a share of stock over the next 12 months if each dividend were the same amount as the most recent dividend. Usually represented by the letter "e" in stock tables.
Indicated yield
The yield, based on the most recent quarterly rate times four. To determine the yield, divide the annual dividend by the price of the stock. The resulting number is represented as a percentage. See: Dividend yield.
Individual Retirement Account (IRA)
A retirement account that may be established by an employed person. IRA contributions are tax deductible according to certain guidelines, and the gains in the account are tax-deferred.
Individual Retirement Account (IRA) rollover
A provision of the law governing IRA's that enables a retiree or anyone receiving a lump-sum payment from a pension, profit-sharing, or salary reduction plan to transfer the amount into an IRA.
Industrial revenue bond (IRB)
A bond issued by local government agencies on behalf of corporations.
Inflation
The rate at which the general level of prices for goods and services is rising.
Inflation-indexed securities
Securities such as bonds or notes that guarantee a return higher than the rate of inflation if the security is held to maturity.
Initial filing
Has various meanings. It could refer to a form that is filed with the Securities and Exchange Commission in advance of a major event, such as a public offering or a share repurchase. It could also refer to filings that occur before legal inside transactions.
Initial margin requirement
When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the Board of Governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange.
Initial public offering (IPO)
A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept considerable risks for the possibility of large gains. IPOs by investment companies (closed-end funds) usually include underwriting fees that represent a load to buyers.
Insider information
Material information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.
Insider trading
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.
Insiders
These are directors and senior officers of a corporation-in effect, those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.
Instinet (Institutional Networks Corporation)
Computerized subscriber service that serves as a vehicle for the fourth market. "Instinet" is registered with the SEC As a stock exchange it numbers among its subscribers a large number of mutual funds and other institutional investors linked to each other by computer terminals. The system permits subscribers to display bids and offers (which are exposed system wide for whatever length of time the initiating party specifies) and to consummate trades electronically. Instinet is largely used by market makers, but, nonmarket makers and customers have equal access.
Institutional broker
A broker who buys and sells securities for institutional investors such as banks, and mutual funds, pensions.
Institutional investors
Organizations that invest, including insurance companies, depository institutions,
Insured bond
A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies.
Interest-only strip (IO)
A security based solely on the interest payments from a pool of mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop, and the value of the IO falls to zero.
Interest rate risk
The chance that a security's value will change due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk: The risk that spread income will suffer because of a change in interest rates.
Interest rate swap
A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable.
Internal growth rate
Maximum rate a firm can expand without outside sources of funding. Growth generated by cash flows retained by company.
Internal rate of return (IRR)
Dollar-weighted rate of return. Discount rate at which net present value (NPV) investment is zero. The rate at which a bond's future cash flows, discounted back to today, equal its price.
International fund
A mutual fund that can invest only outside the United States.
International Monetary Fund (IMF)
An organization founded in 1944 to oversee exchange arrangements of member countries and to lend foreign currency reserves to members with short-term balance of payment problems.
Intraday
Term meaning "within the day," often to refer to the high and the low price of a stock.
Inverse floater
A derivative instrument whose coupon rate is linked to the market rate of interest in an inverse relationship.
Inverse floating-rate note
A variable-rate security whose coupon rate increases as a benchmark interest rate declines.
Inverted yield curve
When short-term interest rates are higher than long-term rates. Antithesis of positive yield curve.
Investment adviser
A person or an organization that makes the day-to-day decisions regarding a portfolio's investments. Also called a portfolio manager.
Investment Advisers Act
Legislation passed in 1940 requiring financial advisers to register with the Securities and Exchange Commission. The measure was enacted to protect the public from fraud or misrepresentation by investment advisers.
Investment bank
Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. See: Underwriters.
Investment club
A group of people who combine their money into a larger pool, then invest collectively in stocks and bonds, making decisions as a group.
Investment company
A firm that that invests the funds of investors in securities appropriate for their stated investment objectives in return for a management fee. See also: Mutual fund.
Investment Company Act of 1940
Legislation that requires investment companies to register with the SEC and that
Investment-grade bonds
A bond that is assigned a rating in the top four categories by commercial credit rating companies. S&P classifies investment-grade bonds as BBB or higher, and Moody's classifies investment grade bonds as Baa or higher. Related: High-yield bond.
Investment policy
Statement of objectives and constraints for an individual's or organization's approach.
Investment trust
A closed-end fund regulated by the Investment Company Act of 1940. These funds have a fixed number of shares that are traded on the secondary markets, like corporate stock. The market price may exceed the net asset value per share, in which case shares are selling at a premium. When the market price falls below the (NAV)/share, shares are selling at a discount. Many closed-end funds are of a specialized nature; the portfolio represents a particular industry or, country. These funds are usually listed on US and foreign exchanges.
Investor relations
The process by which the corporation communicates with its investors.
IRA/Keogh accounts
Special accounts that allow saving taxes deferred until money is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of contributions. Withdrawals of tax-deferred contributions are taxed as income, including the capital gains from such accounts.
Irredeemable bond
A bond lacking a call feature or a right of redemption. Also refers to a perpetual bond.
Irrational call option
The implied call imbedded in a MBS. Irrational because the call is sometimes not exercised when it is in the money (interest rates are below the threshold to refinance), and sometimes exercised when it is not in the money. Option exercise like this affects payments on the MBS.
Issuer
An entity that puts a financial asset in the marketplace.
January effect
Refers to the historical pattern that stock prices rise in the first few days of January. Studies have suggested this holds only for small-capitalization stocks. In recent years, there is less evidence of a January effect.
Joint tenants with right of survivorship
In the case of a joint account, on the death of one account holder, ownership of the account assets is transferred to the remaining account holder or holders.
Joint venture
An agreement between two or more firms to undertake the same business strategy and plan of action.
Jumbo certificate of deposit
A certificate of deposit in increments of $100,000.
Jumbo loan
Loans of $1 billion or more. Or, loans that exceed the statutory size limit eligible for purchase or securitization by the federal agencies.
Junior debt (subordinate debt)
Debt whose holders have a claim on the firm's assets only after senior debtholder's claims have been satisfied. Subordinated debt.
Junk bond
A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower. Junk or high-yield bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poors and Moody's Investor Services, provide the rating systems for companies' credit.
Keogh plan
A type of pension account in which taxes are deferred. Available to those who are self-employed.
Key man (or woman) insurance
A life insurance policy purchased by a company to insure the life of a key executive. The company is the beneficiary in case of the executive's death.
Ladder strategy
A bond portfolio construction strategy that invests approximately equal amounts in every maturity within a given range.
Large-cap
A stock with a high level of capitalization, usually at least $5 billion market value.
Lagging indicators
Economic indicators that follow rather than precede the country's overall pace of economic activity. See also: Leading indicators and coincident indicators.
Lead manager
The commercial or investment bank with the primary responsibility for organizing syndicated bank credit or bond issued. The lead manager recruits additional lending or underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions.
Lead underwriter
The head of a syndicate of financial firms that are sponsoring an initial public offering of securities or a secondary offering of securities. Could also apply to bond issues.
Leading indicator
A change in a measurable economic factor that is evident before the economy starts to follow a specific trend.
Lehman Brothers Adjustable-Rate Mortgage Index
A benchmark index that includes all agency-guaranteed securities with coupons that periodically adjust based on a spread over a published index.
Lehman Brothers Corporate Bond Index
A benchmark index that includes all publicly issued, fixed-rate, nonconvertible, dollar-denominated, SEC-registered, investment-grade corporate debt.
Lehman Brothers Government Bond Index
A benchmark index made up of the Treasury Bond Index and the Agency Bond Index as well as the 1-3 Year Government Index and the 20+ Year Treasury Index.
Lehman Brothers Government/Corporate Bond Index
A benchmark index made up of the Lehman Brothers® Government and Corporate Bond indexes, including U.S. government Treasury and agency securities as well as corporate and Yankee bonds.
Lehman Brothers Mortgage-Backed Securities Index
A benchmark index that includes 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA).
Lehman Brothers Municipal Bond Index
A benchmark index that includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million.
Letter of credit (LOC)
A form of guarantee of payment issued by a bank on behalf of a borrower that assures the payment of interest and repayment of principal on bond issues.
Leverage
The use of debt financing, or property of rising or falling at a proportionally greater amount than comparable investments. For example, an option is said to have high leverage compared to the underlying stock because a given price change in the stock may result in a greater increase or decrease in the value of the option.
Leveraged buyout (LBO)
A transaction used to take a public corporation private that is financed through debt such as bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment-grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.
Leveraged company
A company that has debt in its capital structure.
Limit order
An order to buy a stock at or below a specified price, or to sell a stock at or above a specified price. For instance, you could tell a broker "buy me 100 shares of XYZ Corp at $8 or less" or "sell 100 shares of XYZ at $10 or better" The customer specifies a price, and the order can be executed only if the market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse unexpected price changes.
Limit price
See: Maximum price fluctuation
Liquid market
A market allowing the buying or selling of large quantities of an asset at any time and at low transactions costs.
Listed security
Stock or bond that has been accepted for trading by one of the organized and registered securities exchanges in the United States. Generally, the advantages of being listed are that exchanges provide: (1) an orderly marketplace; (2) liquidity; (3) fair price determination; (4) accurate and continuous reporting on sales and quotations; (5) information on listed companies; and (6) strict regulation for the protection of securityholders. Antithesis of OTC Security.
Living trust
A trust that an individual establishes during the individual's lifetime, enabling the person to control the assets contributed to the trust. Also known as an inter vivos trust.
Living will
A document specifying the kind of medical care a person wants-or does not want-in the event of terminal illness or incapacity.
Load
The sales fee charged to an investor when shares are purchased in a load fund or annuity. See: Bank-end load; front-end load; level load.
Load fund
A mutual fund that sells shares with a sales charge-typically 4% to 8% of the net amount indicated. Some no-load funds also levy distribution fees permitted by Article 12b-1 of the Investment Company Act; these are typically 0. 25%. A true no-load fund has neither a sales charge nor
Loan syndication
Group of banks sharing a loan. See: Syndicate.
London Interbank Offered Rate (LIBOR)
The rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the US are based on spreads off LIBOR. By contrast with the bid rate LIBID quoted by banks seeking such deposits.
Long
One who has bought a contract to establish a market position and who has not yet closed out this position through an offsetting sale; the opposite of short.
Long bonds
Bonds with a long current maturity. The "long bond" is the 30-year US Treasury bond.
Long coupons
(1) Bonds or notes with a long current maturity. (2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.
Long-term forward contracts
Contracts that state exchange rate at which a specified amount of a particular currency can be exchanged at a future date (more than one year from today).
Long straddle
Taking a long position in both a put and a call option.
Long-term
In accounting terms, one year or longer.
Long-Term Anticipation Securities (LEAPS)
Long-term options.
Low grade
A bond with a rating of B or lower.
Macroeconomics
Analysis of a country's economy as a whole.
Maintenance call
A call for additional money or securities when a margin account falls below its exchange-mandated required level.
Maintenance margin requirement
A sum, usually smaller than but part of the original margin, that must be maintained on deposit at all times. If a customer's equity in any futures position drops to or below, the maintenance margin level, the broker must issue a margin call for the amount at money required to restore the customer's equity in the account to the original margin level. Related: Margin, margin call.
Make a market
Dealers are said to make a market when they quote bid and offered prices at which they stand ready to buy and sell.
Margin
Allows investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of a stock and the loan a broker makes. Related: Security deposit (initial).
Margin account (stocks)
A leverageable account in which stocks can be purchased for a combination of cash and a loan. The loan in the margin account is collateralized by the stock; if the value of the stock drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin rules are federally regulated, but margin requirements and interest may vary among broker/dealers.
Margin trading
Buying securities, in part, with borrowed money.
Marginal tax rate
The tax rate that would have to be paid on any additional dollars of taxable income earned.
Margin call
A demand for additional funds because of adverse price movement. Maintenance margin requirement, security deposit maintenance.
Marital trust
A trust created to allow one spouse to transfer, during life or upon death, an unlimited amount of property to his/her spouse without incurring gift or estate tax.
Marked-to-market
An arrangement whereby the profits or losses on a futures contract are settled each day.
Market capitalization
The total dollar value of all outstanding shares. Computed as shares times current market price. Capitalization is a measure of corporate size.
Market index
Market measure that consists of weighted values of the components that make up certain list of companies. A stock market tracks the performance of certain stocks by weighting them according to their prices and the number of outstanding shares by a particular formula.
Market maker
Used in the context of general equities. One who maintains firm bid and offer prices in a given security by standing ready to buy or sell round lots at publicly quoted prices. See: Agent, dealer, specialist.
Market portfolio
A portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets.
Market sectors
The classifications of bonds by issuer characteristics, such as state government, corporate, or utility.
Market timing
Asset allocation in which investment in the equity market is increased if one forecasts that the equity market will outperform T-bills and is decreased when the market is anticipated to underperform.
Market value
(1) The price at which a security is trading and could presumably be purchased or sold. (2) What investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.
Marking to market
Settling or reconciling changes in the value of futures contracts on a daily basis. Also refers to the practice of reporting the value of assets on a market rather than book value basis.
Maturity date
Usually used for bonds. Date that the bond finishes and is paid off. Date on which the principal amount of a note, draft, acceptance, bond, or other debt instrument becomes due and payable.
Medium-term note
A corporate debt instrument that is continuously offered to investors over a period of time by an agent of the issuer. Investors can select from maturity bands of: 9 months to 1 year, more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.
Merger
(1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies. The firm's activity in this respect is sometimes called M&A (Merger and Acquisition)
Microeconomics
Analysis of the behavior of individual economic units such as companies, industries, or households.
Mid cap
A stock with a capitalization usually between $1 billion and $5 billion.
Mid-cap SPDRs
This is the same as a SPDR except the index it tracks is Standard&Poor's Mid-cap 400. This SPDR also trades on the AMEX, under the symbol MDY.
Midmarket
Price around which a market maker derives bid and asked prices.
Minority interest
An outside ownership interest in a subsidiary that is consolidated with the parent
Modern portfolio theory
Principals underlying the analysis and evaluation of rational portfolio choices based on risk-return trade-offs and efficient diversification.
Modified duration
The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.
Momentum
The amount of acceleration of an economic, price, or volume movement. A trader that follows a movement strategy will purchase stocks that have recently risen in price.
M-1, M-2 and M-3
See: money supply.
Monetary policy
Actions taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates.
Money market
Money markets are for borrowing and lending money for three years or less. The securities in a money market can be U.S.government bonds, Treasury bills and commercial paper from banks and companies.
Money supply
M1-A: Currency plus demand deposits
M1-B: M1-A plus other checkable deposits.
M2: M1-B plus overnight repos, money market funds, savings, and small (less than $100M) time deposits.
M3: M-2 plus large time deposits and term repos.
L: M-3 plus other liquid assets.
Monopoly
Absolute control of all sales and distribution in a market by one firm, due to some barrier to entry of other firms, allowing the firm to sell at a higher price than the socially optimal price.
Monte Carlo simulation
An analytical technique for solving a problem by performing a large number of trail runs, called simulations, and inferring a solution from the collective results of the trial runs. Method for calculating the probability distribution of possible outcomes.
Moody's investors service
A security and bond rating agency publishing six bound manuals and a common stock handbook annually.
Morningstar rating system
A system used in rating mutual funds and annuity by Morningstar Incorporated of Chicago.
Mortgage-backed securities (MSBs)
Securities backed by a pool of mortgage loans.
Mortgage pass-through security
Also called a passthrough, a security created when one or more mortgage holders form a collection (pool) of mortgages and sells shares or participation certificates in the pool. The cash flow from the collateral pool is "passed through" to the security holder as monthly payments of principal, interest, and prepayments. This is the predominant type of MBS traded in the secondary market.
Mortgage pool
A group of mortgages with similar class, interest rate, and maturity characteristics.
Moving average
Used in charts and technical analysis, the average of security or commodity prices constructed in a period as short as a few days or as long as several years and showing trends for the latest interval. As each new variable is included in calculating the average, the last variable of the series is deleted.
Multiplier
The investment multiplier which quantifies the overall effects of investment spending on total income. The deposit multiplier which shows the effects of a change in bank deposits on the total amount of outstanding credit and the money supply.
Municipal bond
State or local governments offer muni bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.
Municipal bond insurance
An insurance policy which guarantees payment on municipal bonds in the event of default .
Municipal bond fund
A mutual fund that invests in tax-exempt bonds issued by state, city, and/or local governments. The interest obtained from these bonds is passed through to shareholders and is generally free of federal (and sometimes state and local) income taxes.
Municipal notes
Short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a bond issue, or other revenues.
Municipal revenue bond
A bond issued to finance a public project that is funded by the revenues of the project.
Mutual fund
Mutual funds are pools of money that are managed by an investment company. They offer investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest in companies that are growing at a rapid pace. Funds can impose a sales charge, or load, on investors when they buy or sell shares. Many funds these days are no load and impose no sales charge. Mutual funds are investment companies regulated by the Investment Company Act of 1940. Related: open-end fund, closed-end fund.
Mutual fund cash-to-assets ratio
The portion of the assets of a mutual fund which exists in cash instruments.
National Association of Securities Dealers (NASD)
Nonprofit organization formed under the joint sponsorship of the investment bankers' conference and the SEC to comply with the Maloney Act, which provides for the regulation of the OTC market.
National Association of Securities Dealers Automatic Quotation System (Nasdaq)
An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the OTC market. About 4000 common stock issues are included in the Nasdaq system.
National bank
A commercial bank approved by the U.S. Comptroller of the Currency, which is required to be a member of and purchase stocks in the Federal Reserve System.
Negative amortization
A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.
Negative convexity
A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. For example, a fixed-rate mortgage may lose value as rates go down because of prepayments.
Net asset value (NAV)
The value of a fund's investments. For a mutual fund, the net asset value per share usually represents the fund's market price, subject to a possible sales or redemption charge. For a closed-end fund, the market price may vary significantly from the net asset value.
Net present value (NPV)
The present value of the expected future cash flows minus the cost.
New issue
Securities that are publicly offered for the first time, whether in an IPO or as an additional issue of stocks or bonds by a company that is already public.
New York Stock Exchange (NYSE)
Also known as the Big Board or the Exchange.
NYSE composite index
Composite index covering price movements of all new world common stocks listed on the New York Stock Exchange. It is based on the close of the market on December 31, 1965, at a level of 50.00, and is weighted according to the number of shares listed for each issue. Print changes in the index are converted to dollars and cents so as to provide a meaningful measure of changes in the average price of listed stocks. The composite index is supplemented by separate indexes for four industry groups: industrial, transportation, utility, and finance.
No-load mutual fund
An open-end investment company whose shares are sold without a sales charge. There can be other distribution charges, however, such as Article 12B-1 fees. A true no-load fund has neither a sales charge nor a distribution fee.
Nonpublic information
Information about a company that is not known by the general public, which will have a definite impact on the stock price when released. See: Insider trading.
Offer
Indicates a willingness to sell at a given price. Related: Bid.
Open interest
The total number of derivatives contracts traded that have not yet been liquidated either by an offsetting derivative transaction or by delivery. Related: Liquidation.
Operating expenses
The amount paid for asset maintenance or the cost of doing business. Earnings are distributed after operating expenses are deducted.
Opportunity costs
The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. When not all desired trades can be implemented. Most valuable alternative that is given up.
Option
Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Buyers of call options bet that a stock will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the stock's price will drop below the price set by the option. An option is part of a class of securities called derivatives, which means these securities derive their value from the worth of an underlying investment.
Option-adjusted spread (OAS)
(1) The spread over an issuer's spot rate curve, developed as a measure of the yield spread that can be used to convert dollar differences between theoretical value and market prices. (2) The cost of the implied call embedded in an MBS, defined as additional basis-yield spread. When added to the base yield spread of an MBS without an operative call produces the option-adjusted spread.
Option premium
The option price.
Original Issue Discount securities (OIDS)
Bonds on which the coupon rate is set considerably below the yield to maturity at the time of issuance so that the bonds are issued at a discount from a par value.
OTC Bulletin Board
An electronic quotation listing of the bid and asked prices of OTC stocks that do not meet the requirements to be listed on the NASDAQ stock-listing system.
Out-of-the-money option
A call option is out of the money if the strike price is greater than the market price of the underlying security. That is, you have the right to purchase a security at a price higher than the market price, which is not valuable. A put option is out of the money if the strike price is lower than the market price of the underlying security.
Outstanding shares
Shares that are currently owned by investors.
Over-the-counter (OTC)
A decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked by telephones and computer screens. The market is for securities not listed on a stock or bond exchange. The NASDAQ market is an OTC market for US stocks. Antithesis of listed.
Overbought
Used in the context of general equities. Technically too high in price, and hence a technical correction is expected. See: Heavy. Antithesis of oversold.
Par value
Also called the maturity value or face value; the amount that an issuer agrees to pay at the maturity date.
Parity
For convertibles, level at which a convertible security's market price equals the aggregate value of the underlying common stock; value/worth of the convertible bond considered only as an equity instrument (Conversion ratio times common price). See: Conversion value. For international parity, US$ price of a foreign stock's last sale in an overseas market (Local currency stock price times forex rate times ADR ratio). For listed parity, condition whereby no party has floor priority, and matching thus occurs. For options parity, dollar amount by which an option is in the money. See: Intrinsic value.
Pass-through securities
A pool of fixed income securities backed by a package of assets (i.e., mortgages) where the holder receives the principal and interest payments. Related: Mortgage pass-through security
Passive investment management
Buying a well diversified portfolio to represent a broad-based market index without attempting to search out mispriced securities.
Payout ratio
Generally, the proportion of earnings paid out to the common stockholders as cash dividends. More specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period.
P/E ratio
Current stock price divided by trailing annual earnings per share or expected annual earnings per share. Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25.50 = 10 times $2.55. XYZ stock sells for ten times earnings.
Penny stock
Used in the context of general equities. Stock that typically sells for less than $1 a share, although it may rise to as much as $10/share after the initial public offering, usually because of heavy promotion. All are traded OTC, many of them in the local markets of Denver, Vancouver, or Salt Lake City.
Pink sheets
Refers to over-the-counter trading. Daily publication of the national quotation bureau that reports the bid and ask prices of thousands of OTC stocks, as well as the market makers who trade each stock.
Planned amortization class (PAC)
(1) The class of CMO that has the most stable cash flows and the lowest prepayment risk of any class of CMO Because of a stable cash flow, it is considered the least risky CMO (2) A CMO bond class that stipulates cash flow contributions to a sinking fund. A PAC directs principal payments to the sinking fund on a priority basis in accordance with a predetermined payment schedule, with prior claim to the cash flows before other CMO classes. Similarly, cash flows received by the trust in excess of the sinking fund requirement are also allocated to other bond classes. The prepayment experience of the PAC is therefore very stable over a wide range of prepayment experience.
Poison pill
Anti-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret government agents are said to be instructed to swallow if capture is imminent.
Portfolio turnover rate
For an investment company, an annualized rate found by dividing the lesser of purchases and sales by the average of portfolio assets.
Positive convexity
A property of option-free bonds that the price appreciation for a large downward change in interest rates will be greater (in absolute terms) than the price depreciation for the same downward change in interest rates.
Preferred stock
A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. Preferred stock has characteristics of both common stock and debt.
Premium
(1) A bond sold above its par value. (2) The price of an option contract; also, in futures trading, the amount by which the futures price exceeds the price of the spot commodity. (3) For convertibles, amount by which the price of a convertible exceeds parity, and is usually expressed as a percentage. Suppose a stock is trading at $45, and the bond is convertible at a $50 stock price and the convertible bond trading at 105. A similar bond without the conversion feature trades at $90. In this case, the premium is $15, or 16.66%=(105-90)/90. If the premium is high, the bond trades like any fixed income bond; if low, like a stock. See: Gross parity, net parity. (4) For futures, excess of fair value of future over the spot index, which in theory will equal the Treasury bill yield for the period to expiration minus the expected dividend yield until the future's expiration. (5) For options, price of an option in the open market (sometimes refers to the portion of the price that exceeds parity). (6) For straight equity, price higher than that of the last sale or inside market. Related: Inverted market premium payback period. Also called break-even time; the time it takes to recover the premium per share of a convertible security.
Prerefunding
Procedure of floating a second bond at a lower interest rate in order to pay off the first bond at the first call date and to reduce overall borrowing costs.
Present value
The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. To determine the present value, each future cash flow is multiplied by a present value factor. For example, if the opportunity cost of funds is 10%, the present value of $100 to be received in one year is $100 x [1/(1 + 0.10)] = $91.
Price-book ratio
Compares a stock's market value to the value of total assets less total liabilities (book value). Determined by dividing current stock price by common stockholder equity per share (book value), adjusted for stock splits. Also called Market-to-Book.
Price-earnings ratio
Shows the multiple of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio are determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher multiple means investors have higher expectations for future growth, and have bid up the stock's price.
Price-sales ratio
Determined by dividing current stock price by revenue per share (adjusted for stock splits). Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares outstanding.
Principal-only (PO)
A mortgage-backed security (MBS) whose holder receives only principal cash flows on the underlying mortgage pool. All the principal distribution due from the underlying collateral pool is paid to the registered holder of the stripped MBS on the basis of the current face value of the underlying collateral pool.
Private placement
The sale of a bond or other security directly to a limited number of investors. For example, sale of stocks, bonds, or other investments directly to an institutional investor like an insurance company, avoiding the need for SEC registration if the securities are purchased for investment as opposed to resale. Antithesis of public offering.
Profit margin
Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Also known as net profit margin.
Program trading
Trades based on signals from computer programs, usually entered directly from the trader's computer in to the market's computer system and executed automatically. Applies to derivative products. A process of electronic execution of trading of a basket of stocks simultaneously, for index arbitrage, portfolio restructuring, or outright buy/sell interests. See: super dot.
Prospective Earnings Growth (PEG Ratio)
Based on forecasts from proprietary sources such as Institutional Brokers' Estimate System (IBES), First Call, or Zach's. Growth is forecast of earnings minus current earnings divided by current earnings. Forward-looking measure rather than typical earnings growth measures, which look back in time (historical).
Prospectus
Formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe fund objectives, risks, and other essential information.
Proxy vote
Vote cast by one person or entity on behalf of another.
Prudent-man rule
A common law standard against which those investing the money of others (fiduciaries) are judged.
PSA Prepayment Rate
The Bond Market Trade Association's Mortgaged Asset-Backed Securities Division's prepayment model based on an assumed rate of prepayment each month of the then unpaid principal balance of a pool of mortgages. PSA is used primarily to derive an implied prepayment speed of new production loans. 100% PSA assumes a prepayment rate of 2% per month in the first month following the date of issue, increasing at 2% percentage points per month thereafter until the 30th month. Thereafter, 100% PSA is the same as 6% CPR (Constant prepayment rate).
Public offering
Used in the context of general equities. Offering to the investment public, after compliance with registration requirements of the SEC, usually by an investment banker or a syndicate made up of several investment bankers, at a price agreed upon between the issuer and the investment bankers. Antithesis of private placement. See: Primary distribution and secondary distribution.
Put bond
A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years. If the price is above par, the put is a "premium put."
Put-call parity
Applies to derivative products. Option pricing principle that says, given a stock's price, a put and call of the same class must have a static price relationship because arbitrage opportunities or activities will always reestablish such a relationship.
Put-call ratio
The ratio of the volume of put options traded to the volume of call options traded, which is used as an indicator of investor sentiment (bullish or bearish).
Put option
This security gives investors the right to sell (or put) a fixed number of shares at a fixed price within a given period. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment.
Qualified opinion
An auditor's opinion expressing certain limitations of an audit.
Qualified plan or trust
A tax-deferred plan allowing employer and employee contributions that build up savings, which are paid out at retirement or on termination of employment. Tax is paid only when amounts are drawn from the trust.
Qualified retirement plan
A retirement plan established by employers for their employees that meets the requirements of Internal Revenue Code Section 401(a) or 403(a) and is eligible for special tax considerations. The plan may provide for employer contributions, as in a pension or profit-sharing plan, as well as employee contributions. Employers can deduct plan contributions made on behalf of eligible employees on the business's tax return as business expenses. Plan earnings are not taxed to the employee until withdrawn.
Quick assets
Current assets minus inventories.
Quick ratio
Indicator of a company's financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity and ability to meet its obligations. Also called the Acid test ratio.
Random walk
Theory that stock price changes from day to day are accidental or haphazard; changes are independent of each other and have the same probability distribution. Many believers in the random walk theory believe that it is impossible to outperform the market consistently without taking additional risk.
Rate anticipation swaps
An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, given the investor's assumptions about future changes in interest rates.
Ratings
An evaluation of credit quality of a company's debt issue by Moody's, S&P, and Fitch Investors Service. Investors and analysts use ratings to assess the riskness of an investment.
Real Estate Investment Trust (REIT)
REITs invest in real estate or loans secured by real estate and issue shares in such investments. A REIT is similar to a closed-end mutual fund.
Real Estate Mortgage Investment Conduit (REMIC)
A pass-through tax entity that can hold mortgages secured by any type of real property and can issue multiple classes of ownership interests to investors in the form of pass-through certificates, bonds, or other legal forms. A financing vehicle created under the Tax Reform Act of 1986.
Real GDP
Inflation-adjusted measure of Gross Domestic Product.
Real rate of return
The percentage return on some investments that has been adjusted for inflation.
Real return
The actual payback on an investment after removing the effect of inflation.
Red herring
A preliminary prospectus providing information required by the SEC. It excludes the offering price and the coupon of the new issue.
Refunded bond
Also called a prerefunded bond, a bond that originally may have been issued as a general obligation or revenue bond but that is now secured by an escrow fund consisting entirely of direct U.S. government obligations that are sufficient for paying the bondholders.
Registered investment adviser
SEC-registered individual or firm that substantiates completion of education and work experience in the field, and pays an annual membership fee.
Registered representative
A person registered with the CFTC who is employed by and solicits business for a commission house or futures commission merchant.
Registered security
Used in the context of general equities. Securities whose owner's name is recorded on the books of the issuer or the issuer's agent, called a registrar.
Relative strength
Movement of a stock price over the past year as compared to a market index (like the S&P 500). A value below 1.0 means the stock shows relative weakness in price movement (underperformed the market); a value above 1.0 means the stock shows relative strength over the one-year period. Equation for Relative Strength: [current stock price/year-ago stock price] divided by [current S&P 500/year-ago S&P 500]. Note this can be a misleading indicator of performance because it does not take risk into account.
Relative yield spread
The ratio of the yield spread to the yield level. Used for bonds.
Repurchase agreement
An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. Also called a repo, it represents a collateralized short-term loan for which, where the collateral may be a Treasury security, money market instrument, federal agency security, or mortgage-backed security. From the purchaser's (customer's) perspective, the deal is reported as a reverse repo.
Reserve requirements
The percentage of different types of deposits that member banks are required to hold on deposit at the Fed.
Resistance level
A price level above which it is supposedly difficult for a security or market to rise. Price ceiling at which technical analysts note persistent selling of a commodity or security. Antithesis of support level.
Retention rate
The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio.
Return on assets (ROA)
Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).
Return on equity (ROE)
Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).
Return on investment (ROI)
Generally, book income as a proportion of net book value.
Return on sales
A measurement of operational efficiency equaling net pre-tax profits divided by net sales expressed as a percentage.
Return on total assets
The ratio of earnings available to common stockholders to total assets.
Revenue Anticipation Note (RAN)
A short-term municipal debt issue that will be repaid with anticipated revenues, such as sales taxes, from the project.
Revenue bond
A bond issued by a municipality to finance either a project or an enterprise in which the issuer pledges to the bondholders the revenues generated by the operation of the projects financed. Examples are hospital revenue bonds and sewer revenue bonds.
Reverse stock split
A proportionate decrease in the number of shares, but not the total value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1-for-3 split would result in stockholders owning one share for every three shares owned before the split. After the reverse split, the firm's stock price is, in this example, three times the pre-reverse split price. A firm generally institutes a reverse split to boost its stock's market price. Some think this supposedly attracts investors.
Revocable trust
A trust that may altered as many times as desired in which income-producing property passes directly to the beneficiaries at the time of the grantor's death. Since the arrangement can be altered at any time, the assets are considered part of the grantor's estate and they are taxed as such.
Risk
Often defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset. In context of asset pricing theory. See: Systematic risk.
Risk-adjusted return
Often we subtract from the rate of return on an asset a rate of return from another asset that has similar risk. This gives an abnormal rate of return that shows how the asset performed over and above a benchmark asset with the same risk. We can also use the beta against the benchmark to calculate an alpha, which is also risk-adjusted performance.
Risk arbitrage
Traditionally, the simultaneous purchase of stock in a company being acquired and the sale of stock of the acquirer. Modern risk arbitrage focuses on capturing the spreads between the market value of an announced takeover target and the eventual price at which the acquirer will buy the target's shares.
Risk profile
The slope of a line graphed according to the value of an underlying asset on the x-axis and the value of a position exposed to risk in the underlying asset on the y-axis. Also used with changes in value. See: Payoff profile.
Risk-return trade-off
The tendency for potential risk to vary directly with potential return, so that the more risk involved, the greater the potential return, and vice versa.
Risk tolerance
An investor's ability or willingness to accept declines in the prices of investments while waiting for them to increase in value.
Riskless arbitrage
The simultaneous purchase and sale of the same asset to yield a profit.
Riskless or risk-free asset
An asset whose future return is known today with certainty. The risk-free asset is commonly defined as short-term obligations of the US government.
Riskless rate
The rate earned on a riskless investment, typically the rate earned on the 90-day US Treasury Bill.
Risk premium
The reward for holding the risky equity market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.
Round lot
A trading order typically of 100 shares of a stock or some multiple of 100. Related: odd lot.
Russell Indexes
US equity index widely used by pension and mutual fund investors that are weighted by market capitalization and published by the Frank Russell Company of Tacoma, Washington. For example, the Russell 3000 index includes the 3,000 largest US companies according to market capitalization.
Russell 1000
A market capitalization-weighted benchmark index made up of the 1000 highest-ranking US stocks in the Russell 3000.
Russell 2000
A market capitalization-weighted benchmark index made up of the 2000 smallest US companies in the Russell 3000.
Russell 3000
A market capitalization-weighted benchmark index made up of the 3000 largest US stocks, which represent about 98% of the US equity market.
Safe harbor
Often used in risk arbitrage as a form of shark repellent. A target company acquires a business so onerously regulated that it makes the target less attractive, giving it, in effect, a safe harbor.
Holding by a bank of bonds and money market instruments. For a fee, the bank bank clips coupons and presents for payment at maturity.
Sales charge
The fee charged by a mutual fund at purchase of shares, usually payable as a commission to a marketing agent, such as a financial adviser, who is thus compensated for assistance to a purchaser. It represents the difference, if any, between the share purchase price and the share net asset value.
Seasoned
In the case of equity, having gained a reputation for quality with the investing public and enjoying liquidity in the secondary market; in the case of convertibles, having traded for at least 90 days after issue in Europe, and thus available for sale legally to U.S. investors.
Secondary distribution/offering
Public sale of previously issued securities held by large investors, usually corporations or institutions, as distinguished from a primary distribution, where the seller is the issuing corporation. The sale is handled off the NYSE, by a securities firm or a group of firms, and the shares are usually offered at a fixed price related to the current market price of the stock.
Secondary market
The market in which securities are traded after they are initially offered in the primary market. Most trading occurs in the secondary market. The New York Stock Exchange, as well as all other stock exchanges and the bond markets, are secondary markets. Seasoned securities are traded in the secondary market.
Sector
Used to characterize a group of securities that are similar with respect to maturity, type, rating, industry, and/or coupon.
Sector fund
A mutual fund that concentrates on a relatively narrow market sector. These funds can experience higher share price volatility than some diversified funds because sector funds are subject to common market forces specific to a given sector.
Sell limit order
Conditional trading order that indicates that a security may be sold at the designated price or higher. Related: Buy limit order.
Senior security
A security that, in the event of bankruptcy, will be redeemed before any other securities.
Serial bonds
Corporate bonds arranged so that specified principal amounts become due on specified dates. Related: Term bonds.
Series E bond
A local and state tax-free bond issued by the U.S. government from 1941 to 1979, which was then replaced by Series HH bonds.
Series EE bond
See: Savings bond
Series HH bond
See: Savings bond
Settlement date
The date on which payment is made to settle a trade. For stocks traded on US exchanges, settlement is currently three business days after the trade. For mutual funds, settlement usually occurs in the US the day following the trade. In some regional markets, foreign shares may require months to settle.
Shares authorized
The maximum number of shares of stock of a company allowed in the articles of incorporation, which may be changed only by a shareholder vote. See: Issued and outstanding.
Shelf registration
A procedure that allows firms to file one registration statement covering several issues of the same security. SEC Rule 415, adopted in the 1980s, allows a corporation to comply with registration requirements up to two years prior to a public offering of securities. With the registration "on the shelf," the corporation, by simply updating regularly filed annual, quarterly, and related reports to the SEC, can go to the market as conditions become favorable with a minimum of administrative preparation and expense.
Short covering
Used in the context of general equities. Actual purchase of securities by a short seller to replace those borrowed at the time of a short sale.
Short interest
Total number of shares of a security that investors have sold short and that have not been repurchased to close out the short position. Usually, investors sell short to profit from price declines. As a result, the short interest is often an indicator of the amount of pessimism in the market about a particular security, although there are other reasons to short that are not related to pessimism. For example, hedging strategies for mergers and acquisition as well as derivative positions may involve short sales.
Short position
Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed, before the sale, to make "good delivery" to the buyer. Eventually, the shares must be bought back to close out the transaction. This technique is used when an investor believes the stock price will drop.
Short squeeze
When a lack of supply tends to force prices upward. In particular, when prices of a stock or commodity futures contracts start to move up sharply and many traders with short positions are forced to buy stocks or commodities in order to cover their positions and prevent (limit) losses. This sudden surge of buying leads to even higher prices, further aggravating the losses of short sellers who have not covered their positions.
Short-term debt
Debt obligations, recorded as current liabilities, requiring payment within the year.
Simple interest
Interest calculated as a simple percentage of the original principal amount. Compare to compound interest.
Sinking fund
A fund to which money is added on a regular basis that is used to ensure investor confidence that promised payments will be made and that is used to redeem debt securities or preferred stock issues.
Small-cap
A stock with a small capitalization, meaning a total equity value of less than $500 million.
Soft dollars
The value of research services that brokerage houses supply to investment managers "free of charge" in exchange for the investment manager's business commissions.
SPDRs
SPDRs (Spiders) are designed to track the value of the Standard & Poor's 500 Composite Price Index. Stands for Standard & Poor's Depositary Receipt. They trade on the American Stock Exchange under the symbol SPY. SPDRs are similar to closed-end funds but are formally known as, a unit investment trust. One SPDR unit is valued at approximately one-tenth (1/10) of the value of the S&P 500. Dividends are disbursed quarterly, and are based on the accumulated stock dividends held in trust, less any expenses of the trust. See: Mid-cap SPDR.
Specialist
On an exchange, the member firm that is designated as the market maker (or dealer for a listed common stock). Member of a stock exchange who maintains a "fair and orderly market" in one or more securities. Only one specialist can be designated for a given stock, but dealers may be specialists for several stocks. In contrast, there can be multiple market makers in the OTC market. Major functions include executing limit orders on behalf of other exchange members for a portion of the floor broker's commission, and buying or selling for the specialist's own account to counteract temporary imbalances in supply and demand and thus prevent wide swings in stock prices.
Specialist's book
Chronological record maintained by a specialist that includes the specialist's own inventory of securities, market orders to sell short, and limit orders and stop orders that other stock exchange members have placed with the specialist.
Spin-off
A company can create an independent company from an existing part of the company by selling or distributing new shares in the so-called spin-off.
Split
Sometimes, companies split their outstanding shares into more shares. If a company with 1 million shares executes a two-for-one split, the company would have 2 million shares. An investor with 100 shares before the split would hold 200 shares after the split. The investor's percentage of equity in the company remains the same, and the share price of the stock owned is one-half the price of the stock on the day prior to the split.
Spot price
The current market price of the actual physical commodity. Also called cash price. Current delivery price of a commodity traded in the spot market, in which goods are sold for cash and delivered immediately. Antithesis of futures price.
Spot rate
The theoretical yield on a zero-coupon Treasury security.
Spread
(1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixed-income yield to borrow money.
Squeeze
Period when stocks or commodities futures increase in price and investors who have sold short must cover their short positions to prevent loss of large amounts of money.
Stagflation
A period of slow economic growth and high unemployment with rising prices (inflation).
Standard & Poor's MidCap 400 Index
A market capitalization-weighted benchmark index made up of 400 securities with market values between $200 million and $5 billion.
Standard & Poor's SmallCap 600 Index
A small-capitalization benchmark index made up of 600 domestic stocks chosen for market size, liquidity, and industry group representation.
Straddle
Purchase or sale of an equal number of puts and calls with the same terms at the same time. Related: Spread.
Strike price
The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
Strip
Variant of a straddle. A strip is two puts and one call on a stock. A strap is two calls and one put on a stock. The puts and calls have the same strike price and expiration date. See: Strap.
Subordinated debenture bond
An unsecured bond that ranks after secured debt, after debenture bonds, and often after some general creditors in its claim on assets and earnings. Related: Debenture bond, mortgage bond, collateral trust bonds.
Subordinated debt
Debt over which senior debt takes priority. In the event of bankruptcy, subordinated debtholders receive payment only after senior debt claims are paid in full.
Subscription price
Price that current shareholders pay for a share of stock in a rights offering.
Support level
A price level below which it is supposedly difficult for a security or market to fall. That is, the price level at which a security tends to stop falling because there is more demand than supply; can be identified on a technical basis by seeing where the stock has bottomed out in the past.
Sustainable growth rate
Maximum rate of growth a firm can sustain without increasing financial leverage.
Swap
An arrangement in which two entities lend to each other on different terms, e.g., in different currencies, and/or at different interest rates, fixed or floating.
Syndicate
A group of banks that acts jointly, on a temporary basis, to loan money in a bank credit (syndicated credit) or to underwrite a new issue of bonds.
Systematic risk
Also called undiversifiable risk or market risk.
Tax-deferred income
Dividends, interest, and unrealized capital gains on investments in an account such as a qualified retirement plan, where income is not subject to taxation until a withdrawal is made.
Tax-equivalent yield
The pre-tax yield required from a taxable bond in order to equal the tax-free yield of a municipal bond.
Tax-exempt bond
A bond usually issued by municipal, county, or state governments whose interest payments are not subject to federal and, in some cases, state and local income tax.
Tax-exempt income
Dividends and interest not subject to federal and, in some cases, state and local income taxes.
Tax selling
Selling of securities to realize losses that will offset capital gains and reduce tax liability. See: Wash sale.
Technical analysis
Security analysis that seeks to detect and interpret patterns in past security prices.
10-K
Annual report required by the SEC each year. Provides a comprehensive overview of a company's state of business. Must be filed within 90 days after fiscal year-end. A 10-Q report is filed quarterly.
10-Q
Quarterly report required by the SEC each quarter. Provides a comprehensive overview of a company's state of business.
Tenants in common
Account registration in which two or more individuals own a certain proportion of an account. Each tenant's proportion is distributable as part of the owners estate, so that if one of the account holders dies, that owner's heirs are entitled to that proportional share of the account.
Term insurance
Provides a death benefit only, no build up of cash value.
Term life insurance
A contract that provides a death benefit but no cash build up or investment component. The premium remains constant only for a specified term of years, and the policy is usually renewable at the end of each term.
Thirty-day wash rule
IRS rule stating that losses on a sale of stock may not be used as tax shelter if equivalent stock is purchased 30 days or less before or after the sale of the stock.
Tick
Refers to the minimum change in price a security can have, either up or down. Related: Point.
Time horizon
The period, usually expressed in years, for which an investor expects to hold an investment.
Time value of money
The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.
Top-down equity management style
Investment style that begins with an assessment of the overall economic environment and makes a general asset allocation decision regarding various sectors of the financial markets and various industries. The bottom-up manager, in contrast, selects specific securities within the particular sectors.
Tracking stock
Best defined with an example. Suppose Company A purchases a business from Company B and pays B with 1 million shares of A's stock. The agreement provides that B cannot sell the 1 million shares for 60 days, and also prohibits B from hedging by purchasing put options on A's shares or short-selling A's shares. B is worried that the market may fall in the next 60 days. B could hedge by purchasing put options or selling the futures on the S&P 500. However, it is possible that A's business is much more cyclical than the S&P 500. One solution to this problem is to find a tracking stock. This is a stock that has high correlation with A. Let us call it Company C. The solution is to sell short or buy protective put options on this tracking stock C. This protects B from fluctuations in the price of A's stock over the next 60 days. Because the degree of the protection is related to the correlation of A and C's stock, it is extremely unlikely that the protection is perfect. Tracking stock is also used for internal evaluation. A firm with four divisions, for example, might set up four tracking stocks. The value-weighted sum of the four stocks exactly equals the firm's stock price observed in the market. This is a way to reward managers for good divisional performance with an equity that is tied to their division-rather than potentially penalizing them compensation for bad performance in a division they have no control over.
Trailing earnings
Past earnings. Often used in the context of the price earnings ratio. This ratio is usually distinguished as price to trailing earnings (today's price divided by the most recent 12 months of earnings) versus price to prospective earnings (today's price divided by consensus forecast earnings for the next 12 months).
Tranche
One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics.
Transfer agent
Individual or institution a company appoints to look after the transfer of securities.
Treasury bills
Debt obligations of the US Treasury that have maturities of one year or less. Maturities for T-bills are usually 91 days, 182 days, or 52 weeks.
Treasury bonds
Debt obligations of the US Treasury that have maturities of 10 years or more.
Treasury notes
Debt obligations of the US Treasury that have maturities of more than 2 years but less than 10 years.
Treasury securities
Securities issued by the US Department of the Treasury.
Treasury stock
Common stock that has been repurchased by the company and held in the company's treasury.
Triple witching hour
The four times a year that the S&P futures contract expires at the same time as the S&P 100 index option contract and option contracts on individual stocks. It is the last trading hour on the third Friday of March, June, September, and December, when stock options, futures on stock indexes, and options on these futures expire concurrently. Massive trades in index futures, options, and underlying stock by hedge strategists and arbitrageurs cause abnormal activity (noise) and volatility.
Trust
A fiduciary relationship calling for a trustee to hold the title to assets for the benefit of the beneficiary. The person creating the trust, who may or may not also be the beneficiary, is called the grantor.
Trustee
Agent of a bond issuer who handles the administrative aspects of a loan and ensures that the borrower complies with the terms of the bond indenture.
Turnover
For mutual funds, a measure of trading activity during the previous year, expressed as a percentage of the average total assets of the fund. A turnover rate of 25% means that the value of trades represented one-fourth of the assets of the fund. For finance, the number of times a given asset, such as inventory, is replaced during the accounting period, usually a year. For corporate finance, the ratio of annual sales to net worth, representing the extent to which a company can grow without outside capital. For markets, the volume of shares traded as a percent of total shares listed during a specified period, usually a day or a year. For Great Britain, total revenue. Percentage of the total number of shares outstanding of an issue that trades during any given period.
12B-1 fees
The percent of a mutual fund's assets used to defray marketing and distribution expenses. The amount of the fee is stated in the fund's prospectus. The SEC has recently proposed that 12B-1 fees in excess of 0.25% be classed as a load. A true
no load fund has neither a sales charge nor a 12b-1 fee.
Unamortized bond discount
Par value of a bond less the proceeds received from the sale of the bond, less whatever portion has been amortized.
Unamortized premiums on investments
The unexpensed portion of the difference between the price paid for a security and its par value.
Uncovered call
A short call option position in which the writer does not own shares of underlying stock represented by the option contracts. Uncovered calls are much riskier for the writer than a covered call, where the writer of the uncovered call owns the underlying stock. If the buyer of a call exercises the option to call, the writer would be forced to buy the asset at the current market price. Also called a "naked" asset.
Uncovered put
A short put option position in which the writer does not have a corresponding short stock position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put. The writer has pledged to buy the asset at a certain price if the buyer of the option chooses to exercise it. Uncovered put options limit the writer's risk to the value of the stock (adjusted for premium received.) Also called "naked" puts.
Undervalued
A stock price perceived to be too low or cheap, as indicated by a particular valuation model. For instance, some might consider a particular company's stock price cheap if the company's price-earnings ratio is much lower than the industry average. To refer to undervaluation or overvaluation implicitly assumes some model of valuation. It is always possible that the security is valued correctly and that model applied is wrong.
Underwriter
A firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors. In general, A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities.
Unit investment trust
Money invested in a portfolio whose composition is fixed for the life of the fund. Shares in a unit trust are called redeemable trust certificates, and they are sold at a premium to net asset value.
Unlisted security
A security traded in the over-the-counter market that is not listed on an organized exchange.
Unrealized capital gain/loss
An increase/decrease in the value of a security that is not "real" because the security has not been sold. Once a security is sold by the portfolio manager, the capital gains/losses are "realized" by the fund, and any payment to the shareholder is taxable during the tax year in which the security is sold.
Unsecured debt
Debt that does not identify specific assets that the debtholder is entitled to in case of default.
Value stocks
Stocks with low price/book ratios or price/earnings ratios. Historically, value stocks have enjoyed higher average returns than growth stocks (stocks with high price/book or P/E ratios) in a variety of countries.
Variable annuities
Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio.
Variable-rate CDs
Short-term certificate of deposits that pay interest periodically on roll dates. On each roll date, the coupon on the CD is adjusted to reflect current market rates.
Venture capital
An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.
Volatility
A measure of risk based on the standard deviation of the asset return. Volatility is a variable that appears in option pricing formulas, where it denotes the volatility of the underlying asset return from now to the expiration of the option. There are volatility indexes. Such as a scale of 1-9; a higher rating means higher risk.
Warrant
A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price, usually one higher than current market price. Warrants are traded as securities whose price reflects the value of the underlying stock. Corporations often bundle warrants with another class of security to enhance the marketability of the other class. Warrants are like call options, but with much longer time spans-sometimes years. And, warrants are offered by corporations, while exchange-traded call options are not issued by firms.
Wash sale
Purchase and sale of a security either simultaneously or within a short period of time, often in order to recognize a tax loss without altering one's position. See: Tax selling.
Weighted average Coupon
The weighted average of the gross interest rates of mortgages underlying a pool as of the pool issue date; the balance of each mortgage is used as the weighting factor.
When issued (W.I.)
Refers to a transaction made conditionally, because a security, although authorized, has not yet been issued. Treasury securities, new issues of stocks and bonds, stocks that have split, and in-merger situations after the time the proxy has become effective but before completion are all traded on a when-issued basis. With ice.
Whisper number or forecast
An unofficial earnings estimate of a company given to clients by a security analyst if there is more optimism or pessimism about earnings than shown in the published number. These are often found on the Internet.
Whisper stock
A stock rumored to be the target of a takeover bid, drawing speculators who hope to make a profit after the takeover is completed.
Whole life insurance
A contract with both insurance and investment components: (1) It pays off a stated amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or borrow against.
Wilshire indexes
Widely followed performance measurement indexes measuring performance of all U.S.-headquartered equity securities with readily available price data, created by Wilshire Associates, Inc.
Window dressing
Trading activity near the end of a quarter or fiscal year that is designed to improve the appearance of a portfolio to be presented to clients or shareholders. For example, a portfolio manager may sell losing positions so as to display only positions that have gained in value.
Wire house
A firm operating a private wire to its own branch offices or to other firms, commission houses, or brokerage houses.
World Bank
A multilateral development finance agency created by the 1944 Bretton Woods, (New Hampshire) negotiations. It makes loans to developing countries for social overhead capital projects that are guaranteed by the recipient country. See: International Bank for Reconstruction and Development.
World Equity Benchmark Series (WEBS)
The World Equity Benchmark Series are similar to SPDRs. WEBS trade on the AMEX, and track the Morgan Stanley Capital International (MSCI) country indexes. WEBS are available for: Australia, Austria, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia Free, Mexico, the Netherlands, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
World Trade Organization (WTO)
A multilateral agency that administers world trade agreements, fosters trade relations among nations, and solves trade disputes among member countries.
Wrap account
An investment consulting relationship for management of a client's funds by one or more money managers, that bills all fees and commissions in one comprehensive fee charged quarterly.
Yankee bonds
Foreign bonds denominated in U.S. dollars and issued in the United States by foreign banks and corporations. These bonds are usually registered with the SEC. Such as, bonds issued by originators with roots in Japan are called Samurai bonds.
Yankee CD
A CD issued in the domestic market, typically New York, by a branch of a foreign bank.
Yield
The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.
Yield burning
A municipal bond financing method. Underwriters in advance refundings add large markups on US Treasury bonds bought and held in escrow to compensate investors while waiting for repayment of old bonds after issuance of the new bonds. Since bond prices and yields move in opposite directions, when the bonds are marked up, they "burn down" the yield, which may violate federal tax rules and diminishes tax revenues.
Yield curve
The graphic depiction of the relationship between the yield on bonds of the same credit quality but different maturities. Related: Term structure of interest rates. Harvey (1991) finds that the inversions of the yield curve (short-term rates greater than long term rates) have preceded the last five US recessions. The yield curve can accurately forecast the turning points of the business cycle.
Yield spread
The difference in yield between different security issues usually securities of different credit quality.
Yield to call
The percentage rate of a bond or note if the investor buys and holds the security until the call date. This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several years and normally are called at a slight premium. The calculation of yield to call is based on coupon rate, length of time to call, and market price.
Yield to maturity
The percentage rate of return paid on a bond, note, or other fixed income security if the investor buys and holds it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity, and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate.
Yield to worst
The bond yield computed by using the lower of either the yield to maturity or the yield to call on every possible call date.
Zero-coupon bond
A bond in which no periodic coupon is paid over the life of the contract. Instead, both the principal and the interest are paid at the maturity date.
Zero-coupon convertible security
A zero-coupon bond convertible into the common stock of the issuing company after the stock reaches a certain price, using a put option inherent in the security.
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