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Account Executive:
A brokerage firm employee who advises and handles orders for clients. Every account executive must pass certain tests and be registered with the National Association of Securities Dealers before soliciting or taking orders from customers.
Accredited Investor:
Wealthy investors,
generally maintaining a net worth of at least $1 million
or earning at least $200,000 per year, with the privilege
of investing in risky private stock sales or other securities.
The term itself is defined under the Securities and Exchange
Commission Regulation D Act.
Accrued Interest:
Interest that has accumulated
between the most recent payment and the sale of a bond or
other fixed-income security. At the time of sale, the buyer
pays the seller the bond�s price plus accrued interest,
calculated by multiplying the coupon rate by the number
of days that have elapsed since the last payment.
Acquisition:
One company taking over
controlling interest in another company. Investors are always
looking out for companies that are likely to be acquired,
because those who want to acquire such companies are often
willing to pay more than the market price for the shares
they need to complete the acquisition.
Active
Market:
Heavy volume of trading in a particular stock, bond or commodity.
Also, heavy volume of trading on an exchange as a whole.
Measurement of the number of stocks that have advanced and the number that have declined over a particular period. It is the ratio of one to the other and shows the general direction of the market.
All or None Order:
Buy or sell order marked to signify
that no partial transaction is to be executed. The order
will not automatically be canceled, however, if a complete
transaction is not executed; to accomplish that, the order
entry must be marked FOK, meaning fill or kill.
American Depository Receipt
(ADR):
Receipt for the shares of a foreign-based
corporation held in the vault of a U.S. bank and entitling
the shareholder to all dividends and capital gains. Instead
of buying shares of foreign-based companies in overseas
markets, American investors can buy shares in the U.S. in
the form of an ADR.
American Stock Exchange (AMEX):
Stock exchange that trades stock
and bonds of small-medium sized companies. Located at 86
Trinity Place in downtown Manhattan, the Amex was known
until 1921 as the Curb Exchange.
Annual Meeting:
Once-a-year meeting when
the managers of a company report to stockholders on the
year�s results, and the board of directors stands for election
for the next year. Stockholders unable to attend the annual
meeting may vote for directors and pass on resolutions through
the use of proxy material, which must legally be mailed
to all shareholders of record.
Yearly record of a corporation�s financial condition that must be distributed to shareholders under Securities and Exchange Commission regulations.
Annuity:
Form of contract sold by life insurance companies that guarantees a fixed or variable payment to the annuitant at some future time, usually retirement. In a fixed annuity the amount will ultimately be paid out in regular installments varying only with the payout method elected. In a variable annuity, the payout is based on a guaranteed number of units; unit values and payments depend on the value of the underlying investments.
Arbitrage:
Profiting from differences in price when the same security, currency, or commodity is traded on two or more markets. By taking advantage of momentary disparities in prices between markets, arbitrageurs perform the economic function of making those markets trade more efficiently.
Arbitration:
Alternative to suing in court to settle disputes between brokers and their clients and between brokerage firms.
Asked Price:
The lowest round lot price at which a dealer will sell a security.
Asset:
Anything having commercial or exchange value that is owned by a business, institution, or individual.
Asset Allocation:
Apportioning of investment funds,
among categories of assets, such as cash equivalents, stocks,
fixed income investments, and such tangible assets as real
estate, precious metals, and collectibles. Also applies
to subcategories such as government, municipal, and corporate
bonds, and industry groupings of common stocks. Asset allocation
affects both risk and return and is a central concept in
personal financial planning and investment management.
At the current price, as an option with an exercise price equal to or near the current price of the stock or underlying futures contract.
Audit:
Professional examination
and verification of a company�s accounting documents and
supporting data for the purpose of rendering an opinion
as to their fairness, consistency, and conformity with generally
accepted accounting principals.
Authorized Shares:
Maximum number of shares
of any class company may legally create under the terms
of its Articles of Incorporation. Normally, a corporation
provides for future increases in authorized stock by vote
of the stockholders. The corporation is not required to
issue all the shares authorized and may initially keep issued
shares at a minimum to hold down taxes and expenses.
B
Baby Bond:
Convertible or straight
debt bond having a par value of less than $1000, usually
$500 to $25. Baby bonds bring the bond market within reach
of small investors and, by the same token, open a source
of funds to corporations that lack entree to the large institutional
market.
Net difference over a period of time between the value of a country�s imports and exports of merchandise. Movable goods such as autos, foodstuffs, and apparel are included in the balance of trade.
Balance Sheet:
A financial report showing the
status of a company�s assets, liabilities, and owners� equity
on a given date, usually the close of a month.
Smallest measure used in quoting yields on bonds and notes. One basis point is 0.01% of yield.
Bearer Form:
Security not registered on the
books of the issuing corporation and thus payable to the
one possessing it. A bearer bond has certificates attached,
which the bondholder sends in or presents on the interest
date for payment. The alternative name for this is a coupon
bond. Bearer stock certificates are negotiable without endorsement
and are transferred by delivery. Dividends are payable by
presentation of dividend coupons, which are dated or numbered.
Bear Market:
Prolonged period of falling prices.
A bear market in stocks is usually brought on by the anticipation
of declining economic activity, and a bear market in bonds
is caused by rising interest rates.
Beta:
A measure of risk commonly used
to compare the volatility of stocks and mutual funds to
the overall market. The Standard & Poor�s 500 Stock
Index has a beta coefficient of 1. Any stock with a higher
beta is more volatile than the market, and any with a lower
beta can be expected to rise and fall more slowly than the
market. A conservative investor whose main concern is preservation
of capital should focus on stocks with low betas.
Bid and Asked:
The bid is the highest price
a prospective buyer is prepared to pay at a particular time
for a trading unit of given security; and the asked is the
lowest price acceptable to a prospective seller of the same
security.
Big Board:
A popular term for the New York
Stock Exchange.
Black Monday:
October 19, 1987, when the Dow
Jones Industrial Average plunged a record 508 points following
sharp drops the previous week, reflecting investor anxiety
about inflated stock price levels, federal budget and trade
deficits, and foreign market activity.
Blue Sky Laws:
Laws passed by various states
to protect investors against securities fraud. These laws
require sellers of new stock issues or mutual funds to register
their offerings and provide financial details on each issue
so that investors can base their judgments on relevant data.
Board of Directors:
Group of individuals elected,
usually at an annual meeting, by the shareholders of a corporation
and empowered to carry out certain tasks as spelled out
in the corporation�s charter. Among such powers are appointing
senior management, naming members of executive and finance
committees (if any), issuing additional shares, and declaring
dividends.
Bond:
Any interest-bearing or discounted
government or corporate security that obligates the issuer
to pay the bondholder a specified sum of money, usually
at specific intervals, and to repay the principal amount
of the loan at maturity.
Book Value:
Value at which an asset is carried
on the balance sheet. The book value can be a guide in selecting
underpriced stocks and is an indication of the ultimate
value of securities in liquidation.
Breadth of the Market:
Percentage of stocks participating
in a particular market move. Breadth-of-the-market indexes
are alternatively called advance-decline indexes
Bridge Loan:
Short-term loan, also called
a swing loan, made in anticipation of intermediate-term
or long-term financing.
Broker Dealer:
Individual or firm acting as
a broker or principal in a securities transaction. Another
term for a brokerage firm.
Broker Loan Rate:
Interest rate at which brokers
borrow from banks to cover the securities positions of their
clients. The broker loan rate usually hovers a percentage
point or so above such short-term interest rates as the
federal funds rate and the Treasury bill rate. Since brokers�
loans and their customers� margin accounts are usually covered
by the same collateral, the term "rehypothecation" is used
synonymously with broker loan borrowing. Because
broker loans are callable on 24-hour notice, the term call
loan rate is also used, particularly in money rate tables
published in newspapers.
Bull Market:
Prolonged rise in the prices
of stocks, bonds, or commodities. Bull markets usually last
at least a few months and are characterized by high trading
volume.
Buy Order:
In securities trading, an order
to a broker to purchase a specified quantity of a security
at the market price or at another stipulated price.
Buy Stop Order:
Buy order marked to be held until
the market price rises to the stop price, then to be entered
as a market order to buy at the best available price. Sometimes
called a suspended market order, because it remains
suspended until a market transaction elects, activates,
or triggers the stop. Such an order is not permitted in
the over-the-counter market.
Banking:
The demand to repay a secured
loan usually made when the borrower has failed to meet such
contractual obligations as timely payment of interest. When
a banker calls a loan, the entire principal amount is due
immediately.
Bonds:
Right to redeem outstanding bonds
before their scheduled maturity. The first dates when an
issuer may call bonds are specified in the prospectus of
every issue that has a call provision in its indenture.
C
Call Option:
Right to buy 100 shares
of a particular stock or stock index at a predetermined
price before a preset deadline, in exchange for a premium.
For buyers who think a stock will go up dramatically, call
options permit a profit from a smaller investment than it
would take to buy the stock. These options can also produce
extra income for the seller, who gives up ownership of the
stock if the option is exercised.
Canceled Order:
Voiding an order to buy or sell.
Capital Gain:
Gain or profit from the sale
of assets or securities
Cash Flow:
In a larger sense, an analysis
of all changes that affect the cash account period. The
statement of cash flows included in annual reports analyzes
all changes affecting cash in the categories of operations,
investments, and financing. For example; net operating income
is an increase; the purchase of a new building is a decrease;
and the issuance of stocks or bonds is an increase. When
more cash comes in than goes out, we speak of a positive
cash flow; the opposite is a negative cash flow. Companies
with assets well in excess of liabilities may nevertheless
go bankrupt because they cannot generate enough cash to
meet current obligations.
Certificate Of Deposit (CD):
Debt instrument issued by a bank
that usually pays interest. Institutional CD�s are issued
in denominations of $100,000 or more, and individual CD�s
start as low as $100. Maturities range from a few weeks
to several years. Interest rates are set by competitive
forces in the marketplace.
Closing Price:
Price of last transaction completed
during a day�s trading session on an organized securities
exchange.
Commercial Paper:
Short-term obligations with maturities
ranging from 2 to 270 days issued by banks, corporations,
and other borrowers to investors with temporarily idle cash.
Such instruments are unsecured and usually discounted, although
some are interest-bearing. They can be issued directly-direct
issuers do it that way-or through brokers equipped to
handle enormous clerical volume involved. Issuers like commercial
paper because the maturities are flexible and because the
rates are usually marginally lower than bank rates. Investors-actually
lenders, since commercial paper is a form of debt-like the
flexibility and safety of an instrument that is issued only
by top-rated concerns and is nearly always backed by bank
lines of credit. Both Moody�s and Standard & Poor�s
assign ratings to commercial paper.
Commodities:
Bulk goods such as grains, metals,
and foods traded on a commodities exchange or on the spot
market.
Common Stock:
Units of ownership of a public
corporation. Owners typically are entitled to vote on the
selection of directors and other important matters as well
as to receive dividends on their holdings.
Consumer Price Index (CPI):
Measure of change in consumer
prices, as determined by a monthly survey of the U.S. Bureau
of Labor Statistics. Many pension and employment contracts
are tied to changes in consumer prices, as protection against
inflation and reduced purchasing power. Among the CPI components
are housing costs, food, transportation, and electricity.
Conversion Price:
The dollar value at which convertible
bonds, debentures, or preferred stock can be converted into
common stock, as announced when the convertible is issued.
Convertible Bond:
Corporate securities (usually
preferred shares or bonds) that are exchangeable for a set
number of another form (usually common shares) at a prestated
price. Convertibles are appropriate for investors who want
higher income than is available from common stock together
with greater appreciation potential than regular bonds offer.
From the issuer�s standpoint, the convertible feature is
usually designed as a sweetener, to enhance the marketability
of the stock or preferred.
Corporate Bond:
Debt instrument issued by
a private corporation, as distinct from one issued by a
government agency or a municipality. Corporate bonds typically
have four distinguishing features: (1) they are taxable;
(2) they have a par value of $1000; (3) they have a term
maturity-which means they come due all at once- and are
paid for out of a sinking fund accumulated for that purpose;
(4) they are traded on major exchanges, with prices published
in newspapers.
Coupon Bond:
Bond issued with detachable
coupons that must be presented to a paying agent or the
issuer for semiannual interest payment. These are bearer
bonds, so whoever presents the coupon is entitled to the
interest. Once universal, the coupon bond has been gradually
giving way to the registered bond, some of
which pay interest through electronic transfers.
Current Yield:
Annual interest on a bond divided
by the market price. It is the actual income rate of return
as opposed to the coupon rate (the two would be equal if
the bond were bought at par) or the yield to maturity. For
example, a 10% (coupon rate) bond with face (or par) value
of $1000 is bought at a market price of $800. The annual
income from the bond is $100. But since only $800 was paid
for the bond, the current yield is $100 divided by $800,
or 12 �%.
D
Debenture:
General debt obligation
backed only by the integrity of the borrower and documented
by an agreement called an indenture. An unsecured bond
is a debenture.
Derivative Instrument:
Financial instrument whose
value is based on another security. For example, an option
is a derivative instrument because its value derives from
an underlying stock, stock index, or future.
Discount Broker:
Brokerage house that executes
orders to buy and sell securities at commission rates sharply
lower than those charged by a full service broker.
Discount Rate:
Interest rate that the Federal
Reserve charges member banks for loans, using government
securities or eligible paper as collateral.
Distributions:
Payout of realized capital
gains on securities in the portfolio of a mutual fund or
closed-end investment company.
Dividend:
Distribution of earnings
to shareholders prorated by class of security and typically
paid in the form of money or stock. The amount is decided
by the board of directors and is usually paid quarterly.
Dividends must be declared as income in the year they are
received. Mutual fund dividends are paid out of income,
usually on a quarterly basis from the fund�s investments.
The tax on such dividends depends on whether the distributions
resulted from capital gains, interest income, or dividends
received by the fund, although these distinctions largely
disappeared in 1988 under the tax reform act of 1986.
Dow Jones Industrial Average
(DJIA):
Price-weighted average of
30 actively traded blue chip stocks, primarily industrials
but including American Express and AT&T. Prepared and
published by Dow Jones & Company, it is the oldest and
most widely quoted of all the market indicators. The components,
which change from time to time, represent between 15% and
20% of the market value of NYSE stocks. The DJIA is calculated
by adding the closing prices of the component stocks and
using a divisor that is adjusted for splits and stock dividends
equal to 10% or more of the market value of an issue as
well as for subscriptions and mergers. The average is quoted
in points, not in dollars.
E
Earnings Per Share:
Portion of a company�s
profit allocated to each outstanding share of common stock.
For instance, a corporation that earned $10 million last
year and has 10 million shares outstanding would report
earnings of $1 per share. The figure is calculated after
paying taxes and after paying preferred shareholders and
bondholders.
Ex-Dividend:
Interval between the
announcement and the payment of the next dividend. An investor
who buys shares during that interval is not entitled to
the dividend. Typically, a stock�s price moves up by the
dollar amount of the dividend as the ex-dividend date approaches,
then falls by the amount of the dividend after that date.
A stock that has gone ex-dividend is marked with an x in
newspaper listings.
F
Face Value:
Value of a bond, note,
mortgage, or other security as given on the certificate
or instrument. Corporate bonds are usually issued with $1000
face values, municipal bonds with $5000 face values, and
federal government bonds with $10,000 face values. Although
the bonds fluctuate in price from the time they are issued
until redemption, they are redeemed at maturity at their
face value, unless the issuer defaults. If the bonds are
retired before maturity, bondholders normally receive a
slight premium over face value. The face value is the amount
on which interest payments are calculated. Thus, a 10% bond
with a face value of $1000 pays bondholders $100 per year.
Face value is also referred to as par value or nominal value.
Federal Call:
When a customer engages in
certain types of transactions in their margin account, the
brokerage firm will issue a call notifying the client if
additional equity is required by the settlement date in
order to satisfy Regulation T.
Federal Funds Rate:
Interest rate charged by
banks with excess reserves at a Federal Reserve district
bank to banks needing overnight loans to meet reserve requirements.
Federal Open Market Committee:
See FOMC
Fiscal Year:
Accounting period covering 12
consecutive months, 52 consecutive weeks, 13 four-week periods,
or 365 consecutive days, at the end of which the books are
closed and profit or loss is determined. A company�s fiscal
year is often, but not necessarily, the same as the calendar
year. A seasonal business will frequently select a fiscal
rather than a calendar year, so that its year-end figures
will show it in its most liquid condition, which also means
having less inventory to verify physically.
FOMC:
Key committee in the Federal
Reserve System, which sets short-term monetary policy for
the Federal Reserve. The meetings of the committee, which
are secret, are the subject of much speculation on Wall
Street, as analysts try to guess whether the Fed will tighten
or loosen the money supply.
Front End Load:
Sales charge applied to an
investment at the time of initial purchase. There may be
a front-end load on a mutual fund, for instance, which is
sold by a broker. Annuities, life insurance policies, and
limited partnerships can also have front-end loads. From
the investor�s point of view, the earnings from the investment
should make up for this up-front fee within a relatively
short period of time.
Futures Contract:
Agreement to buy or sell
a specific amount of a commodity or financial instrument
at a particular price on a stipulated future date. The price
is established between buyer and seller on the floor of
a commodity exchange.
G
General Mortgage Bond:
Mortgage covering all
the mortgageable properties of a borrower and not restricted
to any particular piece of property. Such a blanket mortgage
can be lower in priority of claim in liquidation than one
or more other mortgages on specific parcels.
General Obligation Bond:
Municipal bond backed by
the full faith and credit (which includes the taxing and
further borrowing power) of a municipality. A GO bond, as
it is known, is repaid with general revenue and borrowings,
in contrast to the revenue from a specific facility built
with the borrowed funds, such as a tunnel or a sewer system.
Ginnie Mae:
Nickname for the Government
National Mortgage Association and the securities guaranteed
by that agency.
Good Delivery:
Securities industry designation
meaning that a certificate has the necessary endorsements
and meets all other requirements (signature guarantee, proper
denomination, and other qualifications), so that title can
be transferred by delivery to the buying broker, who is
then obligated to accept it. Exceptions constitute bad delivery.
Government Bonds:
Securities issued by the
U.S. government, such as Treasury bills, bonds, notes and
savings bonds. Government bonds are the most creditworthy
of all debt instruments since they are backed by the full
faith and credit of the U.S. Government.
Growth Stock:
Stock of a corporation that
has exhibited faster-than-average gains in earnings over
the last few years and is expected to continue to show high
levels of profit growth. Over the long run, growth stocks
tend to outperform slower-growing or stagnant stocks. Growth
stocks are riskier investments than average stocks, however,
since they usually sport higher price/earnings ratios and
make little or no dividend payments to shareholders.
Gross National Product (GNP):
Total value of goods and
services produced in the U.S. economy over a particular
period of time, usually one year. The GNP growth rate is
the primary indicator of the status of the economy. The
GNP is made up of consumer and government purchases, private
domestic and foreign investments in the U.S., and the total
value of exports. GNP figures are released every quarter.
GTC Order:
Brokerage customer�s order
to buy or sell a security, usually at a particular price,
that remains in effect until executed or canceled. If the
GTC order remains unfilled after a long period of time,
a broker will usually periodically confirm that the customer
still wants the transaction occur if the stock reaches the
target price.
H
Hedge Fund:
Private investment fund
organized to pursue an investment strategy involving risky
investments such as short selling and naked option writing.
Hedging:
A strategy used to offset
investment risk. A perfect hedge is one eliminating the
possibility of future gain or loss. A stockholder worried
about declining stock prices, for instance, can hedge his
or her holdings by buying a put option on the stock or selling
a call option. Selling short is another widely used hedging
technique. Investors often try to hedge against inflation
by purchasing assets that will rise in value faster than
inflation. Large commercial firms that want to be assured
of the price they will receive or pay for a commodity will
hedge their position by buying and selling simultaneously
in the futures market. For example, Hershey�s, the chocolate
company, will hedge its supplies of cocoa in the futures
market to limit the risk of a rise in cocoa prices.
House Call:
Brokerage house notification
that the customer�s equity in a margin account is below
the maintenance level. If the equity declines below that
point, a broker must call the client, asking for more cash
or securities. If the client fails to deliver the required
margin, his or her position will be liquidated. House call
limits are usually higher than limits mandated by the National
Association of Securities Dealers (NASD), a self-regulatory
group, and the major exchanges with jurisdiction over these
rules. Such a margin maintenance requirement is in addition
to the initial margin requirements set by the regulation
T of the Federal Reserve Board.
I
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 also measure the ups and
downs of stock, bond, and commodities markets, reflecting
market prices and the number of shares outstanding for the
companies in the index. Some well-known indexes are the
New York Exchange Index, the American Stock Exchange Index,
Standard & Poor�s Index, and the Value Line Index. Subindexes
for industry groups such as beverages, railroads, or computers
are also tracked. Stock market indexes form the basis for
trading in index options.
Individual Retirement Account
(IRA):
Provision of the IRA law
that enables persons receiving lump-sum payments from their
company�s pension or profit-sharing plan because of retirement
or other termination of employment to roll over the amount
into an IRA investment plan within 60 days. Also, current
IRA�s may themselves be transferred to other investment
options within the 60-day period. Through an IRA rollover,
the capital continues to accumulate tax-deferred until time
of withdrawal.
Initial Public Offering (IPO):
Corporation�s first offering
of stock to the public. IPO�s are almost invariably an opportunity
for the existing investors and participating venture capitalists
to make big profits, since for the first time their shares
will be given a market value reflecting expectations for
the company�s future growth.
Institutional Investor:
Organization that trades
large volumes of securities. Some examples are mutual funds,
banks, insurance companies, pension funds, labor union funds,
corporate profit-sharing plans, and college endowment funds.
Typically, more than 50% and sometimes upwards of 70% of
the daily trading on the New York Stock Exchange is on behalf
of institutional investors.
Interest:
Cost of using money, expressed
as a rate per period of time, usually one year, in which
case it is called an annual rate of interest.
In-The Money:
Option contract on a stock
whose current market price is above the striking price of
a call option or below the striking price of a put option.
A call option on XYZ at a striking price of 100 would be
in the money if XYZ were selling for 102, for instance,
and a put option with the same striking price would be in
the money if XYZ were selling for 98.
Issued and Outstanding Shares:
Shares of a corporation,
authorized in the corporate charter, which have been issued
and are outstanding. These shares represent capital invested
by the firm�s shareholders and owners, and may be all or
only a portion of the number of shares authorized. Shares
that have been issued and subsequently repurchased by the
company are called treasury stock, because they are held
in the corporate treasury pending reissue or retirement.
J
Junk Bond:
Bond with a credit rating
of BB or lower by rating agencies. Although commonly used,
the term has a pejorative connotation, and issuers and holders
prefer the securities be called high-yield bonds.
Junk bonds are issued by companies without long track records
of sales and earnings, or by those with questionable credit
strength. They are a popular means of financing takeovers.
Since they are more volatile and pay higher yields than
investment grade bonds, many risk-oriented investors specialize
in trading them.
K
Keogh Plan:
Tax-deferred pension
account designated for employees of unincorporated businesses
or for persons who are self-employed (either full-time or
part-time). As of 1984, eligible people could contribute
up to 25% of earned income, up to a maximum of $30,000.
Like the Individual Retirement Account (IRA), the Keogh
plan allows all investment earnings to grow tax deferred
until capital is withdrawn, as early as age 59 � and starting
no later than age 70 � . Almost any investment except precious
metals or collectibles can be used for a Keogh account.
Typically, people place Keogh assets in stocks, bonds, money-market
funds, certificates of deposit, mutual funds, or limited
partnerships. The Keogh plan was established by Congress
in 1962 and was expanded in 1976 and again in 1981 as part
of the Economic Recovery Tax Act.
L
Leverage:
Means of enhancing return
or value without increasing investment. Buying securities
on margin is an example of leverage with borrowed money,
and extra leverage may be possible if the leveraged security
is convertible into common stock. Rights, warrants, and
option contracts provide leverage, not involving borrowings
but offering the prospect of high return for little or no
investment.
Liabilities:
Claim on the assets of a
company or individual-excluding ownership equity. Characteristics:
(1) It represents a transfer of assets or services at a
specified or determinable date. (2) The firm or individual
has little or no discretion to avoid the transfer. (3) The
event causing the obligation has already occurred.
Limited Partnership:
Organization made up of a
general partner, who manages a project, limited partners,
who invest money but have limited liability, are not involved
on day-to-day management, and usually cannot lose more than
their capital contribution. Usually limited partners receive
income, capital gains, and tax benefits; the general partner
collects fees and a percentage of capital gains and income.
Typical limited partnerships are in real estate, oil and
gas, and equipment leasing, but they also finance movies,
research and development, and other projects.
Limit Order:
Order to buy or sell a security
at a specific price or better. The broker will execute the
trade only within the price restriction. For example, a
customer puts in a limit order to buy XYZ Corp. at 30 when
the stock is selling for 32. Even if the stock reached 30
1/8 the broker will not execute the trade. Similarly, if
the client put in a limit order to sell XYZ Corp. at 33
when the price is 31, the trade will not be executed until
the stock price hits 33.
Listed Security:
Stock or bond that has been accepted
for trading by one of the organized and registered securities
exchanges in the United States. Listed securities include
stocks, bonds, convertible bonds, preferred stocks, warrants,
rights, and options.
Loan Value:
With respect to regulation
T of the Federal Reserve Board, the maximum percentage of
the current market value of eligible securities that a broker
can lend a margin account customer. Regulation T applies
only to securities formally registered or having an unlisted
trading privilege on a national securities exchange. For
securities exempt from Regulation T, which comprise U.S.
government securities, municipal bonds, and bonds of the
International Bank for Reconstruction and Development, loan
value is a matter of the individual firm�s policy.
M
Margin:
Amount a customer with
a broker when borrowing from the broker to buy securities.
Under Federal Reserve Board regulation, the initial margin
required since 1945 has ranged from 50 to 100 percent of
the security�s purchase price. In the mid-1980�s the minimum
was 50% of the purchase or short sale price, in cash or
eligible securities, with a minimum of $2000. Thereafter,
minimum maintenance requirements are imposed by the National
Association of Securities Dealers (NASD) and the New York
Stock Exchange, in the mid-1980s 25% of the market value
of margined securities, and by the individual brokerage
firm, whose requirements is typically higher.
Margin Call:
Demand that a customer deposit
enough money or securities to bring a margin account up
to the initial margin or minimum maintenance requirements.
If a customer fails to respond, securities in the account
may be liquidated.
Margin Requirement:
Minimum amount that a client
must deposit in the form of cash or eligible securities
in a margin account as spelled out in Regulation T of the
Federal Reserve Board. Reg T requires a minimum of $2000
or 50% of the purchase price of eligible securities bought
on margin or 50% of the proceeds of short sales.
Margin Security:
Security that may be bought
or sold in a margin account Regulation T defines margin
securities as (1) any registered security (a listed
security or a security having Unlisted Trading privileges);
(2) any OTC margin stock or OTC margin bond, which
are defined as any Unlisted Security that the Federal Reserve
Board (FRB) periodically identifies as having the investor
interest, marketability, disclosure, and solid financial
position of a listed security; (3) any OTC security designated
as qualified for trading in the National Market System under
a plan approved by the Securities and Exchange Commission;
(4) any mutual fund or unit investment trust registered
under the Investment Company Act of 1940. Other securities
that are not Exempt Securities must be transacted in cash.
Market Maker:
A broker-dealer who is registered
to trade in a given security on Nasdaq.
Mark to Market:
Adjust the valuation of a
security or portfolio to reflect current market values.
For example, margin accounts are marked to the market to
ensure compliance with maintenance requirements. Option
and future contracts are marked to the market at year end
with paper profit or loss recognized for tax purposes.
Maturity:
Date on which the principal
amount of a note, draft, acceptance, bond, or other debt
instrument becomes due and payable. Also, termination or
due date on which an installment loan must paid in full.
Merger:
Combination of two or more
companies, either through a pooling of interests, where
the accounts are combined; a purchase, where the amount
paid over and above the acquired company�s book value is
carried on the books of the purchaser as goodwill; or a
consolidation, where a new company is formed to acquire
the net assets of the combining companies. Strictly speaking,
only combinations in which one of the companies survives
as a legal entity are called mergers or, more formally,
statutory mergers; thus consolidations, or statutory consolidations,
are technically not mergers, though the term merger is commonly
applied to them.
Money Market Fund:
Open-ended mutual fund that
invests in commercial paper, banker�s acceptances, repurchase
agreements, government securities, certificates of deposit,
and other highly liquid and safe securities, and pays money
market rates of interest. Launched in the middle 1970�s,
these funds were especially popular in the early 1980�s
when interest rates and inflation soared. Management�s fee
is less than 1% of an investor�s assets; interest over and
above that amount is credited to shareholders monthly. The
fund�s net asset value remains a constant $1 a share-only
the interest rate goes up or down. Most funds are not federally
insured, but some are covered by private insurance. Some
funds invest only in government-backed-securities, which
give shareholders an extra degree of safety. Many money
market funds are part of fund families. This means that
investors can switch their money from one fund to another
and back again without charge. Money in an asset management
account usually is automatically swept into a money market
fund until the accountholder decides where to invest it
next.
Mortgage Bond:
Bond issue secured by a mortgage
on the issuer�s property, the lien on which is conveyed
to the bondholders by a deed of trust. A mortgage bond may
be designated senior, underlying, first, prior, overlying,
junior, senior, third, and so forth, depending on the priority
of the lien. Most of those issued by corporation are first
mortgage bonds secured by specific real property and also
representing unsecured claims on the general assets of the
firm. As such, these bonds enjoy a preferred position relative
to unsecured bonds of the issuing corporation.
Municipal Bond:
Debt obligation of a state
or local government entity. The funds may support general
government needs or special projects. Issuance must be approved
by referendum or by an electoral body. Prior to the Tax
Reform Act of 1986, the terms municipal and tax-exempt were
synonymous, since virtually all municipal obligations were
exempt from federal income taxes and most from state and
local income taxes, at least in the state of issue. The
1986 Act, however, divided municipals into two broad groups:
(1) public purpose bonds, which remain tax-exempt and can
be issued without limitation, and (2) private purpose bonds,
which are taxable unless specifically exempted. The tax
distinction between public and private purpose is based
on the percentage extent to which the bonds benefit private
parties; if a tax-exempt public purpose bond involves more
than a 10% benefit to private parties, it is taxable. Permitted
private purpose bonds (those specified as tax-exempt)
are generally tax preference items in computing the alternative
minimum tax and, effective August 15, 1986, are subject
to volume caps.
Mutual Fund:
Fund operated by an investment
company that raises money from shareholders and invests
it in stocks, bonds, options, commodities, or money market
securities. These funds offer investors the advantages of
diversification and professional management. For these services
they charge a management fee, typically 1% or less of assets
per year. Mutual funds may invest aggressively or conservatively.
Investors should assess their own tolerance for risk before
they decide which fund would be appropriate for them. In
addition, the timing of buying or selling depends on the
outlook for the economy, the state of the stock and bond
markets, interest, and other factors.
N
NASD:
Nonprofit organization
formed under the joint sponsorship of the Investment Bankers�
Conference and the Securities and Exchange Commission to
comply with the Maloney Act. NASD members include virtually
all investment banking houses and firms dealing in the over
the counter market. Operating under the supervision of the
SEC, the NASD�s basic purposes are to (1) standardize practices
in the field, (2) establish high moral and ethical standards
in securities trading, (3) provide a representative body
to consult with the government and investors on matters
of common interest, (4) establish and enforce fair and equitable
rules of securities trading, and (5) establish a disciplinary
body capable of enforcing the above provisions. The NASD
also requires members to maintain quick assets in excess
of current liabilities at all times. Periodic examinations
and audits are conducted to ensure a high level of solvency
and financial integrity among members.
Nasdaq:
National Association of
Securities Dealers Automated Quotations System, which is
owned and operated by the National Association of Securities
Dealers. NASDAQ is a computerized system that provides brokers
and dealers with price quotations for securities traded
over the counter as well as for many New York Stock Exchange
listed securities. NASDAQ quotes are published in the financial
pages of most newspapers.
National Securities Clearing
Corporation (NSCC):
Securities clearing organization
formed in 1977 by merging subsidiaries of the New York and
American Stock Exchanges with the National Clearing Corporation.
It functions essentially as a medium through which brokerage
firms, exchanges, and other clearing corporations reconcile
accounts with each other.
Net Asset Value (NAV):
Market value of a mutual fund
share, synonymous with bid price. In the case of no-load
funds, the NAV, market price, and offering price are all
the same figure, which the public pays to buy shares; load
fund market or offer prices are quoted after adding the
sales charge to the net asset value. NAV is calculated by
most funds after the close of the exchanges each day by
taking the closing market value of all securities owned
plus all other assets such as cash, subtracting all liabilities,
then dividing the result (total net assets) by the total
number of shares outstanding. The number of shares outstanding
can vary each day depending on the number of purchases and
redemptions.
Net Income:
Difference between total sales
and total costs and expenses. Total costs comprise cost
of goods sold including depreciation; total expenses comprise
selling, general, and administrative expenses, plus income
deductions. Net income is usually specified as to whether
it is before income taxes or after income taxes. Net income
after taxes is the bottom line referred to in popular
vernacular. It is out of this figure that dividends are
normally paid.
No-Load Funds:
Mutual fund offered by an open-end
investment company that imposes no sales charge (load) on
its shareholders. Investors buy shares in no-load funds
directly from the fund companies, rather than through a
broker, as is done in load funds. Many no-load fund families
(see family of funds) allow switching of assets between
stock, bond, and money market funds. The listing of the
price of a no-load fund in a newspaper is accompanied with
the designation NL. The net asset value, market price, and
offer prices of this type of fund are exactly the same,
since there is no sales charge.
Non-Callable Bonds:
Preferred stock or bond that
cannot be redeemed at the option of the issuer. A bond may
offer call protection for a particular length of time, such
as ten years. After that, the issuer may redeem the bond
if it chooses and can justify doing so. U.S. government
bond obligations are not callable until close to maturity.
Provisions for noncallability are spelled put in detail
in a bond�s indenture agreement or in the prospectus issued
at the time a new preferred stock is floated. Bond yields
are often quoted to the first date at which the bonds could
be called.
NSCC:
See National Securities Clearing
Corporation
O
Odd Lot:
Securities trade made for less than the normal trading
unit (termed a round lot). In stock trading, any purchase
or sale of less than 100 shares is considered an odd-lot.
Offering Price:
Price per share at which a new
secondary distribution of securities is offered for sale
to the public; also called public offering price.
Open Order:
Buy or sell order for securities
that has not yet been executed or canceled; a Good �Till-Canceled
Order.
Option:
Securities transaction agreement
tied to stocks, commodities, or stock indexes. Also, See
Call Option and Put Option
Out-of-the-Money:
Term used to describe an option
whose strike price for a strike is either higher than the
current market value, in the case of a call, or lower, in
the case of a put. For example, an XYZ December 60 call
option would be out of the money when XYZ stock was selling
for $55 a share. Similarly, an XYZ December 60 put option
would be out of the money when XYZ stock was selling for
$65 a share. Someone buying an out-of-the money option hopes
that the option will move in the money, or at least in that
direction. The buyer of the above XYZ call would want the
sock to climb above $60 a share, whereas the put buyer would
like the stock to drop below $60 a share.
Over-the-Counter (OTC):
Security that is not listed
and traded on an organized exchange. Market in which securities
transactions are conducted through telephone and computer
network connecting dealers in stocks and bonds, rather than
on the floor of an exchange. Over-the-counter stocks are
traditionally those of smaller companies that do not meet
the Listing Requirements of the New York Stock Exchange
or the American Stock Exchange. In recent years, however,
many companies that qualify for listing have chosen to remain
with over-the-counter trading, because they feel that the
system of multiple trading by many dealers is preferable
to the centralized trading approach of the New York Stock
Exchange, where all trading in a stock has to go through
the exchange Specialist in that stock. The rules of over-the-counter
stock trading are written and enforced largely by the National
Association of Securities Dealers (NASD), a self-regulatory
group.
P
Penny Stocks:
Stock that typically sell
for less than $1 a share. Penny stocks are issued by companies
with short or erratic history of revenues and earnings,
and therefore such stocks are more volatile than those of
large, well established firms traded on the New York or
American stock exchanges. Many brokerage houses therefore
have precautionary rules about trading in these stocks.
Penny stocks should always be considered very speculative
investments and not suitable for conservative accounts.
Pink Sheets:
Daily publication of the national
quotation bureau that details the bid and asked prices of
thousands of over the counter (OTC) stocks. Many of these
stocks are not carried in daily OTC newspaper listings.
Brokerage firms subscribe to the pink sheets- named for
their color-because the sheets not only give current prices
but list market makers who trade each stock. Debt securities
are listed separately on the yellow sheets.
Preferred Stock:
Class of capital stock that
pays dividends at a specified rate and that has preference
over common stock in the payment of dividends and the liquidation
of assets. Preferred stock does not ordinarily carry voting
rights. Most preferred stock is cumulative; if dividends
are passed (not paid for any reason), they accumulate and
must be paid before common dividends.
Price Earnings Ratio (P/E):
Price of a stock divided by
its earnings per share. The P/E ratio may either use the
reported earnings from the latest year (called a trailing
P/E) or employ an analyst�s forecast of next year�s
earnings (called a forward P/E). The trailing P/E
is listed along with a stock�s price and trading activity
in the daily newspapers. For instance, a stock selling for
$20 a share that earned $1 last year has a trailing P/E
of 20. If the same stock has projected earnings of $2 next
year, it will have a forward P/E of 10.The price/earnings
ratio, also known as the multiple, gives investors
an idea of how much they are paying for a company�s earning
power. The higher the P/E, the more investors are paying,
and therefore the more earnings growth they are expecting.
Prime Rate:
Interest rate banks charge to
their most creditworthy customers. The rate is determined
by the market forces affecting a bank�s cost of funds and
the rates that borrowers will accept. The prime rate tends
to become standard across the banking industry when a major
bank moves its prime rate up or down. The rate is a key
interest rate, since loans to less-creditworthy customers
are often tied to the prime rate.
Producer Price Index (PPI):
Measure of change in wholesale
prices (formerly called the wholesale price index),
as released monthly by the U.S. Bureau of Labor Statistics.
The index is broken down into components by commodity, industry
sector, and stage of processing. The consumer equivalent
of this index is the Consumer Price Index.
Prospectus:
Formal written offer to sell
securities that set forth the plan for a proposed business
enterprise or the facts concerning an existing one that
an investor needs to make an informed decision. Prospectuses
are also issued by mutual funds, describing the history,
background of managers, fund objectives, a financial statement,
and other essential data. A prospectus for a public offering
must be filed with the Securities and Exchange Commission
and given to prospective buyers of the offering. The prospectus
contains financial information and a description of a company�s
business history, officers, operations, pending litigation
(if any), and plans (including the use of the proceeds from
the issue). Offerings of limited partnerships are also accompanied
by prospectuses. Real estate, oil and gas, equipment leasing,
and other types of limited partnerships are described in
detail, and pertinent financial information, the background
of the general partners, and supporting legal opinions are
also given.
Proxy:
Written power of attorney given
by shareholders of a corporation, authorizing a specific
vote on their behalf at corporate meetings. Such proxies
normally pertain to election of the board of directors or
to various resolutions submitted for shareholders� approval.
Put Option:
Contract that grants the right
to sell at a specified price a specific number of shares
by a certain date. The put option buyer gains this right
in return for payment of an option premium. The put option
seller grants this right in return for receiving this premium.
For instance, a buyer of an XYZ May 70 put has the right
to sell 100 shares of XYZ at $70 to the put seller at any
time until the contract expires in May. A put option buyer
hopes the stock will drop in price, while the put option
seller (called a writer) hopes the stock will remain
stable, rise, or drop by an amount less than his or her
profit on the premium.
R
Record Date:
Date on which
a shareholder must officially own shares in order to be
entitled to a dividend. For example, the board of directors
of a corporation might declare a dividend on November 1
payable on December 1 to stockholders of record on November
15. After the date of record the stock is said to be ex-dividend.
Red Herring:
Before investors receive the
final copy of the prospectus, called the statutory prospectus,
they may receive a preliminary prospectus, commonly called
a red herring. This document is not complete in all
details, though most of the major facts of the offering
are usually included. The final prospectus is also called
the offering circular.
Registered Bond:
Bond that is recorded in the
name of the holder on the books of the issuer�s registrar
and can be transferred to another owner only when endorsed
by the registered owner. A bond registered for principal
only, and not for interest, is called a registered coupon
bond. One that is not registered is called a bearer
bond; one issued with detachable coupons for presentation
to the issuer or a paying agent when interest or principal
payments are due is termed a coupon bond. bearer bonds are
negotiable instruments payable to the holder and therefore
do not legally require endorsement. Bearer bonds that may
be changed to registered bonds are called interchangeable
bonds.
Regulation T:
Federal Reserve Board regulation
covering the extension of credit to customers by securities
brokers, dealers, and members of the national securities
exchanges. It establishes initial margin requirements and
defines registered (eligible), unregistered (ineligible),
and exempt securities.
Regulation U:
Federal Reserve Board limit
on the amount of credit a bank may extend a customer for
purchasing and carrying margin securities.
REIT:
A company, usually traded publicly,
that manages a portfolio of real estate to earn profits
traded publicly, that manages a portfolio of real estate
to earn profits for shareholders. Patterned after investment
companies, REITS make investments in a diverse array of
real estate from shopping centers and office buildings to
apartment complexes and hotels.
Round Lot:
Generally accepted unit of trading
on a securities exchange. On the New York Stock Exchange,
for example, a round lot is 100 shares of stock and $1000
or $5000 par value for bonds. In inactive stocks, the round
lot is 10 shares. Increasingly, there seems to be recognition
of a 500-share round lot for trading by institutions.
S
Savings Bond:
U.S. government
bond issued in face value denominations ranging from $50
to $10,000. From 1941 to 1979, the government issued Series
E bonds. Starting in 1980, Series EE and HH bonds were issued.
Series EE bonds, issued at a discount, range from $50 to
$10,000; Series HH bonds, which are interest bearing, range
from $500 to $10,000. Both earn interest for ten years,
though the U.S. Congress often extends that date. The interest
from savings bonds is exempt from state and local taxes,
and no federal tax is due until the bonds are redeemed.
Bond holders wanting to defer the tax liability on their
maturing Series EE bonds can exchange them for Series HH.
Taxpayers meeting income qualifications can buy EE bonds
to save for a child�s higher education and enjoy total or
partial federal tax exemption.
Secondary Distribution:
Public sale of previously issued
securities held by large investors, usually corporations,
institutions, or other affiliated persons, as distinguished
from a new issue or primary distribution, where
the seller is the issuing corporation. As with a
primary offering, secondaries are usually handled by investment
bankers, acting alone or as a syndicate, who purchase
the shares from the seller at an agreed price, then resell
them, sometimes with the help of a selling group, at a higher
public offering price, making their profit on the difference,
called the spread. Since the offering is registered with
the Securities and Exchange Commission, the syndicate manager
can legally stabilize-or peg-the market price by bidding
for shares in the open market. Buyers of securities offered
this way pay no commissions, since all costs are borne by
the selling investor.
Security:
Investment: instrument that
signifies an ownership position in a corporation (a stock),
a creditor relationship with a corporation or governmental
body (a bond), or rights to ownership such as those represented
by an option, subscription right, and subscription warrant.
Selling Short:
Sale of a security or commodity
futures contract not owned by the seller; a technique used
(1) to take advantage of an anticipated decline in the price
or (2) to protect a profit in a long position (known as
selling short against the box). An investor borrows stock
certificates for delivery at the time of short sale. If
the seller can buy that stock later at a lower price, a
profit results; if the price rises, however, a loss results.
Serial Bond:
Issued, usually of a municipality,
with various maturity dates scheduled at regular intervals
until the entire issue is retired. Each bond certificate
in the series has an indicated redemption date.
Series EE Bond:
see Savings Bond
Settlement Date:
Date by which an executed order
must be settled, either by a buyer paying for the securities
with cash or by a seller delivering the securities and receiving
the proceeds of the sale for them. In a regular-way delivery
of stocks and bonds, the settlement date is five business
days after the trade was executed. For listed options and
government securities, settlement is required by the next
business day.
Simplified Employee Pension Plan
(SEP):
Pension plan in which both the
employee and the employer contribute to an Individual Retirement
Account (IRA). Under the Tax Reform Act of 1986, employees
(except those participating in SEPs of state or local governments)
may elect to have employer contributions made to the SEP
or paid to the employee in cash as with cash or deferred
arrangements [401(K)Plans]. Elective contributions, which
are excludable from earnings for income tax purposes but
includable for employment tax (FICA and FUTA) purposes,
are limited to $7000, while employer contributions may not
exceed $30,000. SEPs are limited to small employers (25
or fewer employees) and at least 50% of employees must participate.
Special provisions concern the integration of SEP contributions
and social security benefits and limit tax deferrals for
highly compensated individuals.
Standard & Poor�s Index
(S&P 500):
Broad-based measurement of changes
on stock-market conditions based on the average performance
of 500 widely held common stocks; commonly known as the
S&P 500. The selection of stocks, their relative weightings
to reflect differences in the number of outstanding shares,
and publication of the index itself are services of Standard
& Poor�s Corporation, a financial advisory, securities
rating, and publishing firm.
Stock Split:
Increase in a corporation�s
number of outstanding shares of stock without any change
in the shareholders� Equity or the aggregate market value
at the time of the split. In a split, also called a
split up, the share price declines. If a stock at
$100 par value splits 2-for-1, the number of authorized
shares doubles (for example, from 10 million to 20 million)
and the price per share drops by half, to $50. A holder
of 50 shares before the split now has 100 shares before
the split now has 100 shares at the lower price. If the
same stock splits 4-for-1, the number of shares quadruples
to 40 million and the share price falls to $25. Dividends
per share also fall proportionately. Directors of a corporation
will authorize a split to make ownership more affordable
to a broader base of investors. Where stock splits require
an increase in authorized shares and/or a change in par
value of the stock, shareholders must approve an amendment
of the corporate charter.
Stop Limit Order:
Order to a securities broker
with instructions to buy or sell at a specified price or
better (called the stop-limit price) but only after
a given stop price has been reached or passed. It
is a combination of a stop order and a limit order. For
example, the instruction to the broker might be "buy 100
XYZ 55 STOP 56 LIMIT" meaning that if the market price reaches
$55, the broker enters a limit order to be executed at $56
or a better (lower) price. A stop-limit order avoids some
of the risks of a stop or order, which becomes a market
order when the stop price is reached; like all price-limit
orders, however, it carries the risk of missing the market
altogether, since the specified limit price or better may
never occur. The American Stock Exchange prohibits stop-limit
orders unless the stop and limit prices are equal.
Stop Order:
Order to a securities broker
to buy or sell at the market price once the security has
traded at a specified price called the stop price.
A stop order may be a day order, a good-till-canceled order,
or any other form of time-limit order. A stop order to buy,
always at a stop price above the current market price, is
usually designed to protect a profit or to limit a loss
on a short sale. A stop order to sell, always at a price
below the current market price, is usually designed to protect
or to limit a loss on a security already purchased at a
higher price. The risk of stop orders is that they may be
triggered by temporary market movements or that they may
be executed at prices several points higher or lower than
the stop price because of market orders placed ahead of
them. Also called a Stop- loss order.
Strike Price:
Price at which the stock or
commodity underlying a call or put option can be purchased
(call) or sold (put) over the specified period. For instance,
a call contract may allow the buyer to purchase 100 shares
of XYZ at any time in the next three months at an exercise
or strike price of $65.
T
Tax-Exempt Security:
Obligation whose interest
is exempt from taxation by federal, state, and/or local
authorities. It is frequently called a municipal bond (or
simply a municipal), even though it may have been
issued by a state government or agency or by a county, town,
or other political district or subdivision. The security
is backed by the full faith and credit or by anticipated
revenues of the issuing authority. Interest income from
tax-exempt municipals is free from federal income taxation
as well as from taxation in the jurisdiction where the securities
have been issued. The return to investors from a tax-exempt
bond is less than that from a corporate bond, because the
tax exemption provides extra compensation; the higher the
tax bracket of the investor, the more attractive the tax-free
alternative becomes. Municipal bond yields vary according
to local economic factors, the issuer�s perceived ability
to repay, and the security�s quality rating assigned by
one of the bond rating agencies.
Tender Offer:
Offer to buy shares of a corporation,
usually at a premium above the shares� market price, for
cash, securities, or both, often with the objective of taking
control of the target company. A tender offer may arise
from friendly negotiations between the company and a corporate
suitor or may unsolicited and possibly unfriendly, resulting
in countermeasures being taken by the target firm. The Securities
and Exchange Commission requires and corporate suitor accumulating
5% or more of a target company to make disclosures to the
SEC, the target company, and the relevant exchange.
Trade:
To carry out a transaction of
buying or selling a stock, a bond, or a commodity future
contract. A trade is consummated when a buyer and seller
agree on a price at which the trade will be executed. A
trader frequently buys and sells for his or her own account
securities for short-term profits, as contrasted with an
investor who holds his positions in hopes of long-term gains.
Treasury Bills (T-Bills):
Short-term securities with maturities
of one year or less issued at a discount from face value.
Auctions of 91-day and 182-day take place weekly, and the
yields are watched closely in the money markets for signs
of interest rate trends. Many floating rate loans and variable-rate
mortgages have interest rates tied to these bills. The Treasury
also auctions 52-week bills once every four weeks. At times
it also issues very short-term cash management bills, tax
anticipation bills, and treasury certificates of
indebtedness. Treasury bills are issued in minimum denominations
of $10,000, with $5000 increments above $10,000 (except
for cash management bills, which are sold in minimum $10
million blocks). Individual investors who do not submit
a competitive bid sold bills at the average price of the
winning competitive bids. Treasury bills are the primary
instrument used by the Federal Reserve in its regulation
of money supply through open market operations.
Treasury Stock:
Stock reacquired by the issuing
company and available for retirement or resale. It is issued
but not outstanding. It cannot be voted and it pays or accrues
no dividends. It is not included in any of the ratio measuring
values per common share. Among the reasons treasury stock
is created are (1) to provide an alternative to paying taxable
dividends, since the decreased amount of outstanding shares
increases the per share value and often the market price;
(2) to provide for the exercise of stock options and warrants
and the conversion of convertible securities; (3) in countering
a tender offer by a potential acquirer; (4) to alter the
debt-to-equity ratio by issuing bonds to finance the reacquisition
of shares; (5) as a result of the stabilization of the market
price during a new issue.
U
Uncovered Options:
Option contract for which
the owner does not hold the underlying investment (should
delivery on the option be required).
Unit Investment Trust:
Investment vehicle, registered
with the securities and exchange commission under the Investment
Company Act of 1940, that purchases a fixed portfolio of
income producing securities, such as corporate, municipal,
or government bonds, mortgage-backed securities, or preferred
stock. Units in the trust, which usually cost a least $1000,
are sold to investors by brokers, for a load charge of about
4%. Unit holders receive an undivided interest in both the
principal and the income portion of the portfolio in proportion
to the amount of capital they invest. The portfolio of securities
remains fixed until all the securities mature and unit holders
have recovered their principle. Most brokerage firms maintain
a secondary market in the trusts they sell, so that units
can be resold if necessary. In Britain, open-end mutual
funds are called unit trusts.
V
Value Line Composite Index:
Equally-weighted geometric
average of approximately 1700 NYSE, AMEX, and over the counter
stocks tracked by the Value Line Investment Survey. The
index uses a base value by the Value line Investment Survey.
The index uses a base value of 100.00 established June 30,
1961, and changes are expressed in index numbers rather
than dollars and cents. This index is designed to reflect
price changes of typical industrial stocks and being neither
price nor market value-weighted, it largely succeeds. Options
are not traded on this index, though futures are available
on the Kansas City Board of Trade and futures options on
the Philadelphia Exchange.
Variable Annuity:
Life insurance annuity contract
whose value fluctuates with that of an underlying securities
portfolio or other index of performance. The variable annuity
contrasts with a conventional or fixed annuity, whose rate
of return is constant and therefore vulnerable to the effects
of inflation. Income on a variable annuity may be taken
periodically, beginning immediately or at any future time.
The annuity may be a single-premium or multiple-premium
contract. The return to investors may be a single-premium
or multi-premium contract. The return to investors may be
in the form of a periodic payment that varies with the market
value of the portfolio or a fixed minimum payment with add-ons
based on the rate of portfolio appreciation.
Vesting:
Right an employee gradually
acquires by length of service at a company to receive employer-contributing
benefits, such as payments from a pension fund, profit-sharing,
or other qualified plan or trust. Under the tax reform act
of 1986, employees must be vested 100% after years of service
or at 20% a year starting in the third year and becoming
100% vested after seven years.
Volume:
Total number of stock shares,
bonds, or commodities futures contracts traded in a particular
period. Volume figures are reported daily by exchanges,
both for individual issues trading and for the total amount
of trading executed on the exchange. Technical analysts
place great emphasis on the amount of volume that occurs
in the trading of a security or a commodity futures contract.
A sharp rise in volume is believed to signify future sharp
rises or falls in price, because it reflects increased investor
interest in a security, commodity, or market.
W
Warrant:
Type of security, usually
held together with a bond or preferred stock, that entitles
the holder to buy a proportionate amount of common stock
at a specified price, usually higher than the market price
at the time of issuance, for a period of years or to perpetuity.
Wash Sale:
Purchase and sale of the same
security either simultaneously or within a short period
of time. Wash sales taking place within 30 days of the underlying
purchase do not qualify as tax losses under Internal Revenue
Service rules.
Wilshire 5000 Equity Index:
The Wilshire Index is market
value-weighted and represents the value, in billions of
dollars, of all NYSE, AMEX and over the counter issues for
which quotes are available, some 5000 stocks in all. Changes
are measured against a base value established December 31,
1980. Options and futures are not traded on the Wilshire
Index, which is prepared by the Wilshire Associates of Santa
Monica, California.
Y
Yield:
Rate of return on a bond,
taking into account the total of annual interest payments,
the purchase price, the redemption value, and the amount
of time remaining until maturity; called maturity yield
or yield to maturity.
Z
Zero Coupon Bond:
Security that makes no
periodic interest payments but instead is sold at a deep
discount from its face value. The buyer of such a bond receives
the rate of return by the gradual appreciation of the security,
which is redeemed at face value on a specified maturity
date.