Definitions

A   B   C   D   E   F   G   H   I   J   K   L   M   N   O   P   Q   R   S   T   U   V   W   XYZ

 

1035 Exchange – A transfer of assets from one insurance company to another without any tax consequences or penalties under the tax code.

 

401(k) – A company-sponsored retirement account set up for the benefit of employees. Both employee and employer may make contributions to the account.

 

72T Calculation – An early withdrawal (before age 59 ½) calculation from a retirement account established by the IRS. Calculations are based on a prudent interest rate, usually 80-120% of the current 30-year bond rate. Once distributions are started, the amount cannot be changed for 5 years or until the retiree reaches age 59 ½, whichever is longer.

 

A

 

ACAT Transfer – (Automated Customer Account Transfer) A system for transferring assets from one brokerage firm to another and/or one bank to another. This transfer can only bring assets over in-kind, all or nothing.

 

Annual Report (10K) – Public companies are required to file an annual report with the Securities and Exchange Commission detailing the preceding year’s financial results and plans for the upcoming year. Its regulatory version is called “Form 10k.” The report contains financial information concerning a company’s assets, liabilities, earnings, profits, and other year-end statistics. The annual report is also the most widely-read shareholder communication.

 

Annuity – A contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time.

 

Arbitrage – Arbitrage involves the simultaneous purchase of a security in one market and the sale of it or a derivative product in another market to profit from price differentials between the two markets.

 

Ask Price (offer price) – The price at which a Market Maker is willing to sell a security.

 

Asset Allocation – used to minimize a portfolio’s risk and fluctuation by spreading investments among several asset classes, such as Large Cap, Small Cap, Emerging Markets, Foreign Bonds, etc.

 

B

 

Bear Market – A condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increases.

 

Beneficial Owner – A person who benefits from ownership of a security or mutual fund. Shares or title may be held by a bank or broker for safety and convenience, or in “street name” to expedite transactions, but the real owner is the beneficial owner.

 

Best Ask – The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time.

 

Best Bid – The highest quoted bid of all competing Market Makers to buy a particular stock at any given time.

 

Bid Price (buy price) – The price a buyer is willing to pay for a security.

 

Bid/Ask Spread – The difference between the price at which a buyer is willing to buy a security (bid) and the price at which a seller is willing to sell it (ask). The spread narrows or widens according to the supply and demand for the security being traded.

 

Block Trade – A purchase or sale of a large quantity of stock, generally 10,000 shares or more.

 

Blue-sky Laws – A state law in the U.S. that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales, as well as of stockbrokers and brokerage firms.

 

Bond – A long-term promissory note in which the issuer agrees to pay the owner the amount of the face value on a future date and to pay interest at a specified rate at regular intervals.

 

Broker/Dealer – This term is used in the U.S. securities regulation parlance to describe stock brokerages, because most of them act as both agents and principals. A brokerage acts as a broker (or agent) when it executes orders on behalf of clients, whereas it acts as a dealer (or principal) when it trades for its own account.

 

Bull Market – A financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, currencies and commodities.

 

C

 

Capital Gains – An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

 

Capital Loss – The difference between the purchase price and the price at which an asset is sold, where the sale price is lower than the purchase price.

 

Common Stock – A class of securities representing ownership and control in a corporation and that may pay dividends as well as appreciate in value.

 

Credit Balance – (in a margin account) The amount of funds deposited in the customer’s account following the successful execution of a short sale order.

 

CUSIP  – an acronym that refers to Committee on Uniform Security Identification Procedures number and the nine-digit alphanumeric CUSIP numbers that are used to identify securities, including municipal bonds. A CUSIP number, similar to a serial number, is assigned to each maturity of a municipal security issue.

 

Custodian – A financial institution that holds customers’ securities for safekeeping to minimize the risk of their theft or loss. A custodian holds securities and other assets in electronic or physical form.

 

D

 

DTC (Depository Trust Company) – An organization that acts as a central depository for securities certificates and through which member firms can transfer securities electronically via computerized bookkeeping entries.

 

Day Trading – The practice of trying to take advantage of daily up and down swings in the market for profit.

 

Debit Balance – In a margin account, the Debit Balance is money owed by the customer to the broker for funds advanced to purchase securities.

 

Derivative – A security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties.

 

Discretionary Account – An account empowering a broker or advisor to buy and sell securities without the client’s prior knowledge and consent.

 

Dividend – Distributions to stockholders of cash or stock, declared by the company’s Board of Directors.

 

Diversification – A risk management technique that mixes a wide variety of investments within a portfolio.

 

E

 

Equity – A stock or any other security representing an ownership interest. This may be in either a publicly traded company or a private company (not publicly traded) in which case it is called private equity.

 

Ex-dividend Date – A dividend-paying stock’s ex-dividend date, or ex-date is very important to investors. In a nutshell, if you buy a dividend stock before the ex-dividend date, then you will receive the next upcoming dividend payment.

 

Federal Reserve System – Often referred to as the Federal Reserve or simply “the Fed”, it is the central bank of the United States. It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

 

F

 

Fixed Income Security – An investment that pays regular income in the form of a coupon payment, interest payment or preferred dividend.

 

Foreign Security – A security issued in the currency of a country other than the home country of the issuer.

 

H

 

Hypothecation – A legal term that refers to the granting of a hypothec to a lender by a borrower. In practice, the borrower pledges an asset as collateral for the loan, while retaining ownership of the assets and enjoying the benefits therefrom.

 

I

 

Individual Investor – A person who buys or sells securities for his or her own account. The individual investor is also called a retail investor or retail shareholder.

 

Initial Public Offering (IPO) – A company’s first sale of stock to the public. Companies making an IPO are seeking outside equity capital and a public market for their stock.

 

Investment Goal – An individual’s reason for investing money such as retirement, college fund, leave to heirs, etc.

 

Investment Risk – The risk associated with all investments.

 

IRA (Individual Retirement Account) – An investment tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs as of 2016: Traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs.

 

L

 

Limit Order – A take-profit order placed with a bank or brokerage to buy or sell a set amount of a financial instrument at a specific price or better; because a limit order is not a market order, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is left open.

 

Limited Partnership Unit – An ownership unit in a publicly traded limited partnership, or master limited partnership (MLP). A MLP often distributes all available cash flow from operations to unit holders after the deduction of maintenance capital.

 

Liquidity – A term which describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices.

 

Load – A sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund. The fee may be a one-time charge at the time the investor buys into the mutual fund (front-end load), when the investor redeems the mutual fund shares (back-end load), or on an annual basis as a 12b-1 fee.

 

M

 

Managed Account – An investment account that is owned by an individual investor and overseen by a hired professional money manager. With a mutual fund, the fund company hires a money manager who looks after investments in the fund’s portfolio and may alter the fund’s holdings in accordance with its objectives.

 

Margin – An account in which a customer purchases securities on credit extended by the broker/dealer.

 

Market Order – An order to buy or sell a stated amount of a security at the best possible price at the time the order is received in the marketplace.

 

Market Value – The price an asset would fetch in the marketplace. Market Value is also commonly used to refer to the market capitalization of a publicly-traded company, and is obtained by multiplying the number of its outstanding shares by the current share price.

 

Money Purchase Plan– A money-purchase pension plan is a pension plan to which employers and employees make contributions based on a percentage of annual earnings, in accordance with the terms of the plan. Upon retirement, the total pool of capital in the member’s account can be used to purchase a lifetime annuity.

 

Municipal Bonds – Issued by states, cities, counties and towns to fund public capital projects such as schools, roads, etc. The bonds are exempt from federal taxation and from state and local taxes for investors who reside in the state where the bond was issued.

 

Mutual Fund – An investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stock, bonds, money market instruments and similar assets.

 

N

 

NAV (Net Asset Value) – It is derived by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio’s securities.

 

Net Change – The difference between today’s last trade and the previous day’s last trade.

 

New Account Information Form – A document filled out by the broker that details vital facts about a new client’s financial circumstances and investment objectives.

 

No-load – A mutual fund in which shares are sold without a commission or sales charge. This occurs because the shares are distributed directly by the investment company, instead of going through a secondary party.

 

Non-qualified Investment – An investment that does not qualify for any level of tax-deferred or tax-exempt status. Investments of this sort are made with after-tax money. They are purchased and held in tax-deferred accounts, plans or trusts. Returns from these investments are taxed on an annual basis.

 

O

 

Open Order – An order to buy or sell a security that remains in effect until it is either cancelled by the customer or it is executed.

 

Option – A contract that offers the buyer the right, but not the obligation to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

 

Order Ticket – A form completed by the registered representative of a brokerage firm upon receiving trade order instructions from a customer.

 

OTC (Over-the-Counter) Securities – A security traded in some context other than on a formal exchange such as the New York Stock Exchange (NYSE), Toronto Stock Exchange or the NYSE MKT, formerly known as the American Stock Exchange (AMEX).

 

P

 

Portfolio – A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds. Portfolios are held directly by investors and/or managed by financial professionals.

 

Portfolio Manager – The individual who oversees the buying and selling of securities in an individual or institutional portfolio.

 

Preferred Stock – A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must paid out before dividends to the common shareholders, and the shares usually do not carry voting rights.

 

Price/Earnings Ratio (P/E Ratio) – The ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio can be calculated as: Market Value per Share/Earnings per Share.

 

Profit Sharing – Also known as a deferred profit-sharing plan or DPSP, it is a plan that gives employees a share in the profits of a company. Under this type of plan, an employee receives a percentage of a company’s profits based on its quarterly or annual earnings.

 

Prospectus – A formal legal document that is required by and filed with the Securities and Exchange Commission that provides details about an investment offering for sale to the public.

 

Proxy Vote – A ballot cast by one person on behalf of a shareholder of a corporation who would rather cast a proxy vote than attend a shareholder meeting. Registered investment management companies may also cast proxy votes for the securities in their portfolios, such as on behalf of mutual fund shareholders.

 

Q

 

Qualified Investment – An investment purchased with pretax income. Money invested in a qualifying investment trust, annuity or plan is exempt from income taxes until it is withdrawn. These sorts of investments are tax-deferred, because the money invested in them is taxed at withdrawal only.

 

R

 

Record Date – The cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution. The shareholders of record as of the record date will be entitled to receive the dividend or distribution declared by the company. Also known as the Date of Record.

 

Registered Representative (RR) – A person who works for a brokerage company that is licensed by the Securities and Exchange Commission (SEC) and acts as an account executive for clients trading investment products such as stocks, bonds and mutual funds. Also known as an “Account Executive”.

 

Redemption – The return of an investor’s principal in a fixed-income security, such as a preferred stock or bond, or the sale of units in a mutual fund. Fixed-income securities are redeemed at par value on the maturity date, and called bonds are redeemed at a premium price above par.

 

Return – The gain or loss of a security in a particular period. The “Return” consists of the income and the capital gains relative on an investment, and it is usually quoted as a percentage.

 

Rights – A stockholder’s entitlement to purchase new shares issued by the corporation at a predetermined price (normally at a discount to the current market price) in proportion to the number of shares already owned. Also known as “Subscription Rights” or “Share Purchase Rights”.

 

Roth IRA – A special retirement account where you pay taxes on money going into your account and then all future withdrawals are tax free.

 

S

 

Security – A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option.

 

Settlement – The date on which a 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.

 

Shareholder of Record – A holder of record is the name of the person who is the registered owner of a security and who has the rights, benefits and responsibilities of ownership. The holder of record for a stock typically has shareholder voting rights and receives dividend payouts if there are any.

 

Short Sale – The sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit.

 

Split (Stock Split) – A corporate action in which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to the pre-split amounts (because the split did not add any real value). The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares for every share held earlier. This is also known as a Forward Stock Split.

 

Stock (Common Stock) – A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy.

 

Stop-Loss Order – An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor’s loss on a position in a security.

 

Street Name – Securities held in the name of a broker on behalf of a customer. This arrangement allows shares to transfer easily. If the shares are held in the customer’s name, the actual stock certificates must be transferred upon settlement.

 

Suitability – A broker’s responsibility to make sure that investment decisions are appropriate and consistent with the customer’s investment objectives.

 

T

 

Trade Confirmation – A broker’s written acknowledgement that a trade has been completed. These can be in electronic or paper form, and record information such as the date, price, commission, fees and settlement terms of the trade. They are normally sent within one week of the trade’s completion.

 

Transfer Agent – Keeps records of who owns a company’s stocks and bonds and how those stocks and bonds are held – whether by the owner in certificate form, by the company in book-entry form, or by the investor’s brokerage firm in street name. The Transfer Agent also keeps records of how many shares or bonds each investor owns.

 

U

 

UGMA (Uniform Gifts to Minors Act) – An act in some states of the U.S. that allow assets such as securities, where the donor has given up all possession and control, to be held in the custodian’s name for the benefit of a minor without an attorney needing to set up a special trust fund.

 

UTMA (Uniform Transfer to Minors Act) – An act that allows a minor to receive gifts, such as money, patents, royalties, real estate and fine art, without the aid of a guardian or trustee. Under the UTMA, the gift giver or an appointed custodian manages the minor’s account until the latter is of age.

 

V

 

Variable Annuity – A contract sold by an insurance company. The contract provides the holder with future payments based on the performance of the contract’s underlying securities. The insurer may guarantee a minimum payment, but the rate of return on the underlying securities may vary.

 

Volatility – A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

 

Volume – Amount of trading activity expressed in shares or dollars for a single security or the entire market for a specified period, usually daily, monthly or annually.

 

W

 

Warrant – A certificate issued by a company giving the holder the right to purchase securities at a stipulated price within specific time limits, or with no expiration date (perpetual warrant).

 

Wire House – An archaic term used to describe a broker-dealer. Modern-day wirehouses can range from small regional brokerages to giant institutions with offices around the world.

 

Withdrawal – The process of removing assets from an account.

 

XYZ

 

Yield – Also know as return. The dividends or interest paid by a security expressed as a percentage of the current price. A stock with a current market value of $20 a share that is currently paying dividends at the rate of $1 a year is said to return 5% ($1/$20). The current return on a bond is figured the same way.

 


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