Glossary
A
account agreement Contract between broker and customer.
accounting risk Risk arising from accounting practices, errors, or fraud.
accredited investor An individual with sufficiently high net worth to invest in more speculative types of securities, such as hedge funds and similar unregulated investments.
accumulate Analyst recommendation to acquire shares of a stock; not as positive as buy, more positive than hold.
actively managed Portfolio created according to some decision-making process and intended to outperform a benchmark, not simply mirror it.
actual A physical commodity, such as gold or soybeans.
advance-decline (A-D) Ratio of stocks going up to those going down, a technical indicator.
advisor (adviser) Person or entity who is compensated for investment advice or portfolio management.
alpha Measure of the attractiveness of an investment or the degree to which a security or portfolio is under- or overpriced. Positive alpha values are good; negative values are bad.
alternative investment Investments intended to help diversify a traditional stock/bond portfolio, such as real estate, hedge funds, or commodities.
American Depository Receipt (ADR) Security traded on a U.S. exchange that is equivalent to a foreign stock.
American style Option that can be exercised on any day through expiration. (Compare to European style.)
analyst Market professional who studies companies within a particular industry.
annual rate of return Standardized measure of an investment’s rate of growth.
annualized Stated as an annual rate of return.
arbitrage Buying and selling of equivalent investments to take advantage of mispricings in different markets.
arithmetic mean Simple numerical average of a set of numbers. (Compare
to geometric mean.)
articles of incorporation Legal document creating a corporation.
ascending tops Bullish technical indicator showing a series of new highs.
asking price Price at which a seller offers to sell a security.
asset Something that has economic value to someone.
asset allocation Apportionment of a portfolio in various investment categories, especially stocks, bonds, and cash.
asset-backed securities (ABS) Securities backed by a specific set of assets, which are referred to as underlying assets.
Association for Investment Management Research (AIMR) See CFA Institute.
authorized shares/stock Number of shares a corporation is allowed to issue, per the articles of incorporation.
average life Average amount of time before maturity of bonds in a portfolio.
B
bailout Saving a company from bankruptcy through loans, guarantees, or other forms of capital.
balance sheet Statement of a corporation’s assets and liabilities.
bankruptcy Inability of a corporation or individual to meet financial obligations.
barter Exchange of goods and/or services for other goods and/or services.
basis point One-hundredth of 1 percent.
basis risk Risk deriving from variations in type and quality between a marketable commodity and the specific commodity described in a standard futures contract.
bear market A pronounced downturn in a market.
bearer bond Unregistered bonds with detachable coupons.
behavioral finance Theory of the psychology of investor behavior.
benchmark A performance standard used for valuation purposes.
benchmark risk Risk of selecting an inappropriate benchmark or of failing to match its return.
beta (beta coefficient) Correlation of a stock with an index such as the S&P 500.
bid What a buyer is willing to pay for a security.
Black Monday October 19, 1987, the day of the second great stock market crash of the twentieth century.
Black Tuesday See Wall Street Crash of 1929.
Black-Scholes option pricing model Theoretical framework for determining value of financial options.
black swan A rare, largely unexpected event, with negative consequences.
blue chip Stock of a large-capitalization, financially sound corporation.
board of directors Individuals elected by shareholders to oversee corporate management.
bond Long-term debt securities issued by governments and corporations; also used generically to refer to debt of any maturity.
book entry Proof of securities ownership recorded on an issuer’s books, in contrast to issuance of certificates.
book value Value of a corporation or corporate asset according to accounting conventions.
breakout Technical indicator of an increase in a security’s price range.
budget deficit Cash-flow problem of a company or a government requiring additional financing.
budget surplus Excess cash that may be available to a company (or a government) for investing, paying dividends, or cutting taxes.
bull market Market characterized by a pronounced upswing in price level.
bullish Having a positive view of a market or security.
Buttonwood Agreement (buttonwood tree) Agreement in 1792, leading to the creation of the New York Stock Exchange.
buy Analyst recommendation to buy shares in stock. More positive than accumulate, less positive than strong buy.
buy side Institutional money managers who buy securities from underwriters and broker/dealers; the buy side includes banks, insurance companies, mutual funds, pension funds, and hedge funds.
buy-write Investment strategy combining purchase of an asset with sale of a call option on that asset.
buying climax A frenzy of buying; technical indicator for the end of a rally or bull market.
C
call An option to buy an asset at a certain price up until (or on) the expiration date.
call market Market in which individual stocks are traded periodically rather than continuously.
call premium Price paid or received for a call option.
call price Price paid for a callable bond when its call provision is exercised.
call provision Right retained by some bond issuers to redeem a bond before maturity.
called away Said of an underlying asset exercised away from the call writer.
capacity constraint Size limit for a portfolio investment strategy.
capital Surplus goods and/or money used to create more goods and/or money.
capital appreciation See capital gain.
capital assets Long-term assets of a business, consisting of fixed assets (land, buildings, machinery, furniture, etc.) and securities held for over six months.
capital event A change in the capital structure of a firm resulting from a stock split, corporate merger, spin-off, or similar activity.
capital gain Increase in the market value of an asset.
capital gains distribution Distribution of capital gains to investors in a mutual fund.
capital stock Common stock, or common and preferred stock.
capitalization-weighted An index whose parts are weighted according to their total market capitalization.
cash settlement Futures contract settled in cash rather than by delivery of actual commodity.
catastrophic risk Financial risk arising from man-made or natural disasters.
caveat emptor “Let the buyer beware.”
CDO See collateralized debt obligation.
CDS See credit default swap.
CFA Certified financial analyst, a profession credential for investment research specialists on Wall Street.
CFA Institute Professional organization of certified financial analysts, formerly known as Association for Investment Management Research (AIMR).
cheap Underpriced security. (Compare to rich.)
chop house An unscrupulous brokerage firm that sells worthless chop stocks.
chop stock Worthless stock whose price has been manipulated for use in financial scams.
churning Illegal buying and selling of stocks by a broker for the sole purpose of generating commissions.
classified stock Stock that is divided into classes with different rights.
close(d) corporation Privately held corporation.
closed-end A mutual fund or other investment company with a limited number of shares, often traded in a market.
closed out Forced sale of a portfolio whose value has fallen below a minimum level.
closely held Public corporation controlled by a few shareholders.
collateral Assets that can be used to secure a loan or margin account.
collateralized debt obligation (CDO) A kind of financial instrument that is issued by a special purpose entity (sometimes also referred to as a
CDO) and backed (“collateralized”) by other financial instruments such as bonds (CBO), mortgages (CMO), or bank loans (CLO).
commission A charge associated with a transaction. Commissions may be set by law or regulation, or they may be negotiable between parties.
Committee on Uniform Security Identification Procedure (CUSIP) A nine-character identification code for North American securities. ISIN is the international equivalent.
common stock Security representing a claim to a portion of the corporation’s assets, frequently with voting rights and eligibility to receive dividends.
compounding Earning money by periodic reinvestment of previously earned money.
contingent (deferred) sales charge Sales charge imposed by mutual fund when shares are held less than a minimum number of years.
continuous trading Market in which stocks may trade at any time between the open and close of the market, in contrast to a call market, in which stock trades take place periodically.
control stock A block of stock ownership sufficient to determine outcome of voting in a corporation.
convertible Bond that may be converted into stock.
corporate bond Securities representing debt obligations of U.S. corporations.
correction Term used by technical analysts to describe certain price declines.
cost basis Amount paid for a security.
country risk Risk factors unique to investments in a particular country.
coupon (coupon rate) Percentage of face value of a bond paid annually as interest.
covered call A call whose writer owns the underlying asset.
CPI-U A measure of inflation, standing for Consumer Price Index-Urban. Used in calculating value of Treasury Inflation Protection Securities (TIPS).
crash of 1929 Stock market crash, October 29, 1929.
crash of 1987 Stock market crash, October 19, 1987.
credit default swap (CDS) An agreement in which one party receives a premium for guaranteeing against a default by some other party. Until 2009, the market for CDS was entirely an OTC market with very little transparency.
credit risk Risk that the borrower will default.
creditor Lender or bondholder.
creditor hierarchy Priority of claims in bankruptcy.
critical point In the theory of complex systems, the point at which a new phenomenon emerges; for example, the emergence of money in systems based on barter.
cumulative voting Alternative system of shareholder voting that strengthens representation of minority shareholders by allowing them to vote all their shares for a single director.
currency risk Investment risk due to fluctuations in exchange rates (sometimes extended to include inflation risk).
current yield Coupon divided by purchase price of a bond, usually expressed as a percentage.
customer accounts For SIPC insurance purposes, brokerage accounts that are owned in different ways (e.g., individually versus jointly with a spouse) are insurable separately up to the full amount provided by law.
cyberspace The virtual world of computer networks.
D
day order Buy/sell instructions valid only on the day they are made.
dealer A firm that sells securities from inventory.
defensive Investment posture focusing on risk more than on return.
deflation risk Financial and investment risks arising from widespread shortage of cash and cash equivalents.
delisted Removal of a stock from an exchange for failure to meet continuing listing requirements.
delivery Transfer of ownership of a commodity as a form of settlement. (Compare to cash settlement.)
delta Sensitivity of an option’s price to a small shift in the price of the underlying asset.
depreciation Lowering of the value of an asset on a corporation’s books.
derivative A security that derives its value from the value of another security, underlying asset, or benchmark.
descending tops Bearish technical indicator.
DIAMOND An index fund based on the Dow Jones Industrial Average, traded on the American Stock Exchange.
diluted Earnings estimate that takes into account options, convertible debt, and other forms of noncommon stock.
dip Technical analyst’s description of a certain type of price decline.
direct IPO Initial public offering of a security without the involvement of an underwriter.
director See board of directors.
discount bond (instrument) A bond or other fixed-income security sold at a discount to face value.
discount broker Broker offering lower commission costs but fewer services than a full-service broker.
discount rate Rate charged by the Federal Reserve on loans to member banks.
discounted cash flow (DCF) analysis Analysis of present value of future cash flows.
distributor Company that sells mutual funds directly to public or via brokers.
diversification Investing in a broad range of securities to lower risk and/ or enhance return.
dividend Portion of corporate earnings distributed to shareholders by vote of board of directors.
dividend discount model (DDM) Financial model that analyzes a stock’s value in terms of future dividends.
dividend reinvestment program (DRIP) A way to use dividend payments to automatically purchase more shares of a company’s stock directly from the company, hence without paying a broker’s commission.
DJIA See Dow Jones Industrial Average.
dollar cost averaging Technique for accumulating securities at lower risk by periodically purchasing equal dollar amounts of a security.
double auction Simultaneous buying and selling.
double bottom Bullish technical indicator.
double exempt Municipal bond whose income is exempt from federal and state taxes.
double top Bearish technical indicator.
Dow Jones Industrial Average (DJIA) An index of 30 of the most important, large-cap stocks (excluding transportation and utility stocks) traded on the New York Stock Exchange.
DRIP See dividend reinvestment program.
duration A measure of a bond price’s sensitivity to a small change in prevailing interest rates.
dynamic order A new type of buy or sell order capable of adjusting to evolving market conditions; for example, trading using a preference profile.
E
earnings estimate (earnings forecast) Analysts’ predictions of future corporate profitability.
earnings per share (EPS) Measure of a stock’s profitability, either historically (trailing EPS) or prospectively (forecast EPS).
EDGAR project SEC’s system for Electronic Data Gathering, Analysis, and Retrieval of corporate filings.
effective rate (effective annual rate of return) Yield to maturity.
electronic communications network (ECN) A term for electronic trading systems that operate without the need for human intermediaries or a physical trading floor.
Elliott Wave Technical analysis theory of stock market based on Fibonacci numbers.
enhanced indexing Strategy for outperforming index funds using mathematical models.
EPS See earnings per share.
equivalent taxable yield The yield on a taxable bond that provides equal income to a particular municipal bond investor.
ETF See exchange-traded fund
Eurodollars Term for dollars held in foreign banks, mainly in Europe.
Euromarket Market for bonds outside of the issuer’s home country.
Euronext A European stock exchange; the European side of the NYSE Euronext merger.
European style Option that can be exercised only on the expiration date.
exchange A market with significant organizational structure for trading financial instruments and/or commodities.
exchange rate Rate at which one currency can be bought with another currency.
exchange-traded fund (ETF) A fund that trades on a stock exchange
ex-dividend No longer eligible for a dividend, because dividend has been announced and payment date scheduled.
ex-dividend date (ex date) Date that a stock goes ex-dividend.
execution Implementation of a customer order to buy or sell.
exercise Use by an option holder of the right to buy or sell the underlying asset.
expense ratio Measure of the costs borne by a mutual fund shareholder.
expiration Date after which an option loses all value.
exponential weighting Way of adjusting data to give more importance to more recent measurements.
extrapolating Making a prediction based on a sample.
extrapolation risk Risk that the pattern detected in the sample will not continue as expected.
F
face value The amount of money due on a bond’s maturity date; also called principal amount.
FASB See Financial Accounting Standards Board.
Fed funds rate Rate member banks charge each other; the Fed sets a “target” rate.
Federal Home Loan Mortgage Corporation (Freddie Mac) U.S. government-sponsored, publicly owned corporation, traded on NYSE, that sells mortgage-backed securities.
Federal National Mortgage Association (Fannie Mae) U.S. government-sponsored, publicly owned corporation, traded on NYSE, that sells mortgage-backed securities.
Federal Reserve Board Governing board of the Federal Reserve System, which serves as the central bank of the United States.
fee-based Euphemism used by financial planners who earn commissions on the products they sell.
fee-only Financial planners who promise not to accept any commissions from third parties.
Fibonacci number Element of an infinite sequence that begins 0, 1, 1, 2, 3, 5, 8, and so on. Third and higher numbers are equal to the sum of previous two numbers. Used by some technical analysts who subscribe to the Elliott Wave theory.
fiduciary Someone who has the obligation to look after an investor’s financial interests.
Financial Accounting Standards Board (FASB) Independent self-regulatory body for accounting standards.
financial analyst See analyst.
financial engineering Creation of financial products, especially derivatives, using math and models.
Financial Industry Regulatory Authority (FINRA) A “SRO” or self-regulatory organization that helps the SEC discharge its regulatory responsibilities. It is the successor to two previous SROs that operated independently: the NASD and the regulatory arm of the NYSE.
financial market model A mathematical model of a financial market.
financial planner Someone who offers to help investors develop an investment plan.
financial ratio A number, such as earnings per share, used by financial analysts to evaluate a company.
first call date Earliest date on which a bond can be redeemed by its issuer.
fixed-income securities Generic term for securities that are essentially standardized IOUs issued by governments and corporations. Also called debt securities.
flag Technical analyst’s chart indicating a consolidation within an ongoing uptrend or downtrend.
float Publicly available stock in a corporation.
floating-rate note A bond with an interest rate that varies according to some benchmark.
floor broker A broker who works on the floor of an exchange.
footnotes to financial statement Explanations of financial details that do not appear on the balance sheet or P&L.
forward A private contract for a future transaction at a currently agreed-upon price.
forward rate Currency exchange rate for a transaction to be completed at a later date. 401(k) The most popular type of defined contribution pension plan.
free float The publicly tradable portion of a company’s shares or market capitalization.
full-service broker Broker who offers research and other services, but may charge high commissions.
fully collateralized A futures contract or account that is 100 percent backed by eligible securities (such as T-bills).
fully hedged A portfolio that is (theoretically, at least) protected against shifts in the market, interest rates, or other identified risks.
fully invested A portfolio that has used (almost) all of its cash to buy securities or other assets.
fully valued A security with a market price as high as, or higher than, a financial analyst believes to be warranted based on fundamental analysis.
fund expenses Management fees and other costs of running a mutual fund.
fund family A group of mutual funds managed by the same advisor and sold by the same distributor. Also known as a fund group or complex.
fund of (hedge) funds (FOHF) An alternative investment that invests in other alternative investment vehicles, typically hedge funds
fundamental analysis A method for determining the intrinsic value of companies.
futures (contract) Exchange-traded, standardized contracts for the future delivery of an actual commodity or for cash settlement based on future values of some financial security or index.
G
GAAP See generally accepted accounting principles.
gap A type of technical chart showing a sudden shift in price, volume, or other variable.
G.A.R.P. Stands for Global Association of Risk Professionals.
generally accepted accounting principles Standard accounting practices for analysis and presentation of financial statements and other financial data.
geometric mean Proportional mean or average value.
geometric return A time-weighted rate of return.
Goldman Sachs Commodity Index (GSCI) See S&P Goldman Sachs
Commodity Index.
good-till-canceled (GTC) order Order that continues in force until filled or canceled.
Government National Mortgage Association (Ginnie Mae) Government-sponsored enterprise that issues mortgage-backed securities.
Great Depression Period of economic stagnation between the crash of ‘29 and World War II.
Greeks Numbers representing the sensitivity of an option’s price to small changes in certain factors, including price of underlying asset, interest rates, volatility, and time to expiration.
gross federal debt Federal debt, including interagency debt.
gross profit margin (GPM) Profit margin based on the cost of raw materials.
growth An investment approach that strives to identify growth stocks.
growth stock Stock of a company with growing earnings and/or sales.
H
head and shoulders A type of technical chart.
hedge fund An unregulated private investment company available only to qualified investors; or a fund located offshore. Originally, the term referred to funds that engaged in hedging.
hedging Purchase or sale of securities to offset an existing securities position. See fully hedged.
hidden liquidity Desire to trade that is held back for fear of moving the market.
high-water mark Provision in a hedge fund contract that requires the
fund manager to make up any losses before receiving incentive fees.
historical volatility A measure of the historical tendency of a stock’s price (or return) to fluctuate.
hold Usually the weakest recommendation an analyst will give a stock. Sometimes, a euphemism for “sell.”
horizontal price movement Technical chart.
hostile takeover Purchase of a company by another company, an investor, or a group of investors against the wishes of the company’s existing managers and/or board.
hurdle rate A minimum acceptable rate of return for a project or business venture.
hybrid market A market that allows for a choice between automated electronic trading and traditional brokers or specialists.
I
implied volatility A measure of the current tendency of a stock’s price to fluctuate, inferred from the price of its most liquid option.
in-the-money An option whose exercise price is better than the market price of the underlying asset.
index A list of stocks, bonds, or other securities whose prices are combined to create a single number that represents the value of its constituents. See price-weighted, capitalization-weighted.
index fund A fund designed to track the value of a financial index.
index futures Futures contracts whose values are related to financial indexes.
indicator A measurable financial or economic variable used to analyze securities, markets, and economies.
inflation risk The risk that inflation will erode the value of an investment.
initial margin requirement The minimum proportion of an investment’s cost that you must pay.
initial public offering (IPO) First offering of a company’s stock to the public.
Instinet An electronic market for institutional investors and brokers.
institutional Representing a corporation, government, or other organization.
intelligent agent A computer program that can search for and retrieve information and engage in transactions, such as buying and selling securities, without human intervention.
interest Money paid to an investor in consideration for a loan of principal.
interest rate risk The risk that an investment will respond unfavorably to a change in interest rates.
internal rate of return A measure of return on investment that takes into account both the timing and the amounts of individual cash flows.
internalization Filling an order to buy stock from a firm’s own inventory.
interpolating Plugging in estimates of in-between values of data based on sample data.
interpolation risk Risk that in-between values of data will not conform to the pattern of sample data.
interview with management Part of an analyst’s evaluation of a company.
intrinsic value A measure of the true value of an asset, as opposed to its current market price.
invest Put capital to use in a productive enterprise.
investment objective What an investor or portfolio manager hopes to accomplish.
IPO See initial public offering.
IPO juice Use of IPOs to artificially inflate a fund’s performance.
IRA Individual retirement account.
issue date The date on which a security is available to be sold.
issued shares Amount of a security that has been sold.
issuers The corporate or governmental entities issuing particular securities.
J
junk bond A bond of extremely low credit quality.
K
Kondratieff Wave A hypothetical roughly 60-year economic activity cycle.
L
large-cap stocks Stocks with a total market value greater than $10 billion.
leverage Magnification of investment gains or losses (e.g., by using debt or options).
liabilities Financial obligations.
LIBOR See London Interbank Offered Rate.
LIBOR-plus Use of LIBOR as benchmark to define a floating interest rate (e.g., LIBOR +2%).
limit order Order to buy or sell stock at the limit price or better.
limit price A price point that triggers a limit order. For a purchase, the
limit price is the most you will pay; for a sale, it is the minimum you will accept.
liquidation Sale of a bankrupt company’s assets.
liquidity Presence of buyers and sellers for a security.
liquidity risk The chance that there won’t be buyers or sellers.
listing requirements Minimum standards set by an exchange for the right to be traded.
load Sales charge of a mutual fund, expressed as percent; funds with sales charges are load funds.
London Interbank Offered Rate (LIBOR) Interest rate that major international banks dealing in Eurodollars charge each other.
M
majority shareholder Owner of more than 50 percent of the voting shares of a corporation.
managed (futures) account A professionally managed individual portfolio of futures.
management fee Fee for portfolio management services, typically a percentage of assets under management, assessed daily for mutual funds, quarterly for most other accounts.
margin Cash used to purchase investments with supplemental credit supplied by broker; subject to terms of a margin account agreement.
margin call Broker’s demand for additional cash or securities to maintain a minimum margin.
marginable Securities eligible for margin according to rules established by the Federal Reserve.
marginal income tax rate Highest tax rate paid by an investor (i.e., tax paid on last dollar earned).
mark to market Calculate the market value of a position; in a margin account, used to ensure that minimum margin is maintained.
market capitalization Also called market cap or market value, the total value of outstanding stock, equal to share price multiplied by number of shares outstanding.
market maker Broker responsible for maintaining a liquid, orderly market in a stock.
market order Instruction to buy or sell stock at best available price; the most common type of order.
market risk Risk arising from the inherent volatility of financial markets.
market timer Investor who trades actively, trying to anticipate relatively short-term price movements.
market value See market capitalization.
markup Surcharge by an over-the-counter (OTC) securities dealer.
maturity date Date that principal gets repaid.
median For a set with an odd number of elements, it is the middle number in terms of size; if the set has an even number of elements, it is the average of the two numbers closest to the middle.
merger Combination of two or more corporations into a single corporate entity.
microcap Stocks with a market capitalization below $300 million.
mid cap Stocks with a market capitalization between $200 billion and $10 billion.
minority shareholder Shareholder with less than a controlling interest.
MITT (Market Index Term Trust) An exchange-traded derivative that guarantees investors a degree of principal protection along with an index-determined level of return.
mode The most frequent value in a data set. For example, in the set {2, 2, 2, 3, 3, 4,}, the mode is 2.
model Set of mathematical formulas or computer programs representing a part of the world; a set of computer programs designed to simulate some aspect of the financial markets.
model risk Risk that a model misrepresents reality.
modern portfolio theory (MPT) The standard theory for building an optimally efficient market portfolio.
money market account A securities account invested in money market instruments.
money market instrument Short-term debt obligations such as Treasury bills, certificates of deposit, and commercial paper.
money-weighted rate of return A measure of investment performance that takes into account how much money the investor actually had at risk during each period in question.
mortgage-backed security (MBS) Debt obligation backed by pools of mortgages.
mortgage pool A collection of mortgages held as collateral for mortgage-backed securities.
moving average An average recalculated in each new period by throwing out the oldest value of the previous period and adding in the latest value.
MPD (Market Participation Deposit) Similar to MITTs, but sold over the counter by J.P. Morgan’s private bank.
muni Tax-exempt municipal securities
mutual fund A registered investment company, especially an open-end fund.
mutual fund group See fund family.
N
naked call A call written by someone who does not own the underlying asset.
National Association of Securities Dealers Automated Quotation
(Nasdaq) The largest screen-based equity exchange in the U.S. Market makers maintain liquidity and orderly trading.
net asset value (NAV) The value at which an open-end fund may be redeemed on a daily basis; also, the value at which a no-load fund may be purchased.
New York Stock Exchange (NYSE) The largest stock market in terms of market capitalization. Part of NYSE Euronext.
no-action letter SEC ruling that a proposed product or service will be permitted.
no-load (fund, stock) A fund or stock that is sold without a commission or sales charge.
noise Apparently random fluctuations in price or other data.
nominal dollars The dollar value of an investment, without adjustment for inflation.
number cruncher Someone who uses, builds, or tests financial models; a quant.
O
off-balance-sheet investments Those investments that are not recorded as assets or liabilities on a company’s balance sheet; frequently they appear as footnotes to the financial statement.
officers (and directors) Corporate management and insiders.
offshore Refers to investment companies and securities outside of a nation’s regulatory domain.
OID See original issue discount.
online broker A brokerage firm that is set up for trading via remote computer terminal.
onshore Investment company located domestically.
open-end The most popular form of mutual fund, quoted in terms of net asset value.
open interest Total number of futures or options contracts for a particular exchange, commodity, and contract month.
open-outcry market The system of buying and selling securities on an exchange using continuous trading.
opening price The first price at which a stock trades during the day; on the NYSE, opening and closing prices are set by a call market.
operational risk Risk inherent in the operation of a business.
option Right to buy or sell an underlying asset under certain conditions (e.g., at set prices, times).
ordinary income Any income taxable at the ordinary income rate.
original issue discount (OID) Equivalent of interest for a security (such as a Treasury bill or zero-coupon bond) that is issued at a discount to face value. Different from bonds that trade at discount or premium to par, reflecting capital gains or losses.
out-of-the-money An option whose exercise price is unattractive compared to the market price.
outstanding In terms of shares, those owned by investors.
over the counter (OTC) Anything not done on an exchange.
overpriced Overvalued.
owners’ equity From an accounting standpoint, the portion of a company’s assets belonging to shareholders.
ownership interest What a stockholder’s stock represents.
P
P&L Statement of profit and loss; part of a company’s financial statement.
paper profit An increase in unrealized capital gains.
par value Value shown on the face of a bond.
pass-through Tax status of investment companies that allows them to
pass taxable income and capital gains to the ultimate investors, who are individually responsible for paying taxes on those earnings.
passively managed A portfolio created to duplicate an index or other benchmark.
pay date Date on which a dividend or other payment is received.
payment for order flow Often-criticized practice of brokers compensating other brokers who send them orders for a given stock, which may not give the customer the best price.
performance See return on investment, time-weighted return.
performance presentation standards (PPS) Standards developed by the Association for Investment Management Research describing how investment performance should be measured, verified, and reported to customers and prospects.
PIPEs See Private Investments in Public Equity.
political risk Investment risk arising from political turmoil.
positive yield curve The “normal” state of affairs, in which longer maturities offer greater yields.
preemptive right Right of existing shareholders to purchase a new issue of the company’s shares, at a discount, before they are offered to the general public.
preferred stock Stock that offers some bond-like characteristics such as income and safety of principal.
premium bond Bond trading above par because its coupon rate is higher than the prevailing rate of interest.
present value The value of a future stream of cash flows, at some assumed discount rate.
presidential election cycle (PEC) A four-year stock market cycle in which returns are higher on average and risk is lower on average during the second half of a president’s term.
price target The price that a Wall Street analyst forecasts for a stock.
price-weighted An index weighted to account for the price of its components.
primary dealer A bond dealer allowed to deal directly with the Federal Reserve Bank of New York.
primary market The market for newly issued securities, including IPOs.
prime rate Interest rate charged by commercial banks to top corporate customers and used (like LIBOR) as a benchmark against which other rates are calculated.
principal amount See face value.
Private Investments in Public Equity (PIPE) An alternate source of financing for public companies.
private placement A privately issued security.
privately held corporation A corporation owned privately; shares are not available to the public.
profit and loss (P&L) statement Financial statement showing the result of operations for a specific time period.
promoter Person involved in organizing and financing a public corporation.
prospectus Legal document describing a securities offering and disclosing risk.
proxy Someone to whom you give the right to vote your shares at a shareholder meeting.
public company Company that issues stock to the public.
public offering Sale of stock to the public. (Compare to private
placement.)
put bond Bond that can be sold back to issuer at par on a certain date or dates prior to maturity.
put-call parity Relationship between prices of puts and calls allowing you to derive a fair price for one if you know a fair price for the other—as long as they have the same strike price and expiration date.
put option (puts) Option giving the holder the right—but not the obligation—to sell an underlying asset at a specified price on specified date(s).
Q
quant A mathematician who works in financial markets.
quantitative analysis Mathematical modeling of the financial markets, used in portfolio management, especially by institutions and hedge funds. quantitative model See model.
R
raise cash Sell securities.
real dollars Dollars adjusted for inflation. (Compare to nominal dollars.)
realized capital gains Capital gains counted after a sale; subject to capital gains tax.
recommended list The list of stocks that a brokerage firm’s analysts like.
record date Date used to determine shareholders entitled to a dividend; also called date of record.
refunding Issuance of new bonds to pay off older bonds with a higher interest rate.
registration Process of filing required information with regulators, especially the SEC.
Regulation A SEC regulation allowing simplified registration for small issues.
Regulation T Federal Reserve regulation governing margin requirements.
regulatory risk Investment risk attributable to actual or potential changes in regulations.
reinvestment Taking cash proceeds from an investment and redeploying them in another investment.
reinvestment/rollover risk Risk that the new investment will not be as good as the old one; especially relevant when bonds are called in a lower-interest-rate environment.
remargin Contribute new funds to a margin account to bring it up to minimum requirements.
reorganized Corporate restructuring, undertaken either to avoid bankruptcy or to emerge from bankruptcy without liquidation of assets.
replicate Duplicate a portfolio or one of its characteristics, especially
performance.
resistance level Technical indicator.
return Gain or loss on investment; rate of return.
return on equity (ROE) Measure of return on a corporate shareholder’s equity.
return on investment (ROI) Measure of return as proportion of original investment.
return relative Factor used in compounding multiperiod returns.
revenue Sales.
rich Overvalued according to some financial analysis, indicator, or model.
rights offering Kind of dividend in which existing shareholders are granted options.
rising bottom Bullish technical indicator.
risk Chance that your investment objectives won’t be met in your time frame.
risk arbitrage Buying and selling of stock in companies involved in mergers and acquisitions.
risk-free rate Overnight rate of interest on highest-credit-quality instrument.
rocket scientist See quant.
rule of 72 Rule for determining how quickly money doubles at various
rates of compounding.
rule 144A Type of illiquid security.
S
safe harbor Rules for determining whether an investment must be registered with SEC.
Samurai bonds Foreign bonds issued in Japan, denominated in yen.
scrip Document representing a fractional share; scrip dividends are
sometimes paid instead of cash dividends by companies that need to conserve cash.
SEC Securities and Exchange Commission.
secondary market Market in which already issued securities trade.
sector a broad classification of companies, which may be further divided into subsector, industry group, and industry.
securitization a process in which a collection of assets is used to create a
set of related securities that are sold to investors.
security Paper or computerized document expressing financial claims to an issuer’s assets; abstractly, the claim itself, independent of the form in which it is represented.
selective Street jargon for being cautious about committing additional capital to the stock market.
self-regulatory organization (SRO) Organizations, such as FINRA, and in prior years, NYSE and NASD, allowed to regulate their members under the supervision of the SEC.
sell discipline Conditions under which a security would be sold.
sell side Underwriters and brokers/dealers who sell securities to retail and institutional investors.
selling climax Technical indicator of the end of a bear market.
senior debt Debt that must be paid before any others are paid.
sensitivity Measure of the degree of responsiveness of some financial variable to a small change in some market condition. In mathematical terms, a partial derivative or partial difference.
sentiment Market psychology.
Series 7 An exam that brokers must take and pass before they can be licensed to sell securities.
share Unit of stock.
share repurchase (stock buyback) Corporate initiative to lower the amount of stock issued and outstanding.
shareholder Person or corporate entity that owns stock.
short sale Sale of securities not owned by the seller; used by investors anticipating a decline in the value of a security, or as a hedge.
short-short rule Old rule making it difficult for mutual funds to trade actively by imposing tax penalties for too much short-term trading (no longer in effect).
simple return Arithmetic return.
since inception Measure of investment performance since a fund opened.
sinking fund provisions Requirement that a certain portion of debt be called according to a schedule.
SIPC Securities Investor Protection Corporation, a nonprofit organization set up by Act of Congress in 1970 to insure the securities and cash in the customer accounts of SEC registered broker/dealers.
SIPC insurance Insurance of up to $500,000 in securities, including up to $100,000 in cash equivalents per customer against failure of a member firm.
small-cap Stocks with a market capitalization between $300 million and $2 billion.
smoothed Mathematical technique for eliminating random price fluctuations.
socially responsible investing Taking social or moral factors into account as part of the investment process.
soft dollars Frequently questioned practice allowing institutional investors to pay for various services by directing their commissions to a particular broker.
soybean complex Futures on soybeans, soybean oil, and soybean meal.
SPAC See Special Purchase Acquisition Corporation.
SPDRs S&P 500 Depository Receipts, an exchange-traded index product developed and traded by the American Stock Exchange (AMEX).
S&P Goldman Sachs Commodity Index (S&P GSCI) A broad commodity index.
Special-purchase acquisition company (SPAC) A publicly traded company created to identify and acquire or merge with an existing private company.
special situation A stock believed to be undervalued because of an unusual set of circumstances.
specialist NYSE member responsible for making a market in a particular stock.
spin-off Breaking off part of a company and making it into a separate company with its own stock.
split See stock split.
spot market Commodities market with immediate payment and delivery of goods.
spread The difference between bid and asked price.
SRO See self-regulatory organization.
stagflation Combination of economic stagnation and inflation.
Standard & Poor’s 500 Index (S&P 500 Index) Index of large capitalization stocks.
statutory voting Standard means of electing a corporate board of directors. (Compare to cumulative voting.)
stepping up of the basis Reestablishment of the cost basis for tax purposes.
stock Securities representing an ownership interest in a corporation’s undivided assets.
stock buyback (share repurchase) Repurchase of shares by a corporation to reduce the number of shares outstanding, thus making remaining shares more valuable.
stock certificate A physical document showing the legal owner of some number of shares of stock.
stock dividend Payment to shareholders from corporate earnings, usually in the form of cash or shares.
stock exchange A market with a physical trading floor where buyers and
sellers trade securities, especially equities.
stock fund A mutual fund that invests primarily in stock.
stock loan Lending stock to a short seller in return for some payment; brokers frequently obtain the right to lend out securities held in a margin account.
stock options Options to purchase stock.
stock split Change in the per-share value of a stock by issuance of new
shares to shareholders, in proportion to the number of shares held. For example, a 2-for-1 split doubles the number of shares. A reverse split is used to reduce the number of shares outstanding, thus raising the price of individual shares.
stockholders’ equity See owners’ equity.
stop order An order triggered when stock reaches a predefined price, called the stop price. Similar to a limit order, except that the trade can occur above or below the trigger price.
story stock Stock of a new company without real earnings, but with an exciting idea, opportunity, or technology.
straddle Combination of put and call options with the same strike price, usually close to the current market value.
strangle Combination of call and put options with different strike prices, each option being out of the money.
strip Separation by brokers of a debt security into corpus (principal) and coupons to be sold separately as zero-coupon bonds.
strong buy Highest recommendation by a Wall Street analyst for a stock.
subordinated debt Debt that is lower in the creditor hierarchy than other, more senior, debt.
subscription rights Opportunity to purchase (subscribe to) additional shares of stock at a discount from the public offering price.
subsidiary A corporation or other business entity that is controlled by another business entity.
sucker’s rally The months immediately following the crash of 1929, when stocks gave a false start.
survivor bias Distortion of average performance by excluding funds closed due to poor performance.
swap A two-party transaction involving securities, currencies, commodities, or other assets in conformance to a precise set of rules called a swap agreement.
swap agreement Rules governing swap transaction, standardized by International Swaps and Derivatives Association (ISDA).
swaption Derivative combining features of both swaps and options.
T
takeover Purchase of a controlling interest in a corporation, frequently resulting in a merger.
tax deferral vehicle IRA, 401(k), variable annuity, or other mechanism for deferring taxes.
tax lot A security holding that can be treated as a single unit for tax purposes; must have been purchased at the same price on the same date.
tax risk Investment risk arising from uncertain tax status or from changes in tax code.
taxable muni Municipal bond whose income is not exempt from federal tax.
technical analysis Intuitive, graphic approach to understanding what the market, or a particular stock, is doing. Includes many charting techniques.
ticker A device for transmitting lists of stock or other prices over telegraph lines. See ticker symbol.
ticker symbol Abbreviations for stocks, mutual funds, and other securities; frequently used in newspaper financial tables and by electronic financial information services.
time value Value of an option over and above its intrinsic value, attributable to the chance that it may gain in intrinsic value before expiration.
time-weighted rate of return Measure of investment performance in an average period.
time-weighted return See time-weighted rate of return.
top-down approach Investment approach that begins with and emphasizes global factors in making investment decisions.
tracking error Deviation of a portfolio from an index or other benchmark.
transformed Applied a mathematical formula to smooth or otherwise change data for purposes of analysis.
TreasuryDirect A web-based facility for buying Treasury securities directly from the U.S. government.
Treasury Inflation Protection Securities (TIPS) U.S. Treasury bonds that pay interest and principal; linked to a measure of consumer inflation.
treasury stock Shares issued but still owned by the corporation. See outstanding shares, issued shares.
trend is your friend A maxim of technical analysts who urge investors not to “fight the tape.”
trendline A line drawn by technical analysts that is intended to reveal the market’s trend.
triple witching Friday Simultaneous expiration of index futures, index options, and options on index futures.
turnover The rate at which a stock, portfolio, or market is traded; expressed as an annual percentage.
12b-1 fee Fee charged by mutual fund distributors; used to compensate fund salespeople, although may also be used to defray marketing and advertising expenses.
U
underlying asset The asset an option holder has the right to buy (call) or sell (put).
underpriced Undervalued or cheap. (Compare to rich.)
underwriters Investment bankers who help issuers sell securities to the public and make private placements.
unrealized capital gain Increase in value of a security or portfolio that has not been converted into cash, in which case it would no longer be a
paper profit and taxes might be due.
V
value An investment approach based on fundamental analysis.
variable annuity An investment product that uses insurance features to gain tax-deferred status.
virtual private network A network that piggybacks a public network (e.g., the Internet) but uses software to simulate a private network.
VIX (Volatility Index) A measure of the implied volatility of the S&P 500, considered a fear gauge. A higher value is correlated with a nervous market.
volatility A measure of how much the price of a security moves around its mean, or average, value; more generally, the tendency of security prices to fluctuate.
volume Number of shares or other units of a security bought and sold; the dollar value is called the dollar volume.
voting stock Stock that comes with voting rights
W
Wall Street Crash of 1929 October 24-30, 1929, the days of the first great crash of the twentieth century.
warrants Long-term equity options.
WEBS (World Equity Benchmark Shares) Index funds based on Morgan Stanley Capital International Equity Indexes.
World Wide Web Part of the Internet accessible through web-browsing software.
wrap account Brokerage account that charges a management fee in lieu of commissions.
Y
Yankee bonds A bond denominated in U.S. dollars and issued in the U.S. by a foreign issuer.
yield One of several measures of return, particularly for fixed-income securities.
yield curve Graph showing the relationship between yield and time to maturity.
yield to call A measure of the return on a bond, assuming it is called on its call date.
yield to maturity A measure of the return on a bond, assuming that it is held until maturity.
Z
zero-coupon bond Bond purchased at discount, paying par at maturity.
zero-sum game A situation (“game”) in which money changes pockets but no value is created.