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12B-1 Fee

If you have any mutual funds, the 12b-1 fee is what you pay every quarter (that's four times a year, mathletes) to pay for the administration, paperwork, and all the other stuff it takes to run a mutual fund.

The 12b-1 fees were first created as part of the 1940 Act, which helped set up the rules for the mutual fund business. Back then, people thought that the fees would make the mutual fund industry grow. It didn't quite work out that way. People started investing in index funds and ETFs, so the mutual fund industry is now heading the way of CDs and flip phones. Instead, 12b-1 fees have become a way for the mutual fund industry to "die more slowly."

For more on the mutual fund and index fund show-down, see index funds vs. mutual funds.


144a is a law set up by the Securities & Exchange Commission (SEC). The rule limits when you can trade shares and stocks of a company where you're the owner, investor, or other insider.

According to the rule, if you're a high-flying insider and your company goes public, you might have to wait six months and then some before you can begin trading your stocks or shares.

1940 Investment Advisors Act

Wondering why you're taking a bunch of Series exams? This is why.

After people claiming to be "investment advisors" scammed a lot of innocent folks in the 1930s (and before), this act created a bunch of rules you have to follow to become a registered investment advisor. After this rule was created, you couldn't just open up shop and claim to be an investment advisor—you needed to pass a test and get a piece of paper to prove it. 

200 Day, 50 Day Moving Averages

Moving averages are a series of snap shots of stocks' closing prices over a 50- or 200-day period when the market actually ran (or walked... or crawled).

The charts you see on traders' websites that show a bunch of lines going up and down? Those are the moving averages. Look closely and you'll see a line following the closing prices of a stock and another line either above or below that line. If a stock's price is headed up, there might be what traders call a support line under it. This one shows how low the price will drop before bouncing back up. If a stock is heading to tank-ville, there will be a line drawn above the averages. That one shows how far the stock will jump before it's pulled back down.

The idea is that you can use this info to get an  idea of how the stock's doing and how it might do in the future.

Of course, trying to predict how stocks will do over the long term is a lousy idea. Even financial types in big jets who are paid to predict how stocks will do are right only about as often as the Psychic Friends Network. Stocks don't always follow averages: when they don't they surge past the resistance or support lines, it's called a break out.

401(k) And Roth 401(k)

Want to retire with dignity and not have to rely on spam sandwiches and off-brand prune juice? Retirement savings are pretty much a must.

If you work in the good ol' U.S. of A. in a typical job, part of your hard-earned cash is going towards Social Security, which is supposed to give you some moolah for when you retire. The problem: it's not really enough for most folks who get used to the idea of things like decent food and hot water. That's why retirement accounts were created: so that you can put even more of your hard-earned money away to pay for retirement.

The most popular type of retirement accounts are the 401k and Roth 401k.
  • The Roth 401k was created back in 1978. It's a "qualified" plan, meaning that you don’t automatically get it just for showing up. Instead, you and the company you work for are going to have to sign a bunch of papers and properly structure the thing.

A lot of people choose 401k because most employers will match contributions. For every buck you put in, your employer may give you another buck—until you retire. It's like a twofer on your investing dollar before you even start investing the dough, and it's probably the closest you're going to get to free money from your boss.

401k vs. Roth 401k

So what's the difference between a 401k and a Roth 401k?

With a 401k, you get your retirement account from your boss, and the money you put in gets taken out of your paycheck before you pay income taxes. Let's say that you make $40,000 a year and invest $5,000 in your 401k. Instead of being taxed on $40,000 you're taxed on $35,000, like that $5,000 never happened. Presto—a lower tax bill. But (of course there's a but), while you don't pay the taxes now,  when you retire, you're taxed on the money you take out of the 401k, so the IRS won't be sobbing into their pillow at night. Like Vegas, the house always wins.

With a Roth 401k, you can set up your account with a bank or financial advisor, so it's an option if your boss doesn't offer retirement benefits. The Roth 401k also doesn't give you any tax advantages now. If you make $40,000 this year and contribute $5,000, you still pay income taxes on $40,000. Sorry. But when you're a golden oldie and ready to invest in salsa classes, you can take money out of your Roth 401k without having to worry about paying taxes then. So more cash for you when you're grey.

403(b) Plan

The 403(b) is just a 401(k) for intentionally non-profit organizations like The American Heart Association, Stanford University, and The Hallelujah Church of Skokie. It's set up the same way and works the same way.

Surprised that non-profits invest cash? Sure they do. They love money as much as any of us, and they need to invest to make it through lean times when people aren't adding to their coffers.

409a Valuation

409a valuations are what companies like to complain about most.

They work a little something like this:

Let's say you have a company offers stocks to employees. Under tax laws, you have to do a 409a valuation: you pay someone big bucks so that they come in and root around to determine the valuation of your common stock. This valuation is supposed to help you set the strike prices for employee stock options. It's a pain in the butt and you might not agree with the valuation, but... it's the law.

529 Savings Plan

Want to go to college? With living costs, tuition, books, and everything else, it's going to cost you about as much as a fancy sports car or a nice condo.

We could say the cheesy thing about how a college education will take you further than a BMW. And, hey, maybe it's true, but you're still going to have to cough up the dough. If your parents or granny want to save up cash for you, they can use a 529 Savings Plan. It's a tax advantaged college savings plan for the middle classes. If you meet all sorts of standards, the taxes you pay on college savings are deferred, letting you save up more.

Just one thing: you're going to have to start with a 529 Savings Plan early on if you want to sock away enough for college.

Accredited Investor

The difference between an accredited college and an unaccredited college can be the difference between Princeton and the School of Feel Good Energy your Great-Aunt Bertha set up in her garage last year. Accredited investors work on a similar idea: a bunch of someones have come along and agreed that accredited investors have a bunch of qualifications or meet a bunch of rules.

So accredited investors are simply investors who qualify to do a certain investment. Usually "accredited" means that they have... credit. Or assets. Or wampum. Or knowledge. Which means that they're big boys and girls who are able to invest a large amount of money in a risky venture.

Officially, they're investors who have an income of at least $200,000 for the past two years ($300,000 for joint accredited investors); or have a net worth of at least $1,000,000 (individually or jointly); or are executives, partners, or directors of the entity issuing securities. Institutional investors such as mutual funds, hedge funds, and pension funds also fit the bill.

Accrual Accounting

Accrual accounting refers to the practice of tallying up revenues and costs when a transaction occurs rather than when cash changes hands.


Let's say you pay for a new tattoo with a credit card. If Tattoo Joe uses the accrual method of accounting, he adds the money he charged you to his accounts before your Tylenol even wears off—even if MasterCard takes months to pay up.

The opposite of accrual accounting is cash accounting, where money is only counted when it changes hands. That means Tattoo Joe would only add the price of your tattoo to his coffers after MasterCard had actually transferred the money to his account.

Active Management

Active management is usually used with investment companies offering mutual funds and similar types of investments.

They hire groups of Type-A money people in fancy suits; these portfolio managers and analysts drink a lot of coffee, read a lot of money-related reports and forecasts, and look at a lot of charts to try to figure out how to pick stocks and investments that outperform their return targets.

Passive management, BTW, is the opposite. Usually it's a thing with ETFs and index funds where a bunch of stocks are picked because they are all linked to a specific area (like tech, for example). Nobody spends time trying to figure out what to buy. Instead, the investments are sometimes rebalanced to make sure they still match up what they're supposed to represent. One money guy with a computer can usually handle investments in a passive management style.

Adjustable Rate Preferred Stock

Okay, first see preferred stock for the gist.

Preferred stock is preferred because stockholders with these puppies are paid before common stockholders if a company goes belly-up. If your stock says "preferred stock—ARPS," then the rate paid out depends on a specific set standard or yardstick (usually T-bills). So if T-bills (or whatever the benchmark the company uses) suddenly pay out more, your stock will, too.

And that's how it's adjustable.

Adjustable-Rate Mortgage (ARM)

An ARM is a kind of mortgage. You know, a loan which pledges your house as collateral.

The “adjustable” in there means that the interest rate adjusts periodically, usually every month. The interest rate is calculated on a benchmark, like the prime rate, which is what the safest, best corporate customers pay, with an additional few points of interest (the "ARM margin") added.


Bob started out paying 5% interest on his mortgage when the prime rate was 3%. Then inflation struck and prime went to 6%. Now Bob pays 8% and lives on Ramen noodles because all that extra interest cost leaves little in the budget for food. But he does look good in a Speedo now.

Adjustment Bond

An adjustment bond can choose to pay interest—or not—at will. If the responsible party for the bond punts a payment, they don't go into default—they just keep rollin' over.

Now you might be thinking, “Why would anyone want an adjustment bond when there are bonds that promise to pony up cash faithfully?” Good question. Adjustment bonds are usually issued when a company is facing bankruptcy or is restructuring. If you’re popping antacids like Tic Tacs because you have bonds that might be useless if a company goes under, you (and other bondholders) might get adjustment bonds if the company is really struggling.

It eases up some pressure on the company by letting them pay off what they owe, and it means you might get at least some of your cash (and some of your expected returns) back. It’s better than nothing, which is what you’d get with a bankruptcy and no adjustment bonds.

Administrative Order

The administrator is the person in each state who's in charge of making sure that securities laws are followed and investors are protected. If an administrator thinks something shady is going on, he can issue an order to deny, suspend, or revoke the sketchy financial individual's license so that investors are protected.

When the administrator pulls rank like that, it's called an administrative order.

Advance/ Decline Ratio

It's an index. Just an index... but one that is widely quoted in the financial press.

Specifically, an advance/decline ratio is the number of stocks which are up vs. the number which are down (hence the catchy "advance" and "decline" talk). Money guys and financial reporters use this ratio when trying to decide whether the market is about to change. When the ratio is high, there's a lot of buying (maybe even too much) and when it's low, that could be a sign of overbuying.

You can imagine, though, how this index has wide ranges for error; i.e., every stock could be down one penny and the ratio would be 0—which would be like "as bad as it's ever been"— when in fact the day was basically flat as the opposing team on Glee.

Aftermarket Securities Transactions

Traders in New York City work until 4:00PM. They have busy schedules and fancy dinners to get to, you know. But what happens if you get a burning desire to buy securities after 4 o'clock? What happens if you live in a different time zone and think the world shouldn't revolve around NY time? If you're buying or selling stocks outside of regular hours, you're making an aftermarket securities transaction.

And yes, if you're investing in another country's securities, you're making an aftermarket securities transaction if you buy or sell securities outside of the business hours of that country’s stock exchange.

Money never sleeps. 

Agency Trade

Unlike a trade initiated directly by the customer, an agency trade is when a broker-dealer, such as T.D. Ameritrade or Charles Schwab, initiates a trade on behalf of the client. The broker usually gets the wholesale (cheaper) brokerage price on the commission and terms. In other words, it's the agency's trade (and they have strong negotiating leverage), even if it is on behalf of the client's account (who has relatively weak negotiating leverage).


In a movie, an agent might be 007. For actors, it's the one ignoring their calls and getting 10% of their paycheck. When a company goes public and issues an IPO (Initial Public Offering), the agent is the person who sells or places the stocks or securities—and gets paid a nice commission to take care of all that.

All Or None

Let's say you want to buy some stocks, and you decide to buy 100 shares at $15. You tell your broker you want an All or None (AON). If your broker can't find 100 shares of whatever stock you want at $15, she buys nothing. You've basically told her to go whole hog or abandon ship.


Imagine if Warren Buffett decided to buy up 10% of Netflix (yes, it would mean the world was ending... but that's a separate story). NFLX stock would almost certainly shoot up a ton. So let's say his brokers were told that it was an all or none order. If his brokers are able to grab the 10% before anyone gets a wind of the deal, Sir Warren ends up with a big chunk of a company stock that's about to go sky-high in price. Thanks for the easy money. But if he gets about 2.3% and then his brokers start hemming and hawing very politely, he's stuck. He either has to pay more for the 7.7% (he wanted to get to 10%—and now that everyone's onto him, those stocks are going to be more expensive) or he can turn around and sell the 2.3% so that he has no part of Netflix. Then he'd better hope for another Miley Cyrus scandal to get the heat off his own story.

Alligator Spread

This could refer to a gourmet lunch in Louisiana or a centerfold of glossy pages in PlayGator magazine.

In finance, an alligator spread refers to a situation where huge commissions gobble up any profits that could have happened with a trade. Usually, it happens when put options and call options are used to give the investor a chance to buy at a specific price later on. 

Alternative Minimum Tax - AMT

It might sound like a tax invented for Coachella, but it's really a tax created to make sure that the rich pay their fair share. It has nothing to do with "alternative" or "minimum" anything, really. Created by Congress and the IRS, AMT adds stuff back to the "adjusted gross income" line of your IRS tax return. If you’re really rich, you might find that you can't claim the same deductibles you did before—and you'll probably end up paying more taxes.

AMT ignores one basic thing: the rich don’t fill out the "adjusted gross income" line of their tax forms.

They have people who do that for them... people who incidentally know tax laws really well and can find loopholes anyway. Thanks to the fact that AMT is complex and not really doing much, there was much grumbling about it (as there is with any tax). In response, President Obama signed a law in 2013 that was supposed to be a patch to fix some of the problems. People kept grumbling anyway. 

American Stock Exchange

The AMEX is a stock exchange, which is a place where shares, bonds, and stocks can be bought or sold. The AMEX happens to be the third-largest stock exchange in the U.S. and it's a private intentionally non-profit company. About 15% of all trades in the U.S. are made through the AMEX, and its competitive brethren are NYSE and NASDAQ


An annuity is a contract written by an insurance company, which guarantees income for the rest of your life in return for a set of payments up front.

Note the "ann" in the word, which is also coincidentally the opening of the word annual—as in the payments happen annually. These payments either come in one plop or are "accumulated" over time. In theory, it has less risk than just buying a bunch of stocks. But there is a price to pay for that risk mitigation... usually in the form of lower returns to annuitants.

Anti-Dilution Covenants

Dilution happens when a company issues a bunch of additional shares or options, which can lower the amount of ownership or the value of investments for current shareholders. (Not to be confused with delusion—similar, but not quite the same.)

An anti-dilution covenant sounds like something out of Indiana Jones, but it's really just the tiny fine print that helps protect you if you own shares. If you own convertible shares or preferred stock, you might see this little clause somewhere in the paperwork. If the company issues more shares (diluting your ownership), the clause lets you get more shares if you're an early investor. 

Anti-Money Laundering Laws

Newsflash: you're not supposed to launder money.

No, no one will come get you if you accidentally leave a $5 bill in the pocket of your jeans on laundry day. "Laundering" in the financial sense refers to hiding money from the government.

There are lots of ways to launder (and yes, it's legal for us to tell you about them).

In the good ol' days, the system was very straightforward: A bootlegger made a ton of money selling illegal alcohol but wanted to find another way to show that he had "legitimately" made the dough so the authorities wouldn't catch on. Well, a theater could show a cheap film but still be "sold out." So a bootlegger buys a movie theater and—voilà—the theater business shows itself to be hugely profitable with repeated "sold out" showings... and the bootlegging profits are now hidden.

Today, money laundering usually involves fake accounts, fancy transactions faked on computer screens, and offshore accounts. The idea is the same: you create falsified documents in some way (called "cooking the books") to hide what you're doing from the IRS and the government. Anti-laundering laws are out there to catch people who do it and make sure their goose is cooked if they cook the books.


Talk about a great word to use at cocktail parties (especially if you can say it with a vaguely Euro posh accent). Arbitrage is the business of finding something for cheap and then turning around and selling it for more to another customer, keeping the profits.

Let's say that the kid down the block is selling lemonade for $0.50 a glass, but the local construction workers are willing to pay $1.00 a glass. You buy from the kid, upsell to the construction guys, and pocket the $0.50 difference each time.

Back in the good old days, arbitrage was considered easy money. Thanks to online and electronic trading, though, it's gotten a lot less profitable. For one thing, any 14-year-old with an Internet connection can find a cheaper deal online, so there's less opportunity. There's also less need for the middle man. The construction workers probably have an app on their phone that lets them find the cheapest lemonade around, meaning they don't need your help.

Another current problem with arbitage is the commissions and other costs and fees. Every trade you make online is going to cost you something, so there needs to be a big difference between buy and sell prices for you to make a profit. 


You find gold for sale in Spain for $1,302.50 per ounce when you know buyers in the U.S. who will pay $1,303 per ounce. You're pocketing 50 cents an ounce... which doesn't seem like much, but if you bought and sold 2 tons, that's 16 x 4,000 x $.50 = $32,000... not bad for a few phone calls. But what if a teeny tiny commission of just 0.1% (that's one tenth of one percent) had to be paid on the transaction on each side? You only made 50 cents an ounce to begin with. A 0.1% transaction cost would be $1.30+ on either side. The commish completely destroys the "arb opportunity" in the trade.

Asset Allocation

Think about the assets you have. Maybe you have biceps like Channing Tatum or a smile like Beyoncé. Great.

Now think about your financial assets—like cash, real estate, stocks, and so on. Asset allocation is all about where you put your financial assets so that they make sense for you. If you're young, you might want to put a lot of your assets into stocks because you have lots of time for them to grow, and you want to make money more aggressively. If you're getting close to old geezerhood, you might want to invest in bonds or more stable investments because you and your ticker can't handle the shock of sudden market downturn.

The point is that asset allocation is all about putting your assets into the right combos to balance the risk of losing money against the possibility of making more dough. When you're older, you'll want lower risk, and when you're young and cute, you'll want a better possibility of earning more. Generally: YMMV.

Assets Under Management

Investing in a hedge fund, mutual fund, or any kind of fund? The money managed by that fund is considered the assets under management.

Authorized Stock

When a company goes public and gets incorporated, they change legal status. Part of it means having lots of meetings and signing more paperwork than most of us see in a lifetime. One of those pieces of paperwork is a charter, which outlines a bunch of rules—including the total number of shares a company can issue. This number of shares is called authorized stock, 'cause it's the total number of shares the company is authorized by its charter to issue. 


Let's say Company XXX wants to buy Company Y. Company XXX has an authorized limit of 100 million shares. It currently has 85 million shares and 5 million options, yet unvested, outstanding. Technically it has 90 million shares outstanding. It wants to print shares to buy Company Y. But company Y wants 20% of the primary shares of Company XXX or 17 million shares. Company XXX cannot print the shares to buy Y. Why? Because it needs to get approval to change the charter—doable only by a majority vote of the outstanding shares at the time.

Back End Load

We'll skip the inappropriate jokes and just say that back end load refers to mutual fund b-shares, where you pay fees and commissions when selling your fund, not when you buy or when you hold (see b-shares). Here, "load" is commission and "back end" means that it's paid at the end of the holding period (when you sell).

Balloon Maturity

When a balloon loan comes due. At this point, you have to make your big final payment (balloon loans let you pay a little bit at a time and then a bigger lump sum at the end).

Banker’s Acceptance

Kind of like a Treasury bill but with fewer calories, a banker's acceptance is a promise of future payment, where a banker accepts the responsibility of paying a creditor at a later date on behalf of a borrower. The banker takes the risk in case the payer disappears into thin air. They're often used in international trade transactions since they're a safe way to exchange money in the short term.

A banker's acceptance can also be traded at a slight discount to the face value and held until maturity, sort of like a bond.


A legal process in court that lets you basically say "whoops, sorry—I can't repay what I owe."

When you declare bankruptcy, you're basically getting an excuse not to pay off a bunch of your debts, including credit card debts. Once you go through the process, credit card companies, debt collectors, and other companies can't come up to you to get their money back. You may be asked to liquidate some of the things you have in order to pay back some of what you owe. And some stuff—such as custody payments—cannot be forgiven in a bankruptcy.

It's not a get out of jail free card, either. Bankruptcy basically ruins your credit rating for years and makes it hard for you to get a home loan, credit card, and other types of financing. So why would anyone do it? If you're really over your head in debt, bankruptcy can help you get a fresh start and can help protect you so you don't get your home taken away.

It's pretty much a last resort if you're in financial hot water.

Basis Point

One hundredth of one percent. It's the measure bankers use to talk about mortgages: they talk about mortgage rates going up or down a certain number of basis points.


If mortgage rates are quoted today at 6.274% and next week at 6.284%, they have gone up one basis point. If they move two weeks later to 6.074%, they've gone down 20 basis points from the original quote.

Bearer Bonds

You know that saying "possession is nine-tenths of the law"? That's how bearer bonds work. If you have the paper issuing the bond in your hot little hands, you own the bond (whether you stole it or bought it): there is no record of who bought or sold the bond.

Bearer bonds aren't common today, in part because investors don't like the idea that they can be stolen.

Best Efforts

"Best efforts" is a goofy legal term that describes a kind of goodwill or "we tried really hard, really" when trying to execute a sale, a transaction, or anything that requires brokerage work. It just means that the person doing the work can't sit around on his butt and do nothing—she has to... try.


Beta is a measure used to describe volatility or risk of a portfolio or share. Usually, Wall Street types use the market as a whole to measure how risky or volatile something is. 

Blue-Sky Laws

There are thousands of rules about selling and marketing securities. These laws are there to protect you, but... they're confusing.

For one thing, each state has its own separate laws and there are federal rules to follow, too. Blue-Sky laws are the collective state regulations involving the marketing and sale of securities in a specific state. If you want to make new issues and secondary offerings available in, say, Idaho, you have to register according to the relevant Idaho laws. Some states' regulations are stricter than others.

Board Of Directors

The board of directors is the central nervous system for company management. They get paid to provide oversight on things like compensation, ethical things, accounting, governance, and deciding who is picking up the cake for Janet from accounting's birthday party. Its primary function is to hire (and fire) the CEO who then in turn hires, more or less, everyone else. The board members are elected by votes drawn from the pool of Common Stock investors.

Bond At A Discount

A bond that is selling for less than its stated value. Summer sale for investors.

Bond At Premium

A bond that is selling for more than its stated value.

Why would it sell for more than its value? Investors might be certain the bond will pay off, or its credit rating may have been upgraded since the bond had been issued. Or it's possible that interest rates have dropped and that bond looks more appealing than the ones being issued now. 

Bond Rating

S&P, Moody's, and Fitch are all rating agencies that gather up information about bonds and the companies that issue them. They release ratings about the relative strengths of individual bonds so that investors can make better decisions.

Rating agencies look at things like the financials of a bond issuer, debt loads, and indicators. If a bond is ranked high, there is a low chance of default, meaning that the company or issuer will probably pay you what they're supposed to and you won't lose your money. Lower ratings mean bigger risks.

In the S&P world, BBB is the highest rating for an "investment grade" bond. Anything lower than BBB is considered a junk bond.

Caveat emptor. (That's Latin for "read the fine print.")


No longer the hippest spy in the world (Matt Damon took that spot), the word bond comes from Latin, meaning just "an agreement."

Financially, a bond is an obligation to pay back money. In return for renting that money for some period of time and for the risk of that borrower not being able to pay back the money, bonds charge rent or interest.

Bonds have levels of seniority and other features which can make them "feel like" stocks or other kinds of investments. For example, it is not uncommon in large public companies to have 8 or 9 layers of bonds with fancy names like preferred, senior, junior, convertible, subordinated, or debenture.

Each of these flavors of bonds has a slightly different taste with the one common protein that they are all different forms of debt obligation.

You would likely have been raised in a barn and gotten your transportation to your soccer games in a horse and covered wagon if bonds or debt didn't exist. Almost nobody buys a home without debt. Most people buy cars with debt. Most students pay for their college education with debt. And that plastic in your wallet? Yeah, it's debt. The one unifying string that has woven the financial fabric of this country has been financial trust.

Because our laws around financial obligations are so strict, for hundreds of years, this country has developed a deep sense of trust in another party's promise to repay. That promise is taken seriously by everyone and anyone with whom you will do business in your future as you try to buy toys, shelter, and self-actualization (a convertible Porsche).

Book Entry

You might think that "book entry" would have to do with writing stuff down in an actual book... but... the opposite is true. Book entry is the way that securities get registered today in an electronic form. No physical paper is used and no actual bond certificates or stock certificates are issued in most cases. 

Book Value

A balance sheet term. It's what things are worth at liquidation. If you own a company with stuff like machines, equipment, and inventory (stuff you sell), you'll figure out what things are worth now and how much they decline in value each year. Book value helps you understand how much everything is worth right now if you suddenly need to liquidate (or are just applying for a business loan).


Caterpillar Tractor bought a smelting stove to melt iron at high temperatures. They paid $10 million for it. It should last 20 years and then they can sell it for scrap for $2 million. Using advanced calculus, we can ascertain that it will have depreciated $8 million in the 20 years that they use it. Using arithmetic depreciation, it will have declined in value $8 million / 20 = $400,000 per year in value. By year 10 of having owned the smelting stove, it will have depreciated $4 million. The book value of that stove will be held on the balance sheet of CAT as $6 million.


When you borrow, someone fronts you something (cash, a book, a good shirt for your date on Friday night). "The borrow" is the cost of borrowing shares if an investor has to borrow the shares from the brokerage (it's called short selling a stock). The borrow is usually expensive because of the high interest rates charged. 

Bought Deal

When an underwriter buys shares directly from the issuer first and then files the prospectus and the IPO. These are usually big deals, so the company ends up selling all of their shares. The underwriter, since they are buying up all the shares, can usually negotiate a sweet deal. Because of that, they can turn around and sell them at a good price (attracting more investors) while still making a profit. 


Waltz into a store willing to buy a lot, and you can usually expect a discount or a freebie. The more you spend, the more discounts stores are usually willing to pile on to keep you buying. It works the same way with mutual funds. Buyers of mutual funds can get discounts once they get past breakpoints (the minimum levels where certain discounts are activated). Go past a certain breakpoint, and the commission on the buy might be slashed by 1%. Go above another breakpoint, and the commission will go even lower or disappear entirely. 


Buying shares of One Eyed Man Mutual Fund Company's flagship fund might cost 5.5% commission if you buy less than $25,000 worth. If you buy $500,000 worth of the fund, the commission might just be 1%. Over a million bucks, the commission might be free—the broker will be paid out of the management fee of the company, i.e. One Eyed.

Brochure Rule

This rule came as part of the 1940 Investment Act, and it requires that folks selling securities provide written documentation of what they are selling, i.e. a brochure. That way, if things ever go to court, there's no "he said, she said" in front of the very angry Judge Judy. All the pertinent facts are written down. Preferably not in crayon.

Business Cycle

Just like circle of life, business has its ups and downs. The economy looks to be tanking and then recovers, only to nose-dive again at some later date. The whole process is a cycle: the business cycle.

Not exactly what Mufasa was singing about, but you get the idea.

Buy And Hold

Buy and Hold is a style of investing. Basically, you buy stocks and then hold them. Convoluted idea, we know.

Warren Buffett, the Big Cheese in the investing business, is a big believer in buy and hold. Stockbrokers are less excited about this strategy, because they make their money when people trade, sell, and buy stocks. If everyone held onto stocks, stockbrokers might make less and might have to wear last year's Tom Ford designs. Tragic. 

To be successful at the buy and hold strategy, you will generally focus on putting just a few companies in your investment portfolio—fewer than 12 for most people. Then you avoid selling or trading those shares. To make money, though, you need to choose the "right" shares, and this is where things get tricky. What sort of business is around and profitable forever? Google and Apple might seem like sure bets now, but what happens 30 years (or more) down the line? Warren Buffet and others have found success by investing in things that people "always" buy—like Coca Cola. 

One of the big advantages of the buy and hold strategy is that it gives stocks lots of time to grow in value. Another big plus is that you don't realize gains, which means you don't have to pay capital gains taxes to the IRS. The big drawback is that your stock portfolio is going to go through lots of ups and downs, which will seem extra scary because you only have a limited number of stocks. When it all tanks, you won't be selling. You'll just be sweating it out, hoping that prices head back up. If you need the money in the short term and your portfolio doesn't recover in time, you might panic. This is really a strategy for the young or youngish who are thinking about stashing money away for retirement or even their kids. 

C Corporation

A type of business structure designed to separate the owners' legal and financial liability from that of the company. Unlike S Corporations where the business' profits are taxed at the level of the shareholder, C Corps have their profit taxed at the corporate level and again at the shareholder level after profits are distributed.

Wait, why would a corporation want to be double-taxed?

Well, it offers the most protection to stakeholders. If the corporation goes belly up, they're not on the hook. Most big corporations, like McDonalds, are C Corporations. It's the McCorporation Structure.

Call Option

The right to buy something for a set price for a predetermined, finite period.


IBM is trading at $130 at press time. And, yeah, by the time you read this, it will be some hugely different number, but go with us on this one for now. I might pay $7 for the right to buy IBM for $150 in the next 5 months because I think their new cloud computing servers will generate huge profits and the stock will rock. That means that I am essentially paying $157 for IBM stock that is now trading at $130. Why on earth would I do that?

Greed. (It’s good again.)

Consider the math scenarios. If I buy 100 shares now, I will have spent $13,000 on IBM stock. If it goes to $180, I will have realized a 5 grand gain if I then sell. And if their cloud servers are not a hit and are instead cloudy all day, the stock sinks back home on the range to $100 and my $13,000 has turned into $10,000. Womp.

For the same $13,000, though, if I feel really spicy and aggressive, I could buy 13,000 / $7 or 1,857 call options (in practice, options are sold in buckets or contracts, but for now, think of it as one call for one share of stock). If the stock goes to $100 within the 5 months, I lose all of it. I also lose all of it if the stock is flat. And I also lose all of it if the stock only goes to $150. Forgetting commissions and taxes, if the stock goes to $153.50, I still lose half of the month I put in.

But if I’m right and the stock goes to $180, I’ve made $30 a share, less the $7 a share I paid for the options or $23 a share. I am exposed to 1,857 shares, and I made over 42 grand on the trade. Blows away the 5 grand in just owning the stock.

Call Provision

See call protection. It's just the details and fine print that tell you whether the issuer can call a bond early (and how they can do that). 


Let's say Nike wants to buy a bunch of factories in India and it doesn't have the cash for it. Current interest rates are high, and Nike thinks that it will have a lot of cash coming in over the next few years as its shoes will get much cheaper to make after this acquisition. Nike goes ahead and issues the bonds at a high rate—8%—but there's a call provision. The fine print says that Nike can buy the bonds back at 102.5 cents on the dollar at any time after the first two years have passed. Nike is happy because they get a chance at smaller interest payments and less debt. Investors get at least some money from their investment. 

Callable Preferred

Just see callable. Preferred stock certificates also have fine print that means companies can call their shares at specific times. 

Capital Appreciation

Yes, we all appreciate having capital. But this term applies when the value of capital goes up or, well, appreciates.

Important note: you don't have to do anything for capital to go up in value. Let's say you buy a stock for $20, and after a year its value is $25. It has appreciated $5 a share. You didn't have to do anything, and you don't have to sell, trade, or do anything now. You can just sit back and appreciate the appreciation. 

Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model or CAPM is a model that prices securities in terms of the relative risk and return offered by the security. There are nice, complex equations that can be used to express this pricing model (if you're into that sort of thing), but the important thing to remember is that CAPM recognizes that investors need to be rewarded for risk and for the value of their money in terms of time.

Capital Gains

If you schlep to work each day, you have to pay income tax to the IRS. If you invest money, make money through investments, or inherit money, you have to pay capital gains taxes. The rate on capital gains taxes is lower than income taxes. In theory, that's because the IRS wants to reward you for investing rather than spending. Call us skeptical—it still looks like more taxes to us. 

Capital Markets People

The people who have their hot little mitts involved in the world-wide trading activities of certain sectors (like tech, healthcare, or real estate).

Capital Surplus

See Paid-In Surplus. 

On a balance sheet, a company is supposed to list all its stock and capital. But what happens when the company issues or sells stock at above face value? The extra they are paid is not an earning or a capital stock. So it goes on its separate line as paid-in surplus or capital surplus. 

Cash Flow

Cash is sometimes like water, flowing and ebbing its way around. Cash flow just refers to the process of money flowing in and out of a business. It involves cash inflows, or money flowing in to your business from customers and sales, and cash outflows, like the cash you have to pony up to fix that radiator again. 


When your great grandparents ran their grocery store, at the start of the day there was likely something like $114.52 cents in a big fat cigar box with a lock on it. Then they sold lettuce. And Ipecac. And dead cow parts. They also bought pasta from the pasta purveyor who happened by. And paid the rent collector when he knocked. And they paid their help the day wages due. And so on. And at the end of that day, there was $122.68 in the cigar box. They had cash flow over that period of $8.16. And in those days, that bought a small house.


The Chicago Board of Options Exchange. Want to buy options? No need to go to the Windy City. The CBOE is an exchange that lets you buy and sell options. They sell more than a million contracts a day, since they are pretty much the biggest options exchange around. All the options sold there are the basic calls and puts and all are American-style (which means you don’t have to wait until the day of expiration to exercise your option). Created in 1973, the CBOE is also busy creating e-trading and other financial tech products.

Certificate Of Deposit

Think of it like an upgrade for your savings account. A certificate of deposit (also called a CD) is an unsecured promissory note (like an IOU) given to you by a bank. You can put money into a CD and your money earns more interest than it would with a simple savings account. There's a catch, though: you pay hefty penalties if you try to get at your money before the maturity date. Maturity dates on CDs can be a month or a few years and these puppies can earn you a floating rate or fixed rate. 

Chinese Wall

This concept was named after the Great Wall because it was thought to be impenetrable. The Chinese Wall refers to the divisions between the financial guys at a company and other departments at that same company. The idea is that the sides are divided up so that information can't leak through enough to allow insider trading.

In reality, the Chinese Wall is more like Swiss cheese: insider trading and information sharing between departments and companies happens all the time (even when it shouldn't).


Back in colonial times, before America was the good old U.S.A., colonists would churn cream into butter. Back then, churning involved moving a plunger in a wood bucket over and over and over again. Not exciting, but that's what happens when there's no better technology.

Today, churning is something illegal that brokers do. Churning in the financial sense means making tons of trades in a client's account to get more commissions. It's illegal but sometimes it can be difficult to detect or stop. If you fall prey to a broker who's involved in churning, you'll end up overpaying in commissions, and you might even have to pay extra taxes because of all those trades. 

Closed Indenture

A loan that has maxed out or is up to the maximum amount of funds that can be borrowed. The bank is closed, folks; you'll need to find another way to pay for your dentures.

Closed-Market Transaction

Unlike open-market transactions where investors buy/sell on the open market ("Google is doing well; let's buy some.") these kinds of transactions happen when an insider buys or sells directly from or to a company.

Usually, these sorts of transactions happen when an employee is trading company shares or stock options with the company itself. There are all sorts of rules that insiders and companies have to follow in these types of transactions to make sure that everything is on the up-and-up. These transactions don't usually affect market prices for stocks and securities on the open market.

COGS (Cost Of Goods Sold)

COGS refers to the "Cost of Goods Sold," which are all the expenses a company needs to pay to get their products out the door. So the company that makes your shoes might have to pay for material to make the shoes, the process of making the shoes, the price tags and boxes for the shoes, delivery, and everything else that it takes to get the shoes to the store or to your doorstep. Those costs, all together, are the COGS of your Nikes.

Coincident Indicator

When stuff happens that is generally aligned with other stuff that happens at the same time. 

Helpful, we know.

Here's an example: when the weather turns cold, people buy more gas—they are coincident.

Collateral Trust Bonds

When a company takes shares they own of another company, tosses them in an escrow account, and uses those stocks as collateral for raising money.


Let's say you own a company that makes hair-removal products and you stumble across a formula guaranteed to get rid of knuckle hair forever. (Just think of all those hairy dudes and grannies you could help!) Only one little hiccup: you need cash to make and market the product.

Your company owns Apple stock. So you throw the Apple stock into an escrow account and go to the bank. The bank uses the stock as collateral to give you a loan. Now you have the cash for your new product. Ta-da!

Commercial Paper

These are unsecured, very short-term to maturity bonds (270 days, max) which typically have low yields, low risk, and high liquidity, meaning that you can sell all of them and turn 'em into hard cash in minutes. They're usually sold by large institutions and corporations to meet debt obligations in the short term.


You didn't think that stockbrokers worked out of the goodness of their hearts, did you?

Yachts and fancy cars don't pay for themselves, you know.

Rather than being paid a salary like any Joe Schmo, stockbrokers are paid commissions, which means they are paid a small percentage of every trade they make. It can really add up, especially if someone uses unethical or illegal activities to trade more.

Commissions are really the lifeblood of stockbrokers. What gets commissions and how it gets commissions is an R-rated story (see wrap account; churning; sell-side analyst). But one key theme is that commission rates have come down. There's a lot more shares trade today versus 30 years ago, but commission rates are a fraction (we're talking 0.5–3%) of what they were in 1980.

Commitment Letter

So you need dough—but you don't need it today. You need it in 6 months when your cabin by the lake will be done and you convert your very expensive building loan into a normal mortgage. Well, you can go to the bank and, for a small(ish) fee, get a commitment letter which stipulates that, assuming that nothing material changes between now and then, you will in fact get a loan for $152,000 at 5% fixed interest for 30 years.

Common Stock

Common stock is a share of ownership in a company that gives you voting rights, but does not guarantee you’ll be paid a dividend.

If the company goes belly up, common stock is paid after preferred stock, which means there might not be much left in the tank for you after everyone else has been paid.

Competitive Bid

When a company decides to go public and launch an IPO, they need someone to sell their stock; these sellers are underwriters. But how can a company choose the right underwriters for their IPO? Sometimes, through a competitive bid. Different underwriters submit closed bids and details of the terms they are offering, and the company compares the bids to find the cheapest or best underwriters.  

Complex Trust

Not a simple trust? Yeah. A complex trust has stipulations for all kinds of other activities: how much must be given away to charity, what activities and/or people the trustees have to deal with, and so on. A trust can flip-flop between simple and complex if certain conditions aren't met, such as not paying distributions to beneficiaries in a timely manner. Some trusts are simple and some are complex... but they're all complicated.

Consent To Service Of Process

Consent to Service of Process sounds very dull and wordy... and it is.

If you register as a public company in any given state, the consent to service of process is a form that you (and all parties related to your business) must sign. The form lets the state securities administrator be served legal papers on your behalf. Handy if there's some lawsuit, but otherwise it's just more paperwork to sign.

Consumer Price Index

Recap: inflation is why a basket of household goods might cost $40 today when ten years ago the same basket cost $20. So how can we measure inflation? With that same basket of stuff.

Experts take a basket of basic household products and services and tally up the prices every so often, comparing them to the price of the same stuff months or years ago. This lets them track what’s going with inflation, so you know how quickly the value of your dollar is dropping.

Thanks, guys—we needed more bad news.

P.S. Note that the CPI number does not include energy or food. Like people don’t spend a lot of their income on those things? The thinking is that gas and food are just too volatile and are seen to cloud the "real" inflation numbers.

Contempt Of Court

Yeah, we all know what this one means.

Being held in contempt of court means you've been stupid enough to violate a court order, court injunction, or a subpoena. When a court tells you that you need to do something... you need to do it. Or hire a really good lawyer who can find lots of reasons why you're the exception to the rule.


You might want to look into prune juice or some fiber.

When the economy or a market grows a lot, it eventually contracts or slows down (or hits a slump). It's basically the "what goes up must come down" idea in economics. 

Conversion Ratio

This one has nothing to do with how many heads the minister dips in the river.

The term refers to the number of shares a bond is "convertible into." If you have a convertible bond, this ratio tells you how many shares of common stock you will get if you decide to convert the bond into stocks. 


Let's say a $1,000 bond converts into 100 shares. At ten bucks a share, the conversion is break-even-ish. If it's more than ten bucks a share, you're sitting pretty.

Conversion Rights

The rights to convert. It's usually something people talk about when talking about a bond converting into common stock.

Convertible Bonds

We all wish we could have a convertible bond we could go cruising down the PCH with. Oh wait, wrong kind of convertible.

A convertible bond is a bond that can be converted into common stock. So you can cruise along with your bond, collecting coupons, and then switch lanes and convert into stock for faster growth (...possibly). 


If you're a big spender, you want a cooling off period before you spend big bux. Lack of a cooling period may be why you've made some impulse buys in the past (like the leopard print pantsuit or that trip to Vegas you swore you'd never talk about). When a company publishes an offering memorandum outlining its plans to sell bonds or stock, there is a cooling off period required by law; it prevents investors from rushing in to buy without thinking. 

Corporate Bonds

A bond issued by a corporation (i.e., not a government bond, which is the other very common flavor of bond). Corporate bonds are usually backed by a corporation's credit or assets.


A form of business organization in which the business acquires a legal status separate from its owners; this limits the liability or risks of the owners by placing their other assets beyond the reach of court action and creditors. Corporations divide ownership into units represented by shares of stock that can be transferred or exchanged. Corporations are also generally characterized by the separation of ownership from management; thus shareholders often play very little role in the practical management of the corporation.

Bottom line: if you sue a corporation, you can’t go after Richie McRich who owns the corporation, too.


They're on the back of cereal boxes and at coupons.com en masse.

Oh, coupons also apply to bonds. If you have a bond, the coupon is the money you make from the interest on that bond. A normal vanilla bond pays its interest twice a year, which means that twice a year—for as long as you have the bond (until it expires)—you get cash. 


You have a $500,000, 8% coupon bond. Twice a year, you get $20,000 for your investment. Not bad.

Coupon Bond

A bond which pays a coupon or interest at regular intervals as long as you hold onto the bond. See zero coupon, too, which pays no coupon until the very end.

Coverdell Education Savings Account (CESA)

Coverdell accounts are similar to other college savings programs like 529 accounts. All of them offer the ability to save money tax-deferred (as long as the money is then used only for college costs. And yes, ramen noodles count as an expense), but the CESA has a much broader definition of "eligible post-secondary school," making it easier to get training in a field outside the "traditional" college system. Very good deal if you qualify.

Crash Of 1929


In the 1920s, the stock market was booming, and people were using their stock investments to buy houses and the like. Then, in October 1929, it tanked. People's investments were wiped out, and... hello, Great Depression.

Credit Rating Agency Reform Act Of 2006

This act was meant to improve the quality of company-credit ratings. It was enacted in the hope that we could avoid the subprime mortgage crisis that almost brought down the finances of the entire country. It worked—in the same way that a scale works in an embarrassing episode of The Biggest Loser.

The idea was that the big 3 agencies—Moody's, S&P and Fitch—were colluding with each other and rating every security as "A-okay." The big-3 then produced a product that wasn't reflective of the real risks inherent in the marketplace. Basically, they had been labeling "pink slime" and hot-dog meat as Grade-A sirloin.

The act made it much easier for smaller firms to compete for business by doing quality research and not being afraid to give bad ratings to bad money-butchers.

Credit Risk

Will the borrower pay or end up a deadbeat who doesn't pay their debts? That's credit risk: the risk that the promise to pay won't be honored.

Lenders are really worried about credit risk and have all sorts of ways to figure out whether you're a good  risk or a bad one. They might take a peek at your credit score, for example, or run an employment verification to get some intel on you. 

Cumulative Preferred Stock

The dividend on the preferred stock must be paid before the company can pay the common shareholders a cent.

If it's not paid, then it just builds and builds (a.k.a. accumulates). Usually, dividends are not paid if the company runs into trouble. Once the company gets over the hump and starts paying dividends again, it has to pay up all the missed dividends owed to the preferred stockholders (that amount is the cumulative preferred stock) before paying the common stock folks.

In theory, the company could stiff the preferred holders forever, but that never happens because the common shareholders would revolt and throw those jerks out of their cushy jobs. 

Cumulative Voting

It's about how companies' boards of directors are voted in or out. In cumulative voting, shareholders get one vote for each director, but they can accumulate all of them and pool all of the votes behind just one director if they want.


You have 500 shares of XYZ Corp., and there are 5 directors up for election. That means you have 2,500 votes (500 shares x 5 directors) to allocate, and you can put them all behind your cousin Billy.

Current Ratio

Current ratio is just a measure of what we got against what we owe, based on current (short-term) assets and liabilities (ones we only have to worry about for the next year).

We have to worry about two things here: the ratio itself and how big the numbers are.

If we have a really small business and our liabilities are larger than our assets, we might be scrambling to pay what we owe and we could get into a lot of trouble. If we're handling big moolah (assets of $10 million or more), we've got more pressure if we have lots of debt... even if we have more assets. If sales dip or a lot of our sales are on credit, we could have a hard time paying what we owe. 


Say current assets are $10,000,000 and current liabilities are $3,000,000. We like to see 3-1 or better for this ratio. It just means we’re paying our bills faster than we’re collecting them and it says a lot about our cash liquidity.

Current Yield

Think of it as "market yield": You can figure out the current yield by dividing the amount you make from an investment by the current market price. It gives you a sense of what sort of money you'd be making if you bought a bond or investment and held onto it for a year.


The subordinated debentures for Cablevision have a coupon of 7%. That is, when Cablevision sold $100M of those bonds, they were on the hook for $7M a year in interest. Cablevision couldn't help that Wall Street didn't like their new programming deals, which didn't include C-SPAN, and the bonds sold off heavily—down to 90 cents on the dollar. Anyone who now buys a bond unit (usually solid in increments of $1,000) for $900 still receives the 7% coupon from the good people at Cablevision. It's just that now that $70 in interest is paid out over the initial cost of $900 instead of $1,000. 70/1000 = 7%; 70/900 = 7.8%


When you have custody, you have the actual physical assets, whether they are in the form of cash or securities.

If a client has given their investment adviser full discretion to withdraw customer cash and securities, the investment adviser is considered to have custody.

Cyclical Stock

Stocks that move with economic cycles. These tend to be stocks in companies that can be affected by the economy at large. In many cases, they're from companies that make or sell discretionary items. 


If your company sells cheap-o vacation plans and the economy tanks, fewer people are going on vacation—because they're working overtime. As a result of that, your stock prices might drop. 


Depreciation and Amortization (D&A). It's a method of valuing assets—usually ones that are declining in value. 

Day Order

The order is what you give your broker, telling them to buy or sell specific securities on your behalf. A day order is good for only the day in which it was placed. If it's not filled for some reason, it's no good the next day.


Nothing to do with your grandpappy's dentures, a debenture is a bond-like loan certificate that's backed only by the promise the issuer makes that it will pay back the dough.

Like other investments, it pays interest, but it's risky because there's nothing backing it up.

If the company lied about paying you back? Not much you can do about it. 


Debt-to-EBITDA is a ratio that compares what a company owes in debts to the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

This number is used by bankers and investors to see how leveraged a company is. The higher the number, the more likely it is that a company will struggle to pay up its debt. Debt of more than 3 or 4 times cash flow is considered very high on most planets.

Debt-to-Equity Ratio

A very closely-watched metric by analysts.

The percentage is calculated by dividing a company's debt by the equity of stockholders and other owners. In general, a high D/E ratio is considered dangerous because it means the company has borrowed a lot. Lots of borrowing increases the chances of default and ultimate bankruptcy.


Usually, what happens right around April 15th each year.

From a macro perspective, a depression is defined differently by different groups, but most agree that it's a more severe and prolonged version of a recession, with GDP in sustained decline and unemployment at high rates.

When it happens, everyone has less money to spend and things become a cycle—since people aren’t spending money, businesses don’t need to make as much stuff and they lose revenues so some of them shut down, which means fewer jobs and even less spending. During a depression, the government might step in with programs that are meant to provide jobs and get people spending again.

Due Diligence

Sure, you could buy stocks, start up a company, or make all kinds of money decisions without actually looking into anything.

But when you don't do your homework, you're more likely to end up a whole pile of crappy investments. Due diligence just means hitting the books (or Google) to make sure that a company or business is all that it seems.

Eastern Account

With an eastern account, underwriters bringing new securities on the market are responsible for their own securities and the securities (or accounts) of other underwriters working for the same company or issue. 


Your company decides to go public and sell shares. You hire four underwriting firms to handle things. Each company is responsible for placing 25% of the stock. Company A is made up of mad geniuses who handle their account no problem, but Company B is struggling. Company A will have to help in placing more than 25% of the stock.


Earnings Before Interest, Taxes, Depreciation, and Amortization.

Seems like a five-eyeballed purple fish out of a nuclear plant river. Why on earth would anyone track this arcane piece of financial data?

Well, in theory, EBITDA strips out noise—noise that isn't germane to the business being analyzed. The idea is that EBITDA takes out information about financing and accounting differences, so it's easier to compare companies. Investors use this number to figure out whether a company is a good investing bet or not. EBITDA can be useful, but it can also be fudged—just like any other financial data. 

The notion was popularized by high cap ex industries (like the cable industry) which generated very high unit margins but never had any capital available to give back to shareholders because the industry was busy buying content and itself (i.e. consolidating). Many investors liken EBITDA to "cash flow" as a proxy for the unfettered operational cash earning power of the entity itself.

The dotcom meltdown of the early 2000s happened in part because the EBITDA numbers for dotcom companies were great... even though that didn't stop those companies from flopping. EBITDA can make companies with a lot of debt look far more promising than they are, so always check more than EBITDA when deciding what to invest in, kay?

Effective Date

The effective date is the date when a security can be sold to the public (because its registration has become effective).

Usually it happens about 20 days after the security registration has been filed with the SEC.

Efficient Market Theory

The theory says that you can't beat Mr. Market because all information is already reflected in the stock price—that markets are in fact efficient and that new information pukes out into the marketplace like a burb in a small room. Think you can beat the market because you have some great information? Sorry, champ, but this theory claims that the information is already affecting the market because others know the info, too. Better luck next time.

There are three models of the efficient market theory: the weak form model, the semi-strong form model, and the strong form model.
  • In the weak form model, past information about a stock isn't useful at all. The theory is that the current market value is the correct and best reflection of the value of the stock. 
  • In the semi-strong form model, new public information about a stock is instantly reflected in the price, so you can't gain an advantage by using public information. 
  • In the strong form model, even insider information is said to already be reflected in the market price. 

Not everyone agrees with efficient market theory. They may point out that insiders can (and do) earn higher-than-average returns from trading their companies' stock. They might also point out that Warren Buffet has not only beat Mr. Market but has reduced him to a bloody pulp.

So there's that.

Employee Stock Options

Your employer might want to sweeten your benefits package by offering you stock options—it's a way of enticing you to work for below-market levels of cash salary. If your company makes it big, it can pay off. Otherwise, it's basically just fake money.

Your employee stock options (ESOs) give you the right to buy your company stock for a specific price by a specific date. It’s similar to a regular ol' stock option, but with two big differences:
  1. ESOs can't usually be traded on public exchanges like other options.
  2. You will usually need to be an employee for a specific period of time beforeyou can exercise your options.

Equipment Trust Certificates

Basically an asset backed bond that is backed by equipment or machinery that a company owns. When you buy this sort of bond, the idea is that, in case the company can't pay back the bond, the equipment or machinery they own can be sold to pay for it—that way, you don't lose money.



A company has 40 tractors. On eBay they think they'd fetch a hundred grand. The company raises fifty grand against them by selling bonds offering 8% a year.



Equity can refer to two things:

  1. The amount of value you have in assets minus any debts.  If you have a $200,000 house and owe $100,000 on your mortgage, you have $100,000 in equity. It's an important number if you’re trying to borrow against that amount.
  2. Ownership (of stock). If you own 3 shares of Acme Corporation, you have equity in the company that made the Road Runner famous. Equity means owning a sliver of the big fat pie called Corporate America.


Employee Retirement Income Security Act.

It's a federal law that protects you if you have an employee retirement account. It doesn't mean that your boss has to provide you with an employee retirement account and it doesn't set minimums for how much you can make or invest. But if your boss does offer an employee retirement account, this law sets some ground rules.

Thanks to ERISA, your boss must provide you with some basic information about your investments and must be reasonable when making up your retirement fund. These rules also establish how long you must work before you get any benefits. Basically, the law means your boss can't legally take your money into a retirement account and then drain the cash to take off to Fiji with the hot guy from the mail room. 

Estate Taxes

You know how people say the two things you can't escape are death and taxes? Well, it turns out you can't escape taxes even after you die. Whatever you leave behind is taxed—heavily.

Those are estate taxes.

ETF - Exchange Traded Fund

ETFs (exchange-traded funds) are a bunch of stocks in one investment that are linked to an index (like the Dow or the S&P 500).

When an ETF is set up, someone buys up stocks in the companies listed in a specific index in the same amount as the index itself. Your ETF is based on the FUN* index that's made up of stocks in ten candy and video game companies? Great, your ETF will have stocks in those ten companies. Here's where things get interesting: the thing about an ETF is that no changes are made to the fund as the index changes. Over time, some companies might fold or might be replaced on the index. Some companies might tank. No matter. Your ETF will remain pretty much true to the index on the day your fund was created—no big changes. 

By the way, ETFs may look like mutual funds (they are a collection of stocks, after all) but they trade like stocks on the markets. 

Index Funds vs. ETFs

One key elemental thing worth understanding is the difference between index funds and exchange traded funds.

Index funds are NAV beasts; that is, each day, an uber-bean-counter adds up the stocks and/or bonds in a fund and calculates its value. Periodically (monthly-ish), the fund manager rebalances the fund. Let's say that a company in the S&P 500 is acquired by another or goes bankrupt. Well, it has to be replaced in the index. Or let's say a stock has a monster run and gets huge—should Apple still be 16% of the QQQQ index? It depends on the original documentation of the fund and the fund manager's job is to rebalance" over time.

ETFs do pretty much the opposite. No uber bean-counter, no rebalancing. Like your uncle Dennis's comb-over, the style stays the same.

*not a real index; sorry, dudes

Eurodollar Bonds

Bonds denominated in Euros. Pretty simple. It's more of an adjective than a term.


The guy who cuts your head off if you betray the king?

In finance, the executor is your "personal representative" after you lose your head. This person pays all your remaining bills, files the papers with the courts, figures out taxes, and distributes the remaining money to the beneficiaries, typically requiring them to spend a dark and stormy night in a haunted mansion.


If something is exempt in your finances, it means you don’t have to pay taxes on it. For example, if you have a home loan, you don’t have to pay taxes on the interest rate on your mortgage.

Exempt Security

A security that does not have to meet the registration requirements of The Securities Act of 1933.

Usually, exempt securities are backed by or insured by a government or government institution, banks or depository institutions, insurance companies authorized to do business in the state, railroads and public utilities securities, options or warrants, employee benefit plans, equipment trust certificates, and nonprofits.

The idea, generally, is that these securities are less of a risk for investors so the SEC doesn't have to get involved. 


Expansion of your waistline is one thing; expansion in the economy is...a similar thing.

During times of expansion in the economy, there's lots of spending, lots of business activity, and lots of stuff being made (including wasitline-expanding food). This period of expansion usually means good things for the stock market because business is booming. After a few months or a few years of it, though, the economy slows down and contracts. 

Face Amount

On a given debt security, there is a "face" or cover which has a value printed on it. Essentially, the face amount is how much the security is worth. It's how much will get paid back when the instrument matures or is "called back" prematurely.

Often, debt instruments are bought at discounts or premiums from or to the face amount.

Face Value

What's your face worth?

Guess it depends on your face.

Face value also refers to the numbers on the front of a bond, other debt-like certificate, or stock. It's also known as par value. As the actual value of the bond or stock goes up and down, you can compare it to the face value for kicks (and to figure out how the investment's doing).


Bonds for sale! Get your fresh, hot bonds here!

FACs are a guarantee a company gives to pay whatever is written on the face of the bond. It's a way to lure in investors.


Federal Reserve Board

The Federal Reserve board is the seven people who basically govern the entire Federal Reserve System.

Want a seat on the board? You need to get elected by the President of the U.S. and approved by the Senate. Once you do get to the board, though, you wield a lot of power. The board makes big economic decisions that affect us all. For example, they decide how much banks need to keep in reserve (that's the amount banks need to keep in cash at the federal bank to make sure they don't run out). They also decide the interest rate the Federal Reserve charges when loaning money to banks.

These kinds of decisions affect the interest rates you pay and how well the economy overall is doing. 

P.S. It was created with three mandates: control inflation, enable full employment, and promote stability within the banking system.


First Financial BanCorp (FFBC) is a bank holding company, which means they control a bunch of smaller banks.


The person who's in charge of taking care of assets or something else on behalf of others.

In a trust, the fiduciary manages the trust on behalf of the beneficiary, for example. They must act in the best interests of the beneficiary; they can’t grab the cash and head for the Caymans.


It sounds like Great Aunt Elmo's pet poodle, but FIFO actually means "First in First Out." It's an accounting term which refers to the method of accounting for inventory. With this method, if you have a bunch of inventory you're selling off, you'd recognize the older inventory first (or the cost of that inventory). 


Let's say you live in a high inflation time and you have stocked yacht bolts (they last forever) in your warehouse. The 1,000 bolts you made 10 years ago cost $2 each; the 500 bolts you made last year cost $5. FIFO accounting would have you recognize the $2 bolts first until you had sold all of them out of your warehouse, and then you'd start accounting for the cost as $5 each instead of $2. That's even if you can't tell the $5 and $2 bolts apart. 

Firm Commitment

When the underwriters involved in an IPO make a firm commitment, they're saying that they are responsible for any unsold shares.

They can't just say "Oops, we missed a few." Well, they can, but it's illegal.

Fiscal Policy

Want to start a discussion around Thanksgiving dinner that will make you face-plant into the mashed potatoes? Bring up fiscal policy. Everyone has an opinion about it.

So what is it?

It's basically the plans and strategies created and used by Congress, the president, and other higher-ups to help out the economy. When the economy is tanking, there's a lot of talk about fiscal policies and what's being done to help things along.

Fixed Annuity

An annuity where the earnings on the investment are at a fixed rate. Very similar to the interest on a bond or a savings account.

If you have a retirement fund and then take the money and set up an annuity so that you have a yearly or monthly income from that money, a fixed annuity will give you no surprises: you'll get the same rate and earnings on your investment. 

Fixed Coupon On A Bond

Bonds pay interest twice a year—that interest is called a "coupon" because, in the good ol' days, people would clip the coupon from the bond, mail it in, and get a check from the bondholder a few weeks later. The coupon itself is "fixed" in that if, say, a $1,000 savings bond pays 4%, it'll pay a fixed coupon amount of $20, twice a year.

Fixed Dividend

A dividend paid out on a stock that stays fixed (i.e., the same) each year. Even if the company suddenly hires a reality TV star as CEO and starts tanking, your dividend stays the same. Preferred stocks often have fixed dividends.

Flat Yield Curve

Happens in blue moons and when the cost of renting money is the same for a short period of time or a long period of time.

A normal yield curve goes... up. That is, the cost of borrowing money in the short term is cheaper than the cost of borrowing money in the long term. It's important to understand with bonds. If you're investing in bonds, a flat yield curve happens when the yield on long-term and short-term bonds is pretty much the same. When that happens, there's no point in investing for the longer term—you're not making any more money. When you see a flat yield curve on investments, it can mean that the economy's headed into a recession.

Time to pay attention and get ready to batten the hatches. 


You're looking at U.S. Treasury bonds and you're wondering whether to invest long-term or short-term. The three-year bond has a yield of 6%. You look at the 20-year bond. The yield is 6.2%. Uh-oh. That's a flat yield curve. Time to make sure your investments would do okay in a recession. 


The lowest limit that parties in a particular transaction are willing to accept.

For example, if you set a rock-bottom interest rate or stock price on a transaction, that's the floor. 

Fundamental Analysis

When it's a blast doing damental analysis. Applies to investing in companies - to determine whether it's a good or bad deal at $37.20 a share, you assess the core business operations of the company, their revenue growth, profit margins, cash flow generation and other things that all pertain to the basics of investing which are to get more out of an investment than you put in; this system differs from astrology which is the primary form of "analysis" for "macro trading" and other short term "strategies" that rely on charts and bumps on skulls.

Gross National Product

Hamburgers. They're a huge national product of the U.S. and they're gross. Just see GDP and click here <>

High Alpha Investor

"Alpha" in investing is synonymous with "smart." If you have lotsa Alpha, then you are "smarter than the market."

So a high Alpha investor is someone who beat the market while taking low risk—i.e. not a lot of leverage, not super volatile stocks or categories, etc. It's a new-ish term in "Modern Portfolio Theory" (which is a thing, apparently), that signifies that this fund manager or mutual fund is pretty awesome, and we can quantify that awesomeness with a number. Which we call alpha.

High Octane Stock

Have you seen those silly car commercials where an actor with a super-deep voice talks about octane and horsepower? High octane stocks follow the same idea—lots of power and speed.

These are volatile stocks that people think have lots of chance for fast growth.

Vroom vroom. 

High Yield

High yield bonds pay high interest—usually because they have to. These bonds are considered risky because the company linked to them isn't doing so great. They might be in huge debt or have a history of not paying up.

To attract any investors, they have to offer a better interest rate. Sometimes called "junk" bonds, high yield bonds might seem like a good deal—look at those high interest rates!—but remember that if you buy the bond and the company goes under, you lose all your cash and get nothin'.

Not such a great deal, then, eh?


In a prevailing interest rate world where T-Bills are yielding around 3%, grade B bonds might yield 5% and "junk" or high yield bonds might yield 8% and much, much more... and often carry ratings of CCC or worse.


The person who owns stock options is the holder of them. It's easier to just say "owner," but finance types thought a special word was needed. As always.

Immediate Or Cancel Order

A type of order you send to a broker or brokerage when trading securities. You're basically telling them "Now or never."

If the broker can't buy 100 shares of Google or whatever it is right this hot minute, you don't want them to bother trying later. Good if you have zero patience or want to take advantage of the current market prices. 

Incentive Stock Option

Incentive stock options are used by start-ups and growing companies to hire workers. These companies can't usually pony up the cash to pay a great salary. Rather than seeing the best guys go to Big Conglomerate, Inc., they offer stock options to sweeten the pot and hopefully make workers overlook the low pay. The idea is that if the company takes off, the stock options will be worth more than some big salary.


A Silicon Valley start-up says "We'll pay you $45,000 a year even though you're used to making $100,000. But we'll give you 300,000 ISOs (incentive stock options) at a 4 cent a share strike price. If we make it big, you make millions."

Worth it to you? Maybe. You can retire rich. But if the company doesn't do as well as hoped, you'll have put in years of work for lousy pay.

Income Statement

The infamous P&L or profit and loss statement.

This statement is supposed to show a company's revenues, expenses, and earnings. The idea is that it's supposed to be a clear-cut set of numbers that shows what's coming in and what's heading out. Is the company making money? Is it bleeding cash?

The reality is that accountants can do all kinds of fun accounting stuff to fudge the numbers and hide what's really going on, so those black-and-white numbers don't always tell the full story.

In cases like Enron, WorldCom, and other financial disasters, income statements are telling a mostly fictional story. 


An indenture is the paperwork behind a loan. It says that you are "indentured" (or bound and legally obligated) to pay off the loan or you lose the house or property you used as collateral for the loan. 

Index Fund

See ETF vs. Index Fund.

An index fund is just a big fat basket of stocks or bonds geared to reflect a market "strategy" (i.e., whatever logic that consumers will buy). If you believed in sin doing well over time, you might try to find an index with tobacco, alcohol, gun sales, and gambling.  The more generic funds are those baskets that reflect a popular index like NASDAQ or the S&P 500 or the Dow. 

Here’s the composition of the Dow-Jones Industrials which are 30 big fat cap companies that are supposed to reflect the industrial strength of this country and the world (you have probably heard of a few):

American Express
Walt Disney
EI Du Pont
Exxon Mobil
General Electric
Goldman Sachs
Home Depot
Johnson & Johnson
JP Morgan
Procter & Gamble 
United Technologies
United Health

Individual Account

An account owned by one, individual person.

If you're an introvert who likes to say "No touch, mine!" an individual account might be just right for you. It's also a great account for anyone who wants to be able to have cash in their account without worrying whether their bae has spent all the money on NFL tickets again.

Joint accounts and business accounts are not individual accounts. 


Something that old people love to talk about.

Whenever granny says "Back when I was young, a new Ford cost $1,000," she's talking about inflation, the gradual increase in prices over the years. Thanks to inflation, money drops in value, so the $20 you stow under your bed today will be worth less in five years. By the time you're old enough to complain about it, that $20 won't buy much.

But, hey, at least you'll be able to complain about it.


So… the average annual wage in 1905 was a thousand dollars. But you could buy a pint of milk for a penny, a horse for 10 bucks, and a house for five grand.

While that thousand bucks a year doesn't sound like much today, on an inflation-adjusted basis, the average wage today hasn't changed all that much—the average $40,000 a year on a percentage-basis buys you about the same as what turn-of-the-last-century dollars would get you just a year before the big San Francisco quake.


Insiders are the people who are in the know when it comes to a company and its secrets. Insiders in a company include its officers and directors, large stockholders of the company, and anyone else who would be in possession of important information that the average person doesn't have. Insiders also include immediate family members of all the above.

The important thing about insiders is that they have access to insider information, and if you somehow overhear or learn of this information, you have to be really careful not to use it in trading or you could end up in a legal mess—or in jail.

Insiders themselves have to obey a bunch of rules to make sure they don't use the knowledge they have to gain a trading advantage. 

Insider Trading And Securities Fraud Enforcement Act Of 1988

The Securities and Exchange Act of 1934 (the '34 Act) made it illegal to use inside information to trade stocks. Since people could make a lot of money with insider information and thought they wouldn't get caught (who's going to know I overhead the CEO of Big Company talking about a merger in a Denny's washroom?), some folks pretty much ignored the law.

The 1988 law was basically Congress saying, "We're really serious about this." The 1988 legislation added some hefty penalties if you get caught.

People still trade on insider information though, so... yeah.

Interest Coverage

If a company borrows money, how easily can it pay the interest on the loans?

To answer that question, you have to figure out the interest coverage, which means using this handy equation: 

Earnings Before Interest Taxes / Annual Interest Expense

If you're investing in a company, you want the number to be high, which would mean the company can handle its interest payments easily.

Interest Rate Options

You can go to one of the exchanges in the U.S. and buy interest rate options. Offered on T-notes, T-bonds, and other interest rate instruments, these options let you make money if interest rates go up or down. 

Internal Rate Of Return (IRR)

IRR refers to the growth rate of capital invested in a given project.


Let's say we go into the emu farming business. (Emu = big fat angry stupid ostrich that knows what it did and should respect our restraining order). If we buy 100 acres and 200 emu for $5 million, we believe we'll generate $1 million a year for 20 years. That's a big payback or a high IRR for this initial $5 million investment.

But it will never forgive their unjustified behavior. Shameful.

Interstate Offering

When companies issue an offering of stocks or securities, they can sell shares in their state or in more than one state. If they choose door #2, it's an interstate offering and it will mean more paperwork. The company will need to register with every state and with the SEC.

Intrinsic Value (of An Option)

Intrinsic value of an option is the difference between the strike price and the value of the stock involved. So if you have a call option for Google stock with a strike price of $200 but Google is trading at $250, the intrinsic value is $50. 

Inverse Correlation

You go up, I go down. You go left, I go right. You go jazz, I go heavy-metal.

This term means that any given variables are at odds. If the price of leather pants goes down when cows get fat, the two variables (price of leather pants and size of cows) are inversely correlated.

Inverse Head-and-Shoulder-Chart

A chart that looks like shoulders and a head upside down... if you squint really hard or have had too many martinis at the company lunch.

When the chart is showing sales, company earnings, or stock market prices, a chart of this shape shows that a downward trend has reversed:

The first upside down shoulder shows a drop, then prices or sales go up. Then there's a huge drop followed by an increase (that's the head) and then a smaller drop followed by an increase (that's the second shoulder).

The idea is that this is the time to breathe a sigh of relief that the downturn is getting better.  

Investment Adviser

An investment adviser is any person who takes your  money to give you investment advice or who handles securities analysis. Anyone who promises or advertises themselves as offering investment advice for money is also an investment adviser... even if they're terrible at it.

Investment Adviser Representative

An investment adviser representative is someone who works for or is linked to an investment advisor. The fine folks who brought you the Uniform Securities Act also have this technical explanation of what an investment adviser representative does:
  • Makes any recommendations or otherwise gives investment advice regarding securities
  • Manages accounts or portfolios of clients
  • Determines which recommendation or advice regarding securities should be given
  • Provides investment advice or holds herself or himself out as providing investment advice
  • Receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice
  • Supervises employees who perform any of the foregoing

Investment Advisers Act Of 1940

The federal law that decides what investment advisers can and can't do (spoiler alert: they can't legally take your money and spend it all on their car collection). The Securities and Exchange Commission (SEC) enforces this law and resolves any issues about what it actually means.

Investment Bankers

Investment bankers help companies raise money, sell used companies, and offer money and merger advice to companies. These peeps have cushy, well-paid jobs... in case you were looking for career advice

Investment Contract

The Uniform Securities Act and the Federal Securities Act of 1933 decided that the word "security" wasn't enough, so they created this word, which means the same thing. 

Investment Fund

A "pool of assets" which were bought or invested in. They exist in a legal form called—yes, you guessed it—a fund. These funds are what investment-bankers create, mutual-fund managers obsess over, and everyone else squints at while muttering nonsense about "the Dow" in an effort to appear intelligent.

Investment Grade

Ratings agencies like Moody's think teachers shouldn't have all the fun—so they grade bonds. The higher the grade, the better the bond is doing and the more likely you are to make money.

According to the S&P system, bonds with grades of BBB or higher are investment grade, which means your investments might make you money. Anything below that means the bonds haven't done their homework and are maybe playing hooky. 

Investment Objective

Well, we all wanna make money, right? Duh.

That's everyone's overall investment objective, but scratch a little further, and you'll find that everyone's investment goal or objective is a little different. Some people want to make lots of money fast because retirement is right around the corner. Some people want to make money slow because they don't feel comfortable with risk. Some folks want to make money, sure, but want to invest only in ethical companies.

It's a registered adviser's job to figure out how much someone wants to make and how they want to make money with investments. Knowing this stuff helps the adviser choose the right options for their client. 


Individual Retirement Accounts (IRAs) are accounts you can pay into now so that your money can grow. By the time you’re having senior moments, this money is supposed to be there for you so that you can pay for stuff.

There are two types of IRAs: Roth IRAs and traditional accounts. The big difference is how you pay taxes on your money.
  • With a traditional IRA, you don’t have to pay taxes on the money you put in now, but you are taxed later on when you withdraw money from the account. 
  • The Roth IRA means you don’t get tax breaks now, but when you’re old and grey and need the money, you won’t generally have to pay taxes on the money you withdraw.

The IRS gets a chunk of your cash either way, but you get to decide when you pay up.

Irrevocable Trust

When rich people want to pass on their assets to their heirs without having both the grim reaper and taxes take away all of their hard earned dough, they usually set up an irrevocable trust.

Basically, a legal account is set up so that rich parents contribute money to it under various tax-avoiding rules like "no more than $24,000 per kid per parent per year" and "no more than $10 million total" and so on.

That trust is then irrevocable—that is, it can only be given away to the kid. It can't be taken back if the kid turns out to be a total loser or marries an entire of commune of goat-people.

Serious. Business.


The company behind the stock or bond. Also, the company that gets the money by selling its stock or shares. 


IBM wants to raise debt to buy a competitor. It issues bonds—and it is the issuer who is on the hook to pay it back. Facebook wants to raise money to further suck away the time of middle-aged people everywhere? Facebook sells shares of its stock: it is the issuer of that stock.

Joint Account

A bank account or credit card account owned by two or more people.


Mary Kate and Ashley are sisters with a joint checking account. They each put in $500 each month. They are both responsible for the account. If in March, Ashley doesn’t put in $500 and writes a check for $1,000 on the account when the account only has $900, Mary Kate is equally responsible for the charges of the bounced check. If Ashley skips town, the bank will make Mary Kate pay up.

Joint Tenants With Right Of Survivorship

The JTWROS account is a brokerage account where the other account holder automatically gets everything in the account when the other account-holder dies. 

Here's a hint: If you married someone significantly more attractive than you and twenty years younger, don't get this brokerage account.

Jumbo (Negotiable) CDs

"Jumbo" meaning that the minimum amount for this certificate of deposit (a very safe government backed bond) is a hundred grand.

Junior Obligation Bond

If push comes to shove and a company goes bottom-up, the company issuing bonds will pay the "senior bondholders" before the "junior bondholders." 


Through the 1960s, British economist John Maynard Keynes was popular with economists. Today? He's lost some fans.

In his book, General Theory of Employment, Interest and Money (1936), Keynes wrote that the Depression was caused by a huge decline in total economic spending (he called this total spending in the economy "aggregate demand"). Keynes also wrote that once employment dropped, a new balance with low employment was created and the Depression might continue on and on unless the government started spending.

According to Keynes, the big solution was to have the government spend and spend to get things moving economically—even if it meant the government got into debt. This went against the ideas that economists had before, i.e. that the economy would eventually correct itself, no interference needed.

Not everyone likes Keynes' ideas, but President Roosevelt and the rest of the administration eventually did create the New Deal, which took on a broadly Keynesian quality, characterized by major and unprecedented government interventions into the economy. Keynesian ideas went on to dominate academic and government thinking about political economy through the 1960s.

Lagging Indicators

You know when you suddenly begin to feel nauseous an hour after eating that delicious-looking egg salad sandwich? That's a "lagging-indicator" of the food-poison you ingested an hour earlier. The same goes in the world of finance. If there was some "measurable economic factor" that happened in the past, it probably has something to do with the market's current movement. 

It's also a "technical indicator" that traders use to make (probably irrational) decisions on the direction of a stock.

Lead Manager

The lead underwriter in an IPO. If a company wants to start selling stocks to the public, it needs underwriters to handle all the details. Sometimes, a bunch of underwriters work together in what is known as a syndicate. The head honcho of a syndicate or group of underwriters is the lead manager.

Usually, the lead manager is a bank or underwriting firm rather than one person. 

Leading Indicators

You know when you walk up to a food cart selling egg-salad sandwiches and there's a dead squirrel nearby and the owner keeps swatting at flies? Those are all "leading indicators" that you'll get food poisoning. 

The same goes in the world of finance. If there was some "measurable economic factor" that is currently happening, it probably has something to do with the market's current movement.

Level Load

"Hey guys, we gotta pay someone to tell people this fund exists, or we won't sell any shares."

Level load is a fancy term meaning "the cut of the profit in each transaction that goes to the salesman." Also called a "12b-1 fee," it's where none of the brokers or salespeople make a big up-front commission, but instead opt to get a little bit of the net-asset-value each year in exchange for their attention and advisory.

On the upside? Your broker isn't bouncing you around to this mutual fund or that mutual fund to get a commission. On the downside? They may not be bouncing you around enough to make the kind of investment returns you wanted.

"Level load" basically means that you know you'll be paying X% a year for the fund advice.


Stuff you owe. Financial obligations. All that grown-up stuff.


London Interbank Borrowing.

LIBOR is the "best" interest rate in Britain. It's the interest rate that the safest customers get when they borrow money from British banks.

Life Insurance

Life insurance is kind of a weird term, especially considering that the entire "life insurance" industry is regulated differently from other investment, corporate, or religious entities.

Life insurance "policies" were originally created to protect the soon-to-be-widowed wives of professional loggers and lumberjacks. Members of a fraternity of lumberjacks would pay a couple cents out of their dollar to a pool, knowing that if they were crushed by a log tomorrow, their family would get a check from the fraternity for something. Something > nothing.

Check out our section on life insurance for all the details.


Last In First Out (LIFO) is a type of accounting used if you have inventory in your business.

In this type of accounting, you assess inventory based on the most recent stuff you bought. If you buy 100 copper pipes at $10 and then buy 100 more a few months later at $15 each, you're going to count the $15 pipes until 100 are sold and then assess the next 100 sold after that at the $10 price. 

Limit Orders

You have a broker to help you in buying or selling securities, but the cost of securities changes so often that you can quickly get in over your head. When you tell your broker to buy a certain stock, the price of that stock might go up a lot before the sale goes through, meaning you've just spent a lot more than you intended to.

So what can you do?

You can submit a limit order, where you set a limit on how much you will pay or how little you will sell a given security for. The broker can only buy a stock up to a certain price amount (that you set) or can only sell for above a certain amount. 


A buyer might be looking at GOOG trading at $500 a share but only wants to pay $490 a share for it, so she'd type in the "limit" box on her E*TRADE account 490, 100 shares. If GOOG trades down to that level during the time at which the limit trade is set, then she is the proud new owner of 100 shares of GOOG. If it never gets there and takes off screaming to $600, then she's out of luck and never gets the ride.

Limited Liability

Liability means that your butt is legally on the line in case of a lawsuit. If you own a business, creating a corporation from that business (also known as "incorporating") means that you become a limited liability company; your assets (and the assets of any company owners) are separate from the assets of the company.

If somebody sues the company, they can't gun for your house, retirement fund, or personal assets, in most cases.


You own a spa business and run it out of your house. One day, blue-haired Mrs. Smith slips on freesia massage oil in the lobby and breaks her arm. Her son is a lawyer and sues your business. If you’re not a limited liability, the lawsuit can try to get your house, dog, retirement fund, car, and everything you're worth. If your business is a limited liability legal structure, sonny is out of luck: he and his mom can only go after your business assets and the insurance money used to insure your business.

Limited Liability Company (LLC)

The key word here is "limited." See, there are several ways to exist as a company.

The most personally financially dangerous is that of a sole proprietorship. Should someone slip on the banana peel that you, as owner, left in the front of the meat store, then they could successfully sue you and win. You could not only lose your store but your home, your car, and your xBox.

If you create your company so that it lives inside of an LLC "shell," then the most someone who sues you could win would be… your company. That is, your personal property is protected because you have limited liability for that banana peel thing.

Limited Partnership

A limited partnership is a way of organizing investors who come together for a specific goal (let's be real, here: the goal is  to make lots of money).

For example, a venture capital investment company is a type of limited partnership. There are two types of partners in this structure: the general partners and the limited partners. The general partners are the ones who do the work of taking the money and investing it. The guys who sit around and hope the general partners are making them money are the limited partners.

Limited partnerships can help save some of your cash from the tax man, but they require lots of trust. To be a limited partner, you can't play any role in management. You have to stay passive, which can be hard if you see someone else investing your money in ways you're not quite sure about.

Liquid Market

A market where there are lots of buyers and sellers so investors can cash their investments in quickly.

Currency markets (especially the U.S. currency and Euro markets) are very liquid. If you have a pile of one currency, it's super easy and fast to convert it into a different currency. Fortune 500 company stocks would also be a liquid market because there are usually lots of buyers for that kind of stock. If you wanted to, you could sell your stocks quickly and have cash in hand.

Liquidity Preference Multiples

This is a common term in venture capital funding of start-ups. When an investor first funds the company, they typically get their preferred stock first—ahead of when the common shareholder would get his stock.

But often in deals where the founder wants a much higher valuation than the venture capitalist wants to pay because he thinks his company will be worth billions… then the founder offers a liquidity preference multiple; that is, the venture capitalist who put in $3 million at funding, gets a 3x liquidity preference or $9 million back before the founder who owns common shares gets a dime.

So basically, the person who invested the most gets preference.

Liquidity Preferences

This is a common term in venture capital funding of start-ups. When an investor first funds the company, they typically get their preferred stock first—ahead of when the common shareholder would get his stock. There are other forms of liquidity preferences—i.e., rights that inure to the investor over the investee—like various provisions that would force the founder to sell his company should a certain price be hit within a given time window.

It also involves (we know, we know, lots of definitions, but people use this term in different ways in different settings) the idea that investors prefer securities which are more easily turned into quick cash. So if something has a longer maturity date (like a long term bond or other thing where the money is tied up for a while), then they'll want some sort of extra benefit or premium for tying their money up for so long. 


The study of economics from the perspective of the window of a jet at 37,000 feet.

Macroeconomics looks at the behavior of entire societies, in contrast to microeconomics, which focuses on individual households, individual firms, and presumably bacteria.

The key concepts of macroeconomics are aggregate demand and aggregate supply.

Maloney Act

This law was passed in 1935 and it allowed some self-regulatory organizations to help the SEC is regulating the big, bad financial world and OTC market. It's the law that gave FINRA its powers. Before this law, there was no self-policing allowed.


See margin debt. You're borrowing from your broker to invest money. The margin refers to the amount of money you have to pony up so that the broker pays up the rest. 


If Schwab is offering up to 50% margin and you opened an account with them for $100,000, you can buy up to $200,000 worth of securities. Your $100,000 would represent 50% of the purchase price of $200,000 in stock.

Margin Accounts

An account you can set up with a broker or brokerage where you can borrow money in order to invest more money. The stocks or securities you buy are used as collateral to borrow money to buy more investments. 


You set up a margin account and pour in $100,000. The agreement with your broker is for a 50% margin. That means your broker gives you $200,000 in investments in your account. The $100,000 in stocks you buy with your cash is used as collateral to help you buy more investments so your money can grow faster. 


In stock sales, retail markets, and pretty much anything you can buy, somebody bought it before you did and paid... $X. Then they stuck a price tag on it that said something like $2X or $5X or $10,001X and sold it to you at a profit. They "marked up" the price they originally paid.

A markdown is the opposite, where a retailer says "no one's buying this stinky fish at this price, and I've got to get rid of it now or never, so I'll mark the price down until someone bites."

It also refers to the amount taken away from the final price of a security when it's sold to a dealer on the over-the-counter market. It's most often seen in the municipal bonds market, when no one wants to buy the stinky-fish debt of a random small town.

C'mon people, this bond isn't that bad. And it's on the cheap! Look at that markdown.

Market Maker

Let's say you have a certain stock and you want to sell. You call your broker, but he's got some bad news: "No one's buying thiscomapnysucks.com right now. I don't know why. Sorry."

What do you do? You need a market maker. This institution or individual buys and sells shares of a certain company or industry in order to literally create a market for guys like you—people who want to buy and sell. He accepts a lot of risk, but since he's creating the market, he also gets to name his price. Market makers can also charge commissions.  


Some guy at the NYSE put up a few million dollars of his own money to buy and sell shares of GM. He has various rules he must follow, and as long as he is a good boy, he can offer GM at $34.12 (where he is a seller) and bid for GM at $34.02 where he is a buyer—and live off of the dime per share spread. He'll need a lot of dimes to pay his bills.

Market Manipulation

Manipulating a market is a nasty thing to do—and it's is illegal to boot in the United States.

There are a lot of different schemes. A popular one is to deflate the price of a stock by making lots of sales at below market value. That makes it look like lots of investors are getting rid of their stock, which might make some investors think the stock is about to tank. They sell their stock, pushing the value of the stock down for realsies. 

Another common method of manipulating the market is to buy and sell lots of stock at matching prices. So sell a bunch of stock for $50 a share and then buy it for $50 a share. Repeat over and over. The idea is to make it look like lots of people are snapping up the stock and there's a lot of interest, which can push the price up. 

Market Order

When you have a broker and are buying or trading shares, you get to order them around or give them instructions about what and when to buy (and sell).

There are different flavors of orders. A market order means you're asking your broker to buy a certain amount of a certain security at the current market price. The idea is that the broker is expected to buy or sell now, but the trick is that some securities will go up and down in price a lot, so the price you think you're selling for might not end up being the price the broker can get for you. 


Ellen calls her broker and says, "Gimme 1,000 shares of Coke at market." The broker looks at her screen and says, "Okay, KO is trading at $68.42." That's how much Ellen pays per share.

Market Risk

There are lots of risks when you invest money; two of the most common categories of risk are
  • unsystematic risk
  • systematic risk (also known as market risk)

Unsystematic risk refers to risks linked to a specific stock or security. So you buy stocks in your dad's ice cream company, and the company goes bankrupt (who knew pork rind ice cream would prove so unpopular?). That's unsystematic risk, and you can help reduce some of your risk by diversifying your investments and at least investing in some companies that are likely to do well.

Market risk affects a whole market, and it happens because of things like terrorist attacks, natural disasters, political upheaval, and zombie apocalypses. There's no real way to protect yourself against market risk.

Just take your vitamins and hope you don't get bitten by the walking dead, we guess.

Market Valuation

A given company has a set number of shares outstanding at any one time. Multiply that number by the price of each share, and you have the market valuation.


Shmapple has a billion shares outstanding and its stock trades for $104.32 this moment. That makes the market valuation of Shmapple $104.32 billion. It's the value that the market's assessment puts on the company as a whole by offering to buy or sell shares in the company at that given price.


In stock sales, retail markets, and pretty much anything you can buy, somebody bought it before you did and paid $X. Then they stuck a price tag on it that said something like $2X or $5X or $10,001x and sold it to you at a profit. They "marked up" the price they originally paid. It's called Capitalism. And I've heard it has "invisible hands," so let's keep that in mind when you get pinched inappropriately. It wasn't me, I swear.

Matched Purchases

A scam that can get you in a lot of hot water—if you're caught.

This scheme requires at least two people: one of you sells a stock or security at an agreed-upon price, and the other buys at an agreed-upon price. Then you switch, so that the stock exchanges hands between you—again and again. Lots of trading happens but no one loses money.

The goal is to make other investors (those suckers) think that there's lots of interest in a stock, which will hopefully cause people to buy. That in turn drives the price up, and in the end, you and your co-schemer have stock that's worth more. You can then sell the stock for real to someone else at the inflated price and keep the profit.

You can also go to jail, so choose wisely.


What you gain with age (and something that seems to have eluded us here at Shmoop).

Also, the date when a debt becomes due for paying up.


You buy a $1,000 bond with a maturity date of May 5. You’re basically buying a little bit of a company's debt. So what happens on May 5? That's the date you’ll get your 1G back—and you’ll have the interest you've earned on the bond, too.

Minimum Net Capital

The concept refers to leverage, meaning you can't borrow the moon (any more).

A given brokerage might have a minimum net capital rule of 40%; that is, if you have $1 million in stocks and bonds in that account, you can borrow up to $600,000. Your minimum net capital would then be $400,000 or 40%. The law exists to avoid that little thing that happened in the 20s with the stock market.


Misappropriation can have multiple meanings, but in finance, it usually means that client funds are used in an unauthorized or inappropriate way.


If you give your money to a brokerage firm and a broker at the firm uses the cash to buy a condo for his girlfriend, that is misappropriation. According to FINRA Rule 3070, if the brokerage gets wind of the problem, they must report the issue and take action. 

Modern Portfolio Theory

Back in the 1950s, Harry Markowitz created this theory to create an investment portfolio or investment system for folks who were nervous about risk.

The highlights? Diversification is good and some risk is needed to reap the rewards. Balancing risk with proper diversification and tracking the results is good stuff. 

Monetary Policy

By serving as an intermediary bank, setting reserve requirements, and making short-term loans to banks, the Fed plays a crucial role in overseeing the nation's banks and money supply. Our checks (a huge part of our money supply) are efficiently processed, banks are prevented from lending more of our money than is safe, and banks are provided assistance in meeting the federal regulations that ensure a stable and safe financial system. But the Fed also uses some of these same tools to more generally influence the performance of the economy. By adjusting the discount rate and reserve requirement, the Fed can make adjustments in the nation's money supply during periods of recession and inflation.

Money Laundering

It seems innocent enough: You toss your favorite jeans in the wash and don’t check the pockets. The $5 you had in there after lunch comes out clean and a little crumpled. No harm, no foul.

But that’s not the sort of money laundering the government is worried about. Money laundering means trying to hide money you make illegally by cooking the books, setting up fake businesses, and basically committing a bunch of fraud. The idea is that you create fake companies, fake accounts, or fake customers, so it looks like the money is coming from a legal business when it’s really coming from shady deals.

If you’ve seen Breaking Bad, you know that Walter White got into some seriously shady stuff—including money laundering. He created businesses and even hired an attorney (we're looking at you, Saul) to help him hide where the money was coming from. It's no meth cooking, but... not great.

Money Market

The money market is an odd name for short term bond paper. Many people want to park money for just a few months or so; as a result there is always huge demand for short term money which is relatively safe and highly liquid. It's called "money market" because it was sold as being the same as your checking account—money in the bank.

Money markets are insured by the FDIC (the Federal Deposit Insurance Corporation) and have low interest rates.


One of the big three agencies that rates securities.

Want to buy Star Wars Corporation stock and are wondering whether it’s a good deal? The idea is that Moody’s has done all the boring research for you and lets you know whether the security is a high risk or a good risk.

The problem? Back in the 2000s, some people accused Moody’s and the other big agencies of giving everyone a passing grade. That led to the Credit Rating Agency Reform Act of 2006.

Mortgage Bond

You own a few apartment buildings. They carry mortgages on their own. One day, you decide to merge those mortgages into one piece of debt, using the apartment buildings as collateral—that merged big fat debt is a mortgage bond.


The Municipal Securities Rulemaking Board.

It's where muni bonds go to be governed. Most of the MSRB's activities revolve around proper disclosure of risks, venues in which muni bonds can be properly sold, and various tax allocations for investors.

Very complicated and serious. No smiling allowed.

Municipal Bond

A bond issued by a municipality.

That's it.

Cities use them to raise money for parking facilities, water treatment, streets, and so on. Muni bonds are often backed by the assets they are being used to fund. They're a nice little thing to invest in, especially since they're exempt from federal taxes.

Mutual Funds

A mutual fund is a collection of stocks and/or bonds which are professionally managed for the benefit of investors in them.

Mutual funds exist because individual investors generally have neither enough money nor experience to properly diversify a portfolio. 12 shares of Coca Cola, 18 shares of Disney, 32 shares of GE, etc. are very expensive to buy individually. A professional money manager aggregates lots of small buyers into a big fat pot of money, which then effectively gets "volume discounts" for the purchases and sales of shares.

Mutual funds are usually sold with a "load," which is a fancy term for sales charge, along with a fee for managing the fund. There is a fabulous myth marketed aggressively to retail buyers that consumers get a great deal on "no load" funds. Traditionally, mutual funds were sold through brokers who charged between 1.5 and 7% commission, depending on the size of the purchase and the perceived "quality" or track record of the fund. Mutual funds were in the business of managing money, not selling it, so they were happy with their roles as buyers and sellers of stocks and bonds and they let brokers broker.

Then brokers got into the mutual fund business for a variety of reasons, mainly because they thought they could make money doing it. But there was a hole in the market because many mutual funds underperformed indexes—in theory, more than half anyway—and brokers felt they had leverage.

Mutual funds fought back—think: Star Wars with geeks in glasses fighting with pens—and began to broker their own funds. Fidelity was the most successful of funds becoming "supermarkets" of financial services. Schwab was the most successful broker who went into the funds businesses and/or wholesaled other funds.

Naked Options

Yeah, these sound a lot more exciting than what they actually are.

Naked options are just options that you sell without having enough of the underlying security to cover your butt if the price changes. (See covered options.) If you sell call options and don't own the stock, you could lose a boatload of money if the stock price goes up because you have to buy the stock at the higher price to meet your obligation.



You sell an option that lets Mary, the next-door-neighbor with the yappy Yorkie, buy 100 shares of dentalfloss.com for $1,000. You own 50 shares of the stock right now and it's trading at $10 a share.

But then the company releases it's new super minty dental floss that's sparkly and plays music while you floss. People go crazy for it.

Now the price of shares is $30. Mary comes over with her barking Yorkie and decides to exercise her option. You fork over your 50 shares and you have to buy 50 shares at $30 each ($1500) on top of that to hand over the 100 shares. 


The NASDAQ is the National Association of Securities Dealers Automated Quotations System.

It's an electronic exchange (the first electronic exchange, in fact) that lets investors buy and sell stocks.Want to buy stock in a major company? You can do so through the NASDAQ. 

National Securities Markets Improvement Act

Dateline: 1996. The enactment took away a lot of the bureaucracy between and among state and federal financial laws, which were sometimes in conflict and often redundant, repetitive, requiring the same thing over and over and over and over again. 

This act streamlined things and saved trees from the MulchMonster.

NAV - Net Asset Value

The net asset value (NAV) is the per share market value of a mutual fund, i.e., the price at which a mutual fund closes each day. (See: closed end fund.) The NAV can be calculated with this equation:

(total value of shares and cash in a fund – liabilities) / (number of shares outstanding)

The NAV is important when trying to figure out the price per unit of a fund, which is in turn important when comparing different investments.


A fund has $10 million in liabilities, $50 million in shares and cash, and 4 million shares outstanding. The NAV is $10.

Thanks, math.

Negotiated Deal

A type of contract signed between a company and the bankers acting as underwriters during an IPO. The contract outlines the standards and rules for the bankers. It's part of the big amounts of paperwork that go into issuing securities. 

Nominal Yield

The coupon, or percentage that the bond makes, is the nominal yield of a bond—and it always stays the same. The bond may trade up or down, but the nominal yield stays the same.

By the way, "nom" means "name" in Latin. We showed up in class that day.


A bond has a $1,000 par value, 8% coupon, is due 2034. In trade, the bond might be worth $800 a year from now, $1200 six months from now, and so on. The nominal yield, though, is 8%. Is now, always will be.

Non Exempt

See exempt. Basically, this word means that something has to follow the rules and toe the line.

In investments, non-exempt might mean that something has to get registered with the SEC.

In other settings, it might mean that you won't get a tax break. For example, the interest on your mortgage is exempt from taxes, meaning you don't have to pay taxes on the interest. But the interest on your boat? Not so much. Sorry, yachters.

Non-Cumulative Preferred Stock

Preferred stock that does not require the issuer to pay any missed dividends before it pays dividends to the common stockholders. The company can say "Yeah, here's a juicy 10% dividend, but if we decide it's not in our best interest to pay you, too bad."

It's not usually the best kind of investment, since you're at the mercy of how the company is feeling about dividends and might end up in a "tough luck" kind of situation.

Non-Punitive Orders

Some orders issued by state administrators are punitive; e.g. if a broker steals money from clients, you can be sure that the state administrator will want to bring the pain. But other orders aren't related to crimes or punishment (or Crime and Punishment); those ones are non-punitive.


An agent decides to withdraw their license or cancel it. (She's decided to open a cat B&B instead of being in the rough-and-tumble world of finance.) The state administrator issues an order that cancels or withdraws the license. It's non-punitive because the agent hasn't committed a crime.

At least not a financial one.

Non-Qualified Stock Option

A stock option that isn't "qualified" to get tax breaks. With a qualified stock option, an employee can buy the option out, own the equity, hold it for a year or longer, and then get long term gain tax treatment (i.e., fewer taxes when they sell).

With a non-qualified option, all's fair for the tax man and you end up paying more taxes

Non-Voting Stock

Stock that doesn't give you any rights to vote on company decisions as a shareholder. 

Normal Yield Curve

Check this out for a jolly-good story to help you visualize the general mathematical concept.

In finance, the normal curve is a reflection of how the price of borrowing money works over time. That is, money due and payable sooner is usually cheaper because risks are perceived as less. Over time, there's more uncertainty; to account for that, those who lend money will charge higher prices to rent that money.

It's normal. The curve shapes from low to high in a twisted smiley kind of way.

Odd Lot Theory

The theory here is that when you see a lot of trades with odd lots (small lots of less than 100 shares and in odd numbers), you should run in the opposite direction.

The idea is that odd lots are usually traded by small retail investors (so average Joes who think they're the Wolf of Wall Street because they read some of Investing for Dummies that one time on vacation). Most pros think that small retail investors don't know Jack and that you should do pretty much the opposite of what these guys are doing. 


See bid-ask.

This is the price at which a seller is willing to sell you a security. The offer might have some wiggle room so you can make another offer, or the seller might be pretty sure they're not willing to negotiate. 

Open-End Indenture

It has nothing to do with dentures or figuring out which end to put them in, so stop asking.

And open-end indenture is just a license to borrow. Assuming that some very basic covenants are covered, like the previous year's financial performance providing enough operating cash flow to cover interest costs x many times, the company (or municipality) can then go out to the market and raise yet more debt—open endedly. (Hence, the catchy name.)

Basically, it's a good place to be and means you can get your hands on more cash.

Operating Margin

Key word here: "operating." It's cousin is "gross." Not aesthetically... just financially.


Let's say you sell lemonade for a buck a drink. Your cost per cup is a dime: the water, sugar, the paper cup itself, and the lemon. (Some people count the labor of the dude serving it, but in this futuristic world, you have a decanting robot machine.) Your gross margin here is 90%. But then you have rent, insurance, marketing, some human management, and a bunch of other costs to operate the business. You had pre-tax operating profit of $500 on revenues of $5,000 last month. Your operating margin was 10%.

Remember: Margin is a percentage, not a dollar sign-y number.

Operating Profit

This is the profit earned from a company's everyday main business. It doesn't include the money made from other investments, interest, or profit from owning a state in subsidiary companies.

To figure out your operating profit, you take your total money made, then subtract your cost of goods and services, operating expenses, depreciation, and amortization.

Is the number larger than one? If so, you're making money. Congrats.


Just a fun way of saying operating expenses. (Hey, something about finance has to be fun, right?)

The term refers to the cost of running a business. It can include the cost of staples and ink or the cost of paying employee wages. When companies start getting into trouble, they sometimes think about trimming back on their OPEX. This can result in a leaner, meaner company—or in disaster. Cut operating expenses too far and you won't have enough staff and stuff to offer your customers a good product or service.


Options give you the right to buy (or sell) a security at a specific price on or by a certain date. You're not locked into buying or selling, though—hence, option.

Options come in lots of flavors (employee stock options and naked options, to name two), but the important thing to remember is that they don't give you the same benefits as actual stocks. You won't get dividends or voting rights with options—just the right to buy (or sell) stocks later on. You can trade options just like other investments, though, if people want 'em.


A stock you're interested in is selling at $100 a share. You want to buy 1,000 shares of the stock but don’t have $100,000 to pony up. So you buy the option to buy within the month for $110,000 for 1,000 shares (the extra $10,000 is because the stock might go up in price). You pay $5,000 for the right to do that.

In a month's time, if 1,000 shares of stock are worth $170,000, you have a great deal. You can buy 1,000 shares for $110,000 ($115,000 with the $5G you spent on the option). If the stock drops in value and 1,000 shares are now worth $60,000, you don’t have to buy. You're not locked in. So you've lost $5,000 that you paid for the option, but you've saved a lot of headache.

Option Holder

Uh... someone who holds an option?



In the tech world today, an option holder is usually an early stage employee at a company that didn't have much cash to pay them a decent salary in the lean early years. So the company made up for it by granting them stock options which they hold until the company is sold or goes public. Ms. Employee can then sell those options in the open stock market.

OTC - Over The Counter

If you want to buy stocks and securities, you can mosey on over to an exchange like the NYSE or AMEX. But if you want to trade away from the exchange, you trade OTC, or over the counter. It's is usually done electronically through a dealer network.

Pssst... wanna buy some stocks?

OTC Bulletin Board

It's really just a blog that posts prices of stocks that have traded OTC: over the counter.

Many OTC stocks aren't well covered or reflected by the financial press, so it serves as a single source place where investors can go to check prices.


What happens to a market when there are too many buyers.

According to financial journalists, it means that there need to be more sales.

But some financial pros think there's no such thing as overbought, since lots of buying affects market prices and eventually leads to selling...so it all sorts itself out in the end. 


The amount of capital invested in the company. The end.

Par Value

The stated value of a bond or share—it's the face value, the dollar amount right there on the bond.

Most bonds are sold in increments of $1,000, so if you want to sound like you know what you're talking about, you'd refer to "par of a grand."


What happens when two things are the same. A equals B.

So if two currencies are trading at parity, one dollar of one country's currency gets you one dollar of the other country's currency.

Participating Preferred Stock

PPS is a popular term in venture capital circles.

Think of it as common stock on steroids. When you hold this type of stock, you have preferred stock that also participates in the profits of the company. If the company goes belly-up and has to sell its assets, you might get back the purchase price of your stock plus any extra money common shareholders get from sales of inventory and other assets. 

Passive Investor

Passive management style, or PMS to mutual fund managers, refers a management style for index funds, ETFs, and other investment vehicles where a group of, say, 500 stocks are picked to represent a given area, and then... nobody touches them.

Someone (or someones) tracks their performance; sometimes they drop some stocks and pick up others at year-end, or, if a company is bought or goes bankrupt, a replacement is found. Basically, one guy and a laptop can handle passive investment vehicles.

Someone who buys into those funds is a passive investor.

Passive Management Style

Passive management style, or PMS to mutual fund managers, refers a management style for index funds, ETFs, and other investment vehicles where a group of, say, 500 stocks are picked to represent a given area, and then... nobody touches them.

Someone (or someones) tracks their performance. Sometimes they drop some stocks and pick up others at year-end, or, if a company is bought or goes bankrupt, a replacement is found. Basically, one guy and a laptop can handle passive investment vehicles.

Patriot Act Of 2001

There are books (and books and books) written on the Patriot Act, but here's the deal for finance:

The Patriot Act was drafted in reaction to 9/11 and was designed to track money going to foreign terrorist groups. It allowed the government to monitor many different activities revolving around global wire transfer of money and other things that could impinge on the safety and well-being of Americans. Basically, companies have to actively report a bunch of the activities that they never had to in the past as they relate to dealing with countries we don't necessarily want to invite over to next year's Thanksgiving dinner.


Seems obvious, but within the investment industry the term "person" has a specific meaning. A "person" is any natural person past the legal age of majority or any entity (like a corporation) that can enter into a legally binding contract.

Pooled Investment

Any time a bunch of investors throw their dough in to invest as a collective group, it's called a pooled investment. (We're talking mutual funds, index funds, ETFs... the list goes on.)

Why do it? It spreads risk and adds liquidity. Just make sure there's water in the pool before you start throwing those securities in. We'd rather avoid another incident.

Power Of Attorney (Trading Authorization)

Little Old Maybell Bluehair just can't think straight any more, at least when it comes to managing her considerable money. Husband #4 was loaded and had a weak heart... and one too many cheeseburgers.

Maybell trusts her grand nephew Beauregard to make trades on her behalf and has given him "trading authorization" to manage her account—that is, he can make trades without pre-clearing each one with her.

His status is analogous to having "power of attorney" in doing various legal things in life.

Pre-Emptive Rights

Rights that allow you to do something first.

For example, if you have pre-emptive rights to buy shares, you'd get the chance to buy 'em before they were released to the general public. It's like the Disneyland FASTPASS but with fewer puke bags.

Preferred Stock

Stock of a company that has a higher position on the food chain than common stock. If the company liquidates and there's any money left after all the creditors are paid, holders of preferred stock get paid before the common shareholders.

Bonus question: how much do they get paid? Answer: up to the amount of the par value of the preferred stock.

P.S. Preferred stock was also the name of a cologne in the 1990s. Those were the days.

Premium Pricing

This refers to the method used to figure out how much a stock option should cost.

The "premium" is what you pay to buy an option on a security, whether you own that security or not. (Look up short-selling and marvel at the all the fun ways you can get yourself in serious trouble.) The "option writer" figures out the price by looking at a whole slew of data to find the option's theoretical value, like the stock's underlying price, the length the buyer wants to hold the option, and the strike price (the point that the option will execute).

If the stock just bounces around never hits the option's strike price, the writer still keeps all that delicious premium.

Prepayment Risk

Close your eyes and imagine a high-inflation, high-interest-rate world that is slowly crumbling—that is, The Federal Reserve Board is openly flirting with lowering interest rates.

You bought a bond from a corporation, which was going to pay 10% a year for 15 years. Spectacular returns expected. With one hitch: The issuing corporation had the right to buy back its bonds after 3 years for the price of 102 or 2% over par (the bond's actual face value.) Now with prevailing rates tumbling, that corporation thinks it can refinance that debt for 7% instead of 10%, so it makes sense to get rid of those older bonds and, well, start all over.

So, instead of 10 years of feasting on 10% a year returns, they hand you back your principal plus that extra 2%, and you're done.

That's prepayment risk—the risk that you'll have this awesome huge-yielding bond that you thought was going to last forever... only to just get your money back at a slight premium and the fat monthly checks go away.

Price Earnings

As in price-to-earnings ratio: It's a measure of a company's valuation, usually relative to that of the overall stock market.


If a company, let's call it Theoretical Company Blah, will earn $1 a share this year and the stock of TCB trades at $20, then it has a 20x or 20:1 price-to-earnings ratio. The "gotcha" here is that companies often carry cash and/or debt, so if TRB has $10 a share in debt and $4 a share in cash, then its price-to-earnings ratio is still 20—but it likely has more volatility in its movements, since the debt is gasoline on a fire when things go well or poorly.

Primary Market

A primary market is a market where baby stock issues go to be bought for the first time.

Debt, equity, and other securities start trading on the primary market and then, after they are initially priced (during the Initial Public Offering), they can trade on the secondary market.

It's a magical place with bright-eyed, bushy-tailed securities and lots of yelling.

Primary Offering

Pretty much an IPO.

A company goes public and starts selling shares of its stock so that you get to own a little bit of the company. The shares have not yet been sold on the secondary market—they're farm-fresh. 

Primary Shares

Freshly-minted common shares sold to investors from a company. See Secondary Shares.


The original amount of money you put down for a deposit or investment.

The higher the principal, the more you will pay in interest on a loan or the more potential returns you could get on an investment.


You borrow $10,000 to buy a car. You pay off the loan in two years, and your total payments are $15,000. That means that in addition to the principal of the loan ($10,000), you’ve paid $5,000 in interest.

Principal Trade

This is when the principal in the trade (the owner, more or less) trades for its own profit.

It's something broker-dealers do all the time to make money for their own business by keeping the difference between the bid and ask prices. A client may be certain she wants to buy 100 shares of Amazon at $400—but the principal is the one selling those shares to her. It's like "betting against the house" because presumably the principal (usually a brokerage) knows more about the (short-term) expectations of a given stock than the retired school teacher to whom it is selling.

So when things are a principal trade, they get special attention when selling to Ma and Pa Kettle, little old ladies, and cardiologists from Milwaukee.


Think of a bond as having two parts:
  • the principal that will be paid on the maturity date
  • the interest that's paid in coupon payments regularly

Usually, it's all tied up in a pretty package, but you can separate the two and sell the bond without the coupon payments as principal-only.

Private Placement

Also known as a Reg D offering, a private placement is an offering for unregistered securities which is made to accredited investors (not the general public) and no more than 35 non-accredited investors during any 12-month period.

A sale of securities sold to private parties.

Progressive Tax

The wealthier you are, the harder you get dinged with a progressive tax. The rates increase as your wealth does.

Income tax is a good example of this: If you don’t make a ton slinging lattes, you get a lower tax rate. If you make a cozy seven figures as a lawyer, you get charged at a higher rate.


A legal document issued by a company that lays out everything an investor may need to know in order to make an informed decision.

This report is required by the Securities and Exchange Commission for investments that are being sold. The idea is that clients get this information so that they can make a good decision.


Somebody who is authorized to act as an agent on behalf of another. 

If you own shares in a company, for example, you can get someone to vote by proxy. Rather than casting your vote as a shareholder, you get someone to cast it for you. Maybe because you're too busy frolicking on your yacht.

Prudent Man Rule

Years ago, this term was used after some courts decided that fiduciaries had to act in a reasonable way when deciding what to invest in. The courts eventually decided that prudent men invest in bonds and only bonds, so anyone investing in stocks was not prudent.

Since then, states have become a little more relaxed and use the prudent investor rule, which allows for different types of investments. 

Prudent Man Standards

Being prudent just means being respectful, careful, measured…

And the prudent person standards are set up to protect shady brokers from getting little old ladies investing in very risky vehicles like penny stocks, wild-cat oil-well digging, and the investing equivalent of lottery tickets.

For details on what is not prudent, see The Wolf of Wall Street. You gotta know what you're doing, people, and you can't plead ignorance if something gets screwed up.

Prudent Person Rule

Years ago, this term was used after some courts decided that fiduciaries had to act in a reasonable way when deciding what to invest in. The courts eventually decided that prudent men invest in bonds and only bonds, so anyone investing in stocks was not prudent.

Since then, states have become a little more relaxed and use the prudent investor rule, which allows for different types of investments.

Punitive Orders

If an investment pro violates SEC rules or does something illegal, the state administrator can issue a punitive order, which is a type of punishment. This type of order can deny a license to work in the state, can be a suspension of a license, or can involve some sort of torturous dunk tank.


A stock option that lets you sell your stock at a specific date by a specific date. You’re essentially ponying up money now for the right to sell a stock later. If the price of stock goes down, you can profit from put options.

Put Option

See call option.

Whereas calls are the right to buy a security at a given time range and at a given price, a put is the right to sell a security at a given time range and at a given price (e.g., you may pay $5 a share for the right to sell IBM any time between now and November at $130 a share).

Using options effectively reduces your market risk... and allows you to take over the world.

Putable Bonds

If bonds have a put feature, it means that the owner of that bond has the right to sell the bond back to the issuer at a given price within a given time range before maturity—of the bond, not the people doing the trades... or writing these definitions.

Quick Ratio

"Quick! How liquid are we?"

The quick ratio is a measure of how well (or not-so-well) a company is positioned to be able to quickly pay off its debts. The ratio looks like this:

(Cash + sellable securities + money people owe the company) / (liabilities)

So basically, it compares your total liquid assets to how much you owe. It's important to note that you don't count your current inventory as part of your assets, as it's typically hard to sell everything you have right this moment.

The higher the quick ratio, the healthier the liquidity position.

Random Walk

Hipsters' favorite finance term. Especially if the walk is in Williamsburg.

Random walk is a belief that the market is unpredictable and you can't beat it. The market just walks where it wants to, bro—there's no rhyme or reason to it.

Don't tell Warren.


Rebalancing usually refers to the process of tweaking an index fund so that it conforms to the goals of the investors.

Let's say a fund specifically cited that it seeks to maintain 20% of the fund in energy-related investments. But in a given quarter, energy might have done horribly—say it dropped 25%, so now the fund's energy holdings are only 15% of the whole fund.

The managers must "rebalance" the fund by buying a lot more energy stocks so that the fund "re-conforms" to its stated goal of having 20% of the fund in energy stocks.

If you don't rebalance, the whole fund will tip over and spill everywhere. And for the last time, we're not going to pick up your stocks off the floor.

Recourse Note

Debt for the truly desperate.

A recourse note allows the person making the loan to not only take the asset pledged as collateral for it, but also to go after the person who borrowed the money... personally. With baseball bats and pitch forks.

So even if you only pledged your car as collateral, they could go after your house, your jewelry, your pet pug Mort... leaving nowhere to hide when they come after you. With baseball bats and pitch forks.

Red Herring

Alas, nothing to do with CSI IPO. A red herring is a preliminary prospectus, which companies have to submit to the SEC outlining all the company details before a public offering. It's written partly in red ink, hence the nickname.

Regional Exchanges

Regional exchanges (like the Chicago and Pacific Stock Exchanges) are to the big exchanges (like the NYSE) what the minor leagues are to the majors.

They focus on servicing companies in their region and often deal in securities related to their core commercial interests. That is, Chicago is the broker for Midwest-grown commodities like wheat and corn and dead meat.

Registered Bonds

See bearer bond.

Then see Barry Bonds, just for a break.

Registered just means that a bond's owner has given the bond's issuer their name, social security number, soul, and so on.

This way, if the bond is ever lost or stolen, the owner can go back to the issuer and still get paid. In the case of a bearer bond, it's basically "possession is 100% of the law"—that is, if you "bear" that bond or have it… you own it. It's like a second cousin of cash.

The tellers at the bank prefer that you "grin" when you "bear it."

Registered Representative

A person who acts as an account executive and is allowed to sell securities. It's basically just another word for a stockbroker.

To become a registered representative, you have to pass the Series 7 and Series 63 securities exams and show that you have a good enough moral character to register with the Financial Industry Regulatory Authority (FINRA).

And no, those things aren't mutually exclusive.

Registration Statement

Before launching an IPO, your company has to file a literal crap-ton of paperwork with the state and the SEC. One of the documents is the registration statement, which includes your prospectus and other vital stats.

Regressive Tax

In a progressive tax, the rich pay more taxes. A regressive tax is the opposite—one that affects poor people more. It's not because they are taxed at a higher rate, but because their tax burden is greater.

Sales taxes, for example, are regressive taxes. When you buy detergent, you might have to pay 8.75% in sales tax—and you'll pay that 5% whether you’re rich or not. The extra buck or two might not matter if you're raking in $100G a year, but it can be bruising if that's your budget for lunch. The less you have, the bigger a problem that sales tax is.

Regulation A

Any offering with a value of less than $5 million in any 12-month period may not have to go through the full SEC treatment (just an abbreviated registration), and may be a Regulation A offering. 

Regulation D

This rule lets companies sell to private investors rather than to the general public.

Regulation D offerings don't need to be registered with the SEC, but they do need to toe the line in other ways. The offering can be made to any number of accredited investors, for example, but to only up to 35 unaccredited investors. Rule 144 lockup provisions may also apply to this type of offering.


Real Estate Investment Trust: It's kind of a mutual fund for real estate investments.

This security invests in mortgages or real estate and can be traded on exchanges like a stock. If you like the idea of investing in real estate but don't like the idea of sinking your money into a house, this option gives you some tax breaks but is easier to convert into cash than a house would be. 

Relative Strength Index

How do you measure the strength of a stock? Try the relative strength index (RSI).

Imagine lots of charts and graphs (fun, right?). The price of a stock is graphed over a period of days, months, or years. Everything is put on a scale of 0–100, and analysts start paying attention when the stock prices go above the 70 mark or below the 30 mark. The idea is that too many peaks and valleys or lots of ups and downs is bad news.

Repurchase Agreement

Think: very short-term debt instruments.

That is, things like T-Bills and other government forms of debt paper are sold—and then bought back the next day. The annualized interest rates on these instruments is usually very small, but the instruments are very liquid. So people use these agreements to pay short term bills and take care of large corporate projects for short periods of time.

It's the fruit fly of the securities kingdom.

Reset Date

The date when the rate adjustment of a dividend happens.

"The preferred shares of BUBB will pay an interest rate no less than 50 basis points more than whatever the 10 year T-Bill is yielding on the last trading day of each quarter."

That last trading day is the reset date.

Residual Claim To Assets

The claim to leftover assets.

If you have common shares, you have a residual claim to assets. This means that if the company goes bankrupt and sells its assets, the creditors and others are paid first. If there's anything left over, you have rights to that leftover (residual) stuff.

Spoiler alert: By the time everyone's paid off, there's usually nothing left.

A few percent of $0 is still $0. That's just how math works.

Retirement Accounts

Life is fleeting, nothing lasts forever, and all that jazz.

Eventually, you too will get old, and no matter how cute you are now, you'll have to deal with hip aches and bratty kids. When you can no longer work, you'll want money to pay for food, heat, and adult diapers. You can invest money for that time with a retirement account—like a pension fund, 401k, or IRA.

These funds make your money grow faster (and a lot, if you start early); they offer tax breaks, to boot.

Reverse Split

When a stock is tanking, it risks getting laughed off the exchanges (i.e., being delisted). When this happens, the company can try a reserve split, which means that shares are merged together. If you hold 100 shares at a dollar each, you suddenly own just ten shares—but each is worth $10. It doesn't mean your investment is worth more, but the per-share value has less overall suckage.

Reversionary Interest

The key word here is "revert."

For example:

"For $10,000, you can use the walkway between my house and the beach for 10 years; after that time period, that right to use my (amazing) walkway reverts back to me and only me, and you're left using that other walkway—the one covered in rusty nails and rabid wolves. This forces you to negotiate again, and all the circumstances are different. For instance, now I want $20,000 instead of $10,000."

Reversionary interests apply to vanilla investments too. That is, "Cousin Billy Joe, you get the interest on these bonds and the rent from these apartments until your mama Cousin Louloubelle dies; at that point, the dough from these two vehicles reverts back to me."

Revocable Trust

"Kids, I am giving you 8,000 shares of whatever.com. It's going to sit in this revocable trust until you are 30. If, by that time, you have not married an admitted Packers fan, then the shares are revoked and I'll find some other Packer fan to give 'em to."

Revocable trusts are different from irrevocable most importantly from a tax perspective. In an irrevocable trust, the basis of the investment is fixed and the trust can be funded decades before your progeny would receive it; in a revocable trust, the IRS views it as not-really-a-gift, so taxes are levied after the dough from that trust is converted/sold/used.

Rights Offering

Think: "a right to buy." And buy at a discount.

Companies may be fearful of a hostile takeover or some other big bad event, and they want to give existing shareholders preferential treatment over external non-shareholders. So they might say, "Okay, pals, for the next 60 days, you have the right to buy an additional share of our stock which is currently trading for $312/share… for $300 a share (note the discount, wink wink) and you need to currently own 5 shares for every 1 that you'll then buy." That is, the company is offering those rights to buy at a discount—and the shareholders can sell those rights to other non-shareholders for cash.

In essence, it's kind of a funky, one-time dividend.

(See warrants, too.)


A fund may have doubled in a given year—yep, it went up 100% in one year. You paid $10 a share for that fund, and now it's worth $20 a share.

Did the managers do a good job? Well, there's an easy "of course!" in there because you doubled your money in one year—how can that possibly be bad? Well, what if the managers only invested your money in a series of California State Lottery tickets and it just happened that one of those tickets won and paid off huge, so that while 99.9% of your portfolio went bankrupt (or ended up being worth zero when the Scratcher returned a frowny face), 0.1% made a 100,000x return.

On a risk-adjusted basis, the fund was bad; the managers took insane and irresponsible amounts of risk. They returned a dandy absolute number but could very easily have had your $10 a share investment be worth $0.00 a share a year later.

Not good investment management practice.

Road Show

Before a company issues an IPO, they sometimes hit the road like a rock star—except with fewer wrecked hotel rooms... usually.

Road shows take company management around the country to give presentations to possible investors, analysts, and groupies. The idea is to drum up interest so that when the IPO happens, people will buy shares.

Think Cirque du Soleil but with charts and suits. 

Roth IRA

It's a retirement package that taxes you for investments when you invest 'em.


Say it's 2019, and you make a contribution of $2,000. You're taxed at the 50% marginal rate, so you had to earn $4k to keep that $2k. But at least you have that $2k. You then invest it in your Roth IRA and it compounds at 10% a year in an index fund. You take it out 22 years later and it has doubled 3 times—that is, it became worth $4k in 7.2 years, then $8k in another 7.2 years then $16k in another 7.2 years—at which time you retire and want the dough for the cruise to Boca.

You take out the $16k—untaxed. You got to compound all those years with no tax paid on the gains. In a normal IRA, you'd be taxed on those gains.

Roth Love.

Round Lot

A hundred shares of stock. (It can also refer to shares that can be neatly divided by 100.)

Usually, exchanges require you to buy at least 100 shares of stock before they talk to you (same with brokers), and they like to do trades in rounded numbers ending in zeroes.

Maybe they're not as good at math as they claim to be.

Rule 144

If you want to sell unregistered or restricted stocks and securities, the SEC wants you to follow some rules. For example, you might have to hold onto the stocks for a while before trading or selling (that's Rule 144).

See lockup provision.

Rule Of 72


A nifty little equation that lets you use the number 72 to figure out how long it will take for you to double the value of your investment. Just divide 72 by the annual rate of return on an investment to find out how many years will take for it be worth twice as much.


You buy a bond for $1,000 at an annual rate of 8%. Divide 72 by 8 and you'll find out that it'll take you nine years to double that 1G.

S Corporation

See sole proprietorship, limited liability corporation, and C corporation.

An S corporation is a type of incorporation for a company which "fits" for companies with 100 shareholders or less. In this case, a company's profits aren't taxed twice when paying out profits to shareholders.


Kendra's Kazoo Factory has 50 shareholders and made $5M in profits, pre-tax, last year. Normally her company would pay $1.5M in taxes and then only have $3.5M to pass through to the 50 employees. Those employees then pay their personal individual income tax on that $3.5M. Figure it's about 40% is and the $3.5M turns into $2M after taxes. So we've taken $5M in profits and turned it into $2M by giving over $3M to the Taxman.

But in an S Corporation type of incorporation, there's no corporate slice of $1.5M meat—instead, all $5M is passed through to the 50 employees who then pay their 40%ish tax and the $5M turns into $3M instead of $2M.

Definitely a better deal for the people who worked hard to earn that money.

S&P 500

The Standard & Poor's 500 is a U.S. stock market index that's based on 500 major companies in the U.S. If you want to know how the U.S. stock market is doing, check the S&P 500.

For more, head on over to our Learning Guides.


In "the markets," a sale is both "the market" as well as "someone buying something."

Also, keep a look out for the word "sale" predicated by the word "yard." And then text us. We need a slightly-used desk chair.

Sarbanes Oxley

The Sarbanes-Oxley Act (SOX) of 2002 was created after the accounting scandals at Enron and WorldCom showed just how much numbers could be fudged.

Under Sarbanes-Oxley, there are stricter penalties for fraud and more rules about transparency and the reporting of accounts.


The Securities Exchange Commission.

It was brought into existence by Congress in reaction to a whole lotta shady dealings against farmers who knew a lot about wheat but nothing about making bread.

The SEC helps regulate the trading and management of securities in broad form. There are 5 commissioners (think: the board of directors) who are appointed by the president and approved by the Senate. The big focus is disclosure—that is, the SEC isn't there to help investors make good investments; they are there so that the laws of caveat emptor (buyer beware) can at least be fairly and equally evaluated. Then investors can dig their own holes.

Second Market

A platform where shares of non-public companies can be traded. 

Secondary Offering

First, there's an initial public offering. Any time a company sells shares after that, it's a secondary offering.

You can only be first once, but you can be second all you want.

Section 457 Plan

It's an extra benefit to government employees, courtesy of Uncle Sam. Employees under this plan are allowed to defer (not avoid) taxes on income.


Ms. Havisham decides to take the amount she lost on a failed wedding out of her paycheck each year—$10,000—and put that money in a 457 plan. There are no taxes on that $10,000 until she takes it out of that plan, at which point it's taxed normally.

These plans are set up to help government employees better prepare for a quality retirement, i.e. not one in which they are living in the back seat of their old station wagon.

Secured Bond

A secured bond is backed by an asset. It guarantees that if the company gets into trouble and can't pay you back, they will sell the asset and use the money to pay the principal and interest on their bonds. 

Securities Act 1933

Before this law, securities trading was the Wild West. Companies could lie about their shares and financials and do all kinds of other unethical things. This was the first major securities law, and it required companies to register before their shares could be sold to the public.

Suddenly, overseeing the securities market in the U.S. became possible. 


The generic term for anything that you can invest in: stocks, bonds, mutual funds, REITS—all of them are securities.

Selling Away

Selling away means your broker-dealer suggests stocks and securities not held or sold by their firm.

Usually, securities regulators from upon it since it generally means the broker-dealer is taking business away from the firm.

Selling Group

In any given offering of debt, equity, or marbles, there is usually more than one bank who markets the IPO (or secondary, or whatever).

On a big IPO like Alibaba's, there was Goldman, Morgan, Merrill, and an ocean of smaller banks around the world. Together, these comprise "the selling group." Fat Mike, Skinny Mike, and Ed from up the street would comprise the marbles' selling group.

Senior Debt

In companies who borrow a lot, there's usually a whole stack of debt. Layers upon layers of borrowings were done over years to build stuff and stave off peasant rebellions.

For instance, the cable industry borrows famously in many different "inventive" ways. Senior debt is the safest of that group; it sits on top of junior debt, which sits on top of debentures or unsecured debt.

In the event that the peasants do overrun corporate headquarters and the company goes belly-up for whatever reason, the senior debt is paid back first. And there's always the chance that junior debt won't get paid back at all.


See: senior debt.

There's a pecking order in liquidation if things go... awry. Having seniority is good. Juniority? Not so good. Senior bonds get paid first.

Serial Maturity

How long has that box of Cheerios been in the cupboard?

Yeah, it's not about that.

In debt offerings with serial maturity, a portion of the total outstanding debt is retired or bought back by the issuer each period or "serial time."


Shmoopazon is a public company, which just sold $1 billion worth of bonds. It is going to buy back $100 million of them every 6 months after 3 years have passed. It picks by lottery which bonds it'll buy back, usually in $25,000 units, and if your number is called, well, lots of soup for you. You get your principal cash back, plus usually a small premium, plus whatever interest would have accrued in the previous period. You can then spend that money on Grape Nuts, which is a very mature cereal.


Sales, general and administrative expenses.

It's a line on an income statement and stands for the money used to manage a business, deliver products or services, and market the company. These costs are important to the overall expenses of a business, but they don't fit with the costs of production.  

Shares Outstanding

The number of shares of a company that are out there in the world, owned by investors and shareholders. Any shares bought back by the company are not included in this number, which will change over time as the company raises more funds. 


Company X has issued a hundred million shares to employees, investors, and the general public. The company bought back ten million shares. They have ninety million shares outstanding. 

Sharing In Profits/Losses Of Clients

An agent can only share in a client's account profits or losses if the agent has been allowed to do so by a principal or if the agent contributed to the account, in which case, the agent can only take part in the profits and losses to the extent that they took part in the account.

These limits and rules ensure that the agent can't help themselves to an account's profits whenever they want.

Sharpe Ratio

The Sharpe ratio is a calculation used by investors to figure out the link between risk and return.

Short Sale

Selling something that you don't currently own because you think the price will go down. You borrow the security and sell it. If you're right, the price drops and you buy it back later for less. Put another way: Your Granddad always said, "buy low, sell high." This is just "sell high, buy low."

The net result is the same.


You see sales of Lost company for $40 a share. You think the price is about to head down so you borrow ten shares and sell 'em for $40. You make $400. A week later the shares are selling for $10. You buy the stock for $10. That's 10 shares for $100 and you give back what you've borrowed. The $300 difference is your profit. 

Simple Trust

See complex trust.

The key differentiator is that a simple trust must distribute any income it made during the year. (A complex trust can retain 'em.)

Income is different from just capital or real estate or whatever appreciating in value—that stuff gets retained in the simple trust. And the beneficiary can not be a charity—it has to be a taxable someone or something.

Yeah, we know: not that simple.

Sinking Fund

A company with bonds outstanding will buy back some of the bonds each year, gradually paying off the debt. They do this by handing over chunks of money to a trustee who uses the cash to buy some of the bonds on the open market.

Investors love sinking funds because the company is putting money toward the bonds, so it's much less likely that they'll default (not pay). Low risk = happy investor.


Company X has $100 million a year in extra cash. It has 10 bonds outstanding, each with a $50 million face value. The company takes half of its free cash flow (that's $50 million a year) to buy back the bonds. On the company's balance sheet, that's one less debt. The company's financials look rosier already. 

Soft Dollars

This is basically the opposite of cold, hard cash.

Brokers need to get paid (how else are they going to keep their Maseratis running?) but they need not always be paid in cash. In many cases, brokers will pay for things like trading stations or research on their own nickels—and then "give" those to their clients.

In return, the client trades with that broker or buys shares through them. Ordinarily, the client would pay a commission, but, in this case, the client gets soft things from that broker like research from the analysts who the brokers employ to opine on the direction of shares of public companies.

Soft dollars are also much better for stuffing mattresses. Warmer, too.

Sole Proprietorship

This is a business structure where there is one person in charge and one person owning the company.

There is unlimited liability: If something goes wrong and the business is sued, lawyers can come after all the business assets and all the owner's assets—even their house and car and other stuff that's not linked to the business at all. Why? Because the business is simply an asset the owner has; there is no divide or safety barrier between the business and the owner.

Special Situation

Everyone loves Apple. Or Google. Or TheWhatever.

But then...

Newscasters from across the globe release information that the son of the high-profile CEO of said company has been caught playing the original Donkey Kong arcade version—and everyone's having a crazy freak-out about it. (Don't ask.)

A lot of people then bail out of the stock because of the uproar which is likely to die away in a couple weeks... or days, given that the 24 hour news cycle is nuts.

This incident would be your "special situation." It's a blip in the radar that doesn't have anything to do with the actual valuation of an investment or its tangible future expectations.


A member of a stock exchange who is responsible for maintaining an orderly market in a particular stock or stocks that are traded on the exchange. The specialist is required to provide liquidity through purchasing shares when there are no other buyers and selling when there are no other sellers.

The specialist maintains a book that shows all limit and stop orders for the stock, which, yes, is considered inside information—but specialists are specifically exempted from the normal insider trading rules as long as the trades made on inside information are to maintain an orderly market.

Order in the market!


The difference between the bid and the ask price. (See bid-ask spread.)

Spread To Treasuries

Ever wonder how bonds get priced? It sure ain't random.

It happens through a spread to treasury, which is the yield difference between a a U.S. Treasury security and a similar bond. U.S. Treasury securities are considered to have pretty much zero risk, so if a U.S. Treasury is yielding 4%, a bond from a private company could yield maybe 14% because (duh) it's a much higher risk. 


Scrooge McDuck piles his cash in his money bin for easy swimming, but, in the real world, we stack our bills neatly.

"Capital Stack" refers to the totality of all the investment instruments used to fund a particular project or company. The investments at the top of the stack are considered riskier, and people typically require those to pay out better dividends and interest. The lower in the stack you go, the less risk the investments are thought to have.

Think of it like a food pyramid for yummy investments: lenders and stockholders are the ones most concerned with counting their "risk calories."

It also means that Scrooge McDuck is incredibly disorganized and doesn't have a sound grasp of investment risk. He does have a mean backstroke, though.

Stand-by Line Of Credit

Stand by your money. 

That's how the saying goes, right?

This term simply means a specified, predetermined amount of money that a company or investor can get from the bank quickly. It's like having a credit card, only more official. And hopefully with a lower interest rate.

It's different from a normal loan in that the borrower doesn't have to take all the money at once.

Standard & Poor's

S&P is a ratings agency (owned by a publishing company) that has opinions on the creditworthiness of debt and sometimes other instruments. Opinions that it shares, of course. S&P also manages an index fund series called the S&P 500, which tracks the top 500 U.S. companies by market value across nine industries.

Standard & Poor's is typically mentioned nervously at uncomfortable dinner parties in an effort to appear intelligent and world-wise. Too bad the spaghetti stain on your shirt has already spoken for you.

State Administrator

The finance cops.


It's the state administrator's job to protect investors from evil overlord swindlers who would abscond with dough and take it on the lamb. The state administrator basically makes sure that the Uniform Securities Code laws are followed/obeyed and manages the arbitration/legal proceedings if they're violated.

Statutory Voting

For every share you have, you get one vote. 

That's statutory voting.

You can't weight your vote, meaning, if you have 100 votes, you can't cast them all for the same director. (That would be cumulative voting.)

Stochastic Analysis

A term from the far-off land of statistics in which a disparate set of points are analyzed to find patterns that would lead the analyzer to a logical conclusion.

It comes in two flavors: slow and fast, with the fast being much more sensitive to the tiny squiggles and jumps in a stock's price.

It's like using math to read a crystal ball.

Stock Certificate

The piece of paper that proves you own X shares in a company.

Hopefully it's actually higher than X.

Basically, it's just proof that you own the stock. Today, most of 'em are in electronic form. 

Stock Split

See stock dividend. They are identical in result.

Basically, it's what happens when a company takes its shares outstanding and doubles them. So if you hold 100 shares, after the split, you'll hold 200 shares. That might seem exciting, but it does nothing—for you. If you owned $100 of shares before the split, you will own $100 of shares after; just the number of individual shares will be bigger.

The company might get some benefit from a split because the price per share will be smaller, which can encourage more investors to buy.


You own 100 shares of BananaSplit and each share is worth $10 (for a grand total of $1,000). Then they split their stock. You now have 200 shares of BananaSplit all worth $1,000 or $5 per share. Not much has changed. But if you were a new investor and wanted to invest in the stock, you'd only have to pay $500 to buy 100 shares. That might be more realistic for you if you're on a budget. 

Stop Order

A stop order is a longer-term order you give your broker. It basically says "when the stocks reach this price, buy" or "when they reach this price, sell." The idea is that these orders prevent you from losing money or losing control of stock prices.


You feel like something is about to go down with a stock. You can smell it: big change is coming.

The only problem: You don't know whether the stock will soar or tank hard. So... you need an option trade that will make you money in either case.

Allow us to introduce you to the straddle. In this option trade, you buy a put and a call with the same expiration and strike price. Whether the stock goes up or down, you can make money. 

Strategic Asset Allocation

This is just a fancy word for "putting money in investments that make sense based on your circumstances."

SAA refers to the practice of setting basic percentages of assets in a portfolio that match risk and volatility to the investor's needs. That is, some dude at 30 years old just entering the workplace as a vaunted young cardiologist can take a lot more risk/volatility in his life than an 80 year old retiree. The asset allocation for the 30 year old might be 90% equities, 10% debt; for the 80 year old, it might be the other way around.

The asset allocation for a crazy hill-person would be in a mayonnaise jar in the ground under the moonshine still.

Strike Price

The price at which you may strike—whaBAM!—lightning fast. It's the price on an option where you can either buy or sell the security. WhaBAM! (We just like saying that.)


You have a stock trading at $14 a share. You were a lucky employee to have joined before the IPO and you received stock options with a strike price of a dollar a share. You can say that you are $13 in the money based on the stock trading here at $14. In practice, to buy your Beemer, you would execute what's called a same-day sale with your broker who would remit to you the difference from the strike price to the actual clearing price or 13 bucks. Then go 325i.

Subordinated Debenture

A corporate bond that is lower in priority—i.e., subordinated—to other debt that the company has.

Big companies have lots of layers of debt, and they need to prioritize to figure out what gets paid first. Subordinated bonds are lower rated and they get paid after the higher-priority, higher-rated bonds.

P.S. Debentures are usually not secured by specific collateral, so they're the equivalent of a standing room ticket at an English soccer match.

Good luck.

Super-Voting Stock

Super-voting stock owners have super(voting)powers that other stockholders don't.

This type of stock is sometimes used when owners have founded a company and want to have more voting rights than their shares would allow. It can also be used when a group of people think their vote will better protect the company. 


Super-voting stock might be structured so that the founder who owns 20% of a company might have 5 to 1 super voting stock, in which case that founder's 20% economic share gets treated as if it's 100 votes against the 1 vote for 1 normal share owned by everyone else.

Translation: The founder can't be fired by the board. 

Supply-Side Economics

Supply-side economics is a group of theories that suggest we should slash capital gains taxes—and lower corporate and business taxes while we're at it.

The folks behind these theories say that policies that help out suppliers and producers (the people who bring goods and services to the economy) have the best effect on making the economy stronger and that we don't need to worry about consumers or the people buying.

Surety Bond

Remember when you were a kid at summer camp and had to pony up a buck to prove your heavy roller status at Friday night's poker game?

Surety bonds are kind of like that.

We repeat: kind of.

A surety bond is an agreement between three parties. One party guarantees that second party will fulfill a promise to the third party.

For example, one signer might guarantee that a small business will honor a government contract. If the small business doesn't meet the contract, the person who signed on may have to pay up.


When a company wants to make an offering, they need underwriters to handle all the details. A syndicate is group of underwriters assembled to handle jobs (issues) too big for one underwriter alone. Like the Avengers of finance—only less cool and more nerdy. Actually, a lot of the Avengers are pretty nerdy, so strike that last one.

Syndicates usually consist of a lead underwriter (like Captain America), investment banks, and smaller broker/dealers.

Syndicate Agreement / Syndicate Letter

Who gets what? That's the gist, anyway, of a syndicate letter / agreement. In a selling group of, say, an IPO, there needs to be a detailed contract as to who "owns" the various key functions in marketing a given product. That's what the letter does. If you did something really bad in a former life, today you are the lawyer who has to write these for a living.

Systematic Risk

A big system risk you take when you invest in anything.

If you own stocks, and the whole stock market goes into a swan dive, them's the breaks. You can reduce the risk or hedge the risk by buying puts or sell calls...or investing in something besides the stock market.


T-Bills are federal debt you can invest in. T-Bills have short maturity dates of 91, 182 or 365 days, so they're a good bet if you want short-term investments. They have low risk because you're basically borrowing money from yourself.


Want to invest in federal debt? You hear about it often enough, so why not?

T-bonds are a low-risk way to invest in federal debt; they have a maturity of ten years or more, so be prepared to wait. 


You're always lending money to your BFF, so why not lend to Uncle Sam and actually make money from it?

T-notes are Treasury securities that let you invest in federal debt. These have a maturity date of 2, 3, 5, or 7 years.

What happened to 4 years and 6 years? No one knows. They just don't exist.


A syndicate is a group of underwriters who help a company issue stock. They get paid for it, usually by making a profit when they sell those stocks. When they make this sort of profit, it's called a takedown.

Tax Basis

Lucky you. You bought WildInternetCompany.com at its IPO of $12 a share. It zoomed after a year to $50 a share. Now you go to sell it, knowing that you'll pay taxes on your gain of $38 a share.

Your tax basis on this investment is $12 a share; you pay taxes on the gains above that 12 bucks or in this case, $38 is taxable at the Federal plus State levels. But you're okay with that because you just made a killing and didn't have to mow a single yard to get it.

Technical Analysis

Take the two driest words in the English language, put them together, and what do you get?

Something pretty useful, actually.

Technical analysis takes a look at past prices of stocks, trading volume, and other stuff that has gone down in the market. Using charts and formulas, the idea is that you can use this information to figure out what might happen with securities in the near future. 


A type of account that has more than one owner.

Each owner puts in a certain amount of money, and the amount of money they share in the account is based on this investment. If we put in twice as much as you, our share is twice what yours is. If one of the owners dies, their share of the money goes to their estate, not to the other account owners.

(Yeah, put the baseball bat down.)

Term Life Insurance

Term life refers to the type of life insurance in which you pay a relatively low monthly fee (called a premium) each month. If you die that month, your beneficiaries win big. If you don't, then you've wasted your money. But you're alive.

So... win win?

With term life insurance, there's is no "savings account" like in whole or universal life insurance. It all goes away.

Term policies typically only last for a certain amount of time (or term); then, if you want to keep the insurance in place, you have either buy a new policy (at a more expensive rate, because you're now older) or pay more premium that increases every year. Either way, you pay more.

You can see how it's a double-edged sword: It's cheaper than whole life insurance at first, but it'll eventually go away or up-in-price, and it lacks the savings-account-ish feature that whole life boasts.

Can you imagine trying to sell this complicated, ultra-dry stuff to people for a living? We should be nicer to insurance salesmen.

Term Sheet

A piece of paper that sets out terms of a deal. Sometimes on a napkin.

Even if on a napkin, it can be legally binding, so stay away from napkins and other pieces of paper unless you're really sure you want the deal and agree to the terms.


I invest $1,000,000.00 in you.com today.

In return, I get:
  • 51% of your company
  • your lungs
  • your liver
  • your soul

Thank you. 


Mr. Faust

Term To Maturity

The time from when a bond is issued to the time it matures.

That is, you could have bought a 10 year bond 3 years into its life—its term to maturity is 7 years. Term kind of = time. The term to maturity for writers here in the bullpen at Shmoop is... well, still TBD.

Testamentary Trust

It's basically a legal entity holding the proceeds from a will that becomes active when the writer of that will kicks the bucket.

It it's the kicker's "testament" as to what they want done with their house, car, liver, and lungs.

The Fed

Phew. This is a big one. Here, check this out.

And then explain it to us.

The Howley Case

This particular Supreme Court case established just what a security was.

It started when a guy began selling real estate that his established orange grove just happened to be planted in. It was kinda implied that people got profit from these oranges. However, the dude's company managed all of the trees itself, and, if buyers didn't use the company's management services, the buyers couldn't realistically make any money off of their investment.

As a result, the court ruled that the acreage investment was a kind of security contract, and as such, came under different (higher) scrutiny than if the buyer had just bought non-productive-land.

Talk about makin' lemonade out of… oranges.

The Insider Trading Act Of 1988

Everyone knows that if you make a huge bet on a roulette wheel, and it happens to stop at the exact moment it hits your number, well, you're probably cheating. And for a long time, everyone knew that people who had important information or "insider info" would probably be the first people to put their fingers into the proverbial roulette wheel to their own profit.

Well, that got out of hand.

The stakes became silly, making it to where any Joe Shmoe who happened to work in the right office building could suddenly own their own island nation if they made the right trade at the right time using insider information.

This act turned the previous slap-on-the-wrist into an orange jump-suit.

The Securities Amendments Act Of 1975

Before 1975, trading stocks was very much a regional thing. New York was the sun, and the rest of the world more or less just... orbited.

The 1975 Act created a national market clearing system so that a share of IBM traded for generally the same price in California, Georgia, New Hampshire, and New York. This way, smaller, less-liquid regions aren't penalized with higher transaction costs than the wolves on Wall Street.

Fairness FTW.

The Securities Exchange Act Of 1934

This is the big grand-daddy of modern securities trading, as it created the structure, requirements, and regulations for the secondary (after IPO) market.

The SEC sprung fully formed from the Act's head and began its long reign of dreaded compliance meetings.

Time Value

See intrinsic value. All options have two parts that decide their value.
  • Intrinsic value is how much you'd make if you exercised the option right now: it's the difference between the strike price and the current price of the underlying stock.
  • Time value is the difference between the current price of the option and its intrinsic value.

Time value also refers to the way that options can help you use time to make money and to limit how much you can lose.

Let's say you buy a stock option today. You know the value of the stock today—you can just Google it. But will it go up or down? Will the option make you money? Since a stock option doesn't require you to buy or sell a stock today, you can use time to your advantage. Maybe a company is launching a new product in three days. If you have a stock option, the value of the stock (and your option) might increase or decrease sharply after that. A call option lets you make money if the stock price goes up, but limits the amount you stand to lose if the stock value goes down (you only ever lose as much as you paid for the option). The closer the stock option gets to its expiry date, the lower the time value involved, since it's unlikely the stock price will change much in the eleventh hour. 

The idea of time value is an important concept in investing in general. That is, "a dollar today is worth more than a dollar tomorrow" (in a normal world). Why? Because today you can invest that dollar. Even if you only buy a 1% very safe T-Bill, that dollar today will be worth something like 1.00001 dollars tomorrow. Thanks to inflation, though, the money you get tomorrow will actually be worth less.

Time-Weighted Rate Of Return

It's really hard to compare huge pools of investments in an apples-to-apples way. Some of the stocks in a given mutual fund or portfolio could throw off periodic dividends—which is great, but when that happens, it skews the regular rate-of-return number, making it look better than it really should.

So, to figure out what the given portfolio has actually done in the market, the time-weighted return simply looks at the original investment and takes out all the varying cash-flows that occurred. Otherwise, any stock that gives out a healthy dividend would look waaaaay better than one that doesn't. Sometimes we need to just look at how each stock performed, not the stock-and-dividend.

And you thought you had weird hobbies.

Trade Deficit

A bad thing that happens when the imports from a country are higher than our exports to that country. There's an imbalance, and that country profits more because they make more money on the trade.


For decades, America gathered most of the natural resources it needed to build cars... from America. We made our own steel, tires, leather, rear-view mirror fuzzy dice, etc. We then sold that car to Europeans and Asians and made a friendly killing. We had balanced trade in those days where we were King of the Castle. 

Then bad things happened. We lost our dominance in the auto industry; our cost of labor skyrocketed relative to that in emerging countries, so we lost a lot of our industries; and we never even made it to the finals of the World Cup. 

Today, more wealth leaves the U.S.—buying things from China and other countries—than wealth comes in. Translation: We have a trade deficit with China.

Trading Authorization (Power Of Attorney)

Little Old Maybell Bluehair just can't think straight any more, at least when it comes to managing her considerable money. Husband #4 was loaded and had a weak heart...and one too many cheeseburgers.

Maybell trusts her grand nephew Beauregard to make trades on her behalf and has given him "trading authorization" to manage her account—that is, he can make trades without pre-clearing each one with her.

His status is analogous to having "power of attorney" in doing various legal things in life.

Trading Volume



Trading volume is the number of shares traded in a specific security today or over a period of time. If trade volume is high, it means lots of trades are being made involving a specific market or security.


Can you find it? Keep lookin'... that's the number of shares that have traded thus far today.

Transfer Agent

When you sell a security, a lot happens. Paperwork gets filed, money gets exchanged, eyes glaze over, the security changes hands.

The person who makes sure that the security gets to the right person and things go smoothly is known as the transfer agent. 

Treasury Bonds

The most liquid bonds in the world, treasury bonds are backed by the "full faith and credit of the United States" and its ability to tax its citizens.

The U.S. Government will go bankrupt before reneging on a treasury bond—and as a result of such good credit backing, treasury bonds usually have meaningfully better credit ratings than similar bonds issued by corporations, municipalities, and other money-needers.

Treasury Stock

The stocks or shares a company holds in its own treasury or for itself.

It's usually stock the company has bought back, but it can be stock that was never sold in the first place. There are no dividends paid, no voting rights (since no one really "owns" the stock), and the stock isn't included in the company's shares outstanding.

Why keep treasury stock? Two reasons.

First, if they think they might want to raise money later on, the company has these stocks at the ready to sell. Second, the stocks in reserve give them enough stocks to keep lots of ownership in the company. 


A trend is just a general direction in which something is happening.

Think mom jeans and the term YOLO.

It means more-or-less the same thing in finance, only referring to the general direction that a stock, bond, or general industry is going.

And since we know you're going to ask: no, our ripped courds aren't trendy. They're classic.


This one is pretty simple. When you look at a stock chart and you see that big ol' dip where it went down then back up? That's a trough—as opposed to a peak, which is the top o' the squiggly mountain.

Trust Account (or Trust)

A trust is kinda what it says it is: one person trusts another party to follow certain written instructions.

A bank or trusted party is tasked with being sure that the money that is supposed to get paid actually does gets paid—and to the right people/things. The person creating the trust, the trustor, gives another guy, the trustee, the right to hold official possession of stuff for the benefit of someone else, the beneficiary.

There are lots of adjectives that can be attached to trusts, and tax laws change every time you do so, so check out some of our other definitions and make sure you pick the right one for the right circumstances.

Trust Indenture Act 1939

This Federal Act requires any bond issue over $5,000,000 have an indenture before being offered to the public.

An indenture is the laundry list of details about the bond, such as coupon, maturity date, collateral, mother's maiden name, and so on. "The Trust" in the act refers to the requirement that the issuer hire an independent trustee who acts on behalf of the bondholders.

Trust Instrument

Trust instrument is just a fancy way of saying trust.

Because that's apparently a thing.


Someone worth-ee of trust-ee.

The trustee oversees the trust and makes sure that its intents are being followed to the letter of the law. They're the ones who hire the lawyer who calls the family together to inform them that they have to spend a night in a haunted mansion to receive the lavish fortune.

U.S. Pay Bonds

We're safe. We're sound. We're sane.

At least that's how the U.S. looks financially when compared with most of the rest of the world. So, a bunch of countries issue their own bonds—but denominated in U.S. dollars. Ours is a "hard currency" in that we don't or at least haven't historically created massive 10% a month inflation to deflate our own currency and make it super easy for our government to pay off its debts.

Because there exists that trust, the rest of the world often values our own currency higher than its own. When they issue, say, Argentine bonds payable in U.S. dollars, that's a Yankee bond: We are the yanker; they are the yank-ee.


UGMA is what you say when your mother tells you to go wash your face.

It's also the Uniform Gift to Minors Act, a law from the 70s that outlines the gifts minors can receive and the taxes they have to pay. Thanks to this law, you can give your kid securities and assets without having to set up a trust. If you stay below certain limits, Junior, Jr. might not even have to pay taxes on the gift—but you do have to make sure you follow a bunch of rules. 


Stock options are only profitable in certain circumstances, mostly depending on the price of the stock.

If a particular option would be worthless if it expired or were executed today, then it would be referred to as "being underwater."


You joined WildInternetCompany.com about 3 months after the very hot IPO. Its stock zoomed to $34 a share after pricing at $12. Your options were granted the day you joined, taking the average close price of the previous month or $34 a share.

Sadly, the new products they launched, well, sucked. The share price has sagged to $24 a share now. You are $10 "underwater" in your options.

Uniform Net Capital Rule

Say you're a broker-dealer (or at least the guy in the big leather chair who owns it). This rule says that, even though your company's actual worth is constantly, wildly fluctuating (due to making trades for your clients and "holding" stocks and assets for them), you've got to have enough liquid, cold, hard cash to meet all your obligations at the end of the business day.

In 1975, this rule was enacted to give the SEC the power it needed to make sure that these firms didn't become accidental Ponzi schemes. Each security held by the B/D (broker-dealer from now on. Get used to these acronyms; they'll win you credibility in the industry) is valuated by the SEC, factoring in what they call a "haircut," which is different for each security. The haircut for each is determined by the current market price (i.e., "Hey, who wants this smelly fish? It's still made of 100% fish. Anyone?) and how liquid the investment actually is.

So, as you can guess, every security is completely different when figuring how much of it is actually usable by a B/D if everything goes belly-up tomorrow.

Clear as mud? Or at least clear as fish?

It doesn't smell that bad. Come on, people.

Uniform Prudent Investor Act

Being prudent just means being respectful, careful, measured...you get it.

And, in this case, we're talking about people who act as trustees for estates. In other words, if you happen to find yourself the trustee for a huuuuge portfolio, and it's your job to invest/manage that money on behalf of a beneficiary (that's a big sticking point, by the way; that's the only reason trusts are made in the first place) then this rule says that you cannot invest the money into your own imaginary company you just filed on Legalzoom.com, nor can you invest it in dodo-bird-futures. Because they have been dead for years and there is no such thing as dodo-bird-futures.

So yes, this act says "if you are a trustee, and you act in a willfully stupid manner, you can get in big trouble."

The end.

Universal Life Insurance

This is a combination of the concepts of "term life" and "a savings account with interest."

The insurance company lets you take out a policy that typically renews every year, meaning that the premium goes up, every year. But—they also let you put money into this tax-deferred savings account called a "sub-account" that makes it to where you can stop paying those term premiums after a certain year or just build up a crazy amount of money inside the policy as if it were a bank.

Sounds great, right? Well, the entire idea took a big hit when interest rates fell hard-core. Mostly because the people who made these policies couldn't imagine a world where prime interest rate could fall below 8%. Guess what? It did.

Unlimited Liability

It means you can have your pants sued off—literally.

In this structure (like a sole proprietorship or a freelance business), if your company is sued, the lawyers can go after your company and your own money and assets—even the stuff that has nothing to do with your business. That's why lots of people prefer limited liability companies.

If your company destroys a city, the business can be sued. But you can still take your personal money (which remains yours) and move to a city you haven't destroyed yet.


It's a tale of two pizza parlors: the Joneses and the Smiths. The Joneses owned their pizza parlor personally as a sole proprietorship style of business ownership. The Smiths set up a limited liability corporation for $299 on LegalZoom.com.

Both operated basically the same. Until The Cheese Day happened. It was bad cheese. They had the same supplier. It turned all of their clients' stomachs to mush. And both operators got sued. And lost. A million dollar judgment.

The Smiths lost the restaurant, but they had taken money out of it for years, so they were just fine financially. They'd open a new one down the street. And change cheese suppliers.

The Joneses were not so lucky: the parlor brought $300,000 at auction and the family still owed $700,000. The lawyers stepped in and sold their house, net of mortgage and realtor commissions for $500,000. The cars went for $25,000. Then went the fish tank, the shoes, the jewelry brought over from Europe during the war. All of that was another $20,000.

It still wasn't enough. We shan't continue with what happened to the Joneses, but you don't want to keep up with them. It's called a "limited liability corporation" for really good reason and costs a couple hundred bucks to set up. 

Unsecured Bond

An unsecured bond (think: promise) is a bond where you get little more than a promise that the bond will be paid back. There are no assets backing it up, no strongly written legal language saying you'll make money or even get your initial investment back. 

So why are unsecured bonds of any interest to investors? Well, if management ever didn't pay back a promised bond, their careers would be pretty much totally over. Management has a lot to lose, and as long as you trust them to act in their own best interest, unsecured bonds may be a good bet—they typically pay higher interest rates than secured bonds and usually issuers do pay them. 


Comcast has issued unsecured bonds for decades. They are well known by Wall Street and have never missed a bond payment. As a result, they can issue pretty much anything they want—they've earned the freedom over time. There's nothing guaranteeing the bond but at this point it seems pretty low risk.

Unsystematic Risk

Risks that are caused by lousy decisions—having a lousy investor or investing in bonds when you should have bought stocks—as opposed to major disasters.

See systematic risk for the opposite


You think you're smart. You bet the ranch on new IPO whatever.com...and end up giving the ranch to your broker.

That's unsystematic risk because you're the problem. Moral: don't bet the ranch. And if you aren't a pro investor with all the training, just buy an index fund and go play golf. At least you'll get a nice tan out of it.


The UTMA (Uniform Trust to Minors Act) lets parents set up trusts and entities to keep money and assets on ice for their kids. When Junior was 21 and could make his own bad decisions, UTMA made it easy for the assets and cash to pass over to him.

Valuation Ratios

The valuation ratio is similar tot he price-to-earnings ratio. It's a measure of a company's valuation, usually relative to that of the overall stock market.


If a company—let's call it Theoretical Company Blah—will earn $1 a share this year, and the stock of TCB trades at $20, then it has a 20x or 20:1 price-to-earnings ratio.

The gotcha in here is that companies often carry cash and/or debt, so if TRB has $10 a share in debt and $4 a share in cash, then its price-to-earnings ratio is still 20—but it likely has more volatility in its movements as the debt is gasoline on a fire when things go well or poorly.


It's a very ethereal, vague concept, but remember this: Value is always what the buyer thinks it is.

What are you willing to pay for Bea Arthur's Sunday dress wig? Anybody? Nothing?

Good. We'll bid $100.

Vanilla Bonds

Basic bonds. Nothin' fancy. No special features.

Personally, we prefer mint chocolate chip, but what can you do?

Variable Annuity

A retirement account you create with an insurance company.

For years, you put money in the account, and the company invests in money market funds or different types of mutual funds.

Then you get old and wrinkly.

Time to tap into all that cash so you can get serious about your bingo game. At that point, the insurance company promises a minimum payment ("we'll pay you at least $500 a month"), but the payments each month can vary (always above that minimum) depending on how the investments did and how much money you socked away. 

Variable Insurance

The "variable" part means that "this already established life insurance or annuity product does not have a standard set interest rate."

Translation: The interest rate can vary.

Why? Because they're basing their interest rates off of one of the big stock market funds, like the S&P, the Dow, or sometimes (and this is why it gets complicated, fast) portfolio managers picking other portfolio managers.

This comprises both "variable life insurance" and "variable annuities" because both of those are governed by the same concepts.

Volatility Index (VIX)

A well-known measure of how volatile the market is.

A chart that looks like the Rocky Mountains has high volatility; a chart that looks like a dead man's pulse has low volatility.

Here's what things have been lookin' like lately.


If you own stock in a company, and that stock has voting rights, you get to have a say in some of the stuff that goes down at the company.

Voting Rights

In Wall Street jargon, this phrase refers to the right to vote on corporate policy, who is in the board of directors, and decisions on issuing securities like stocks and bonds.

Companies usually have different classes of stock; e.g., A-shares are "one share, one vote," B-shares are "one share, ten votes," and so on.

Wash Sale

This concept is essentially the IRS saying "I see what you did there" when people sell a stock to take a loss (thus lowering their yearly tax-paying-requirement) and then buy the same stock or one of equal value to it within 30 days.

This one gets really really technical because it's always calculated on a trade-per-trade basis according to an ever-shifting tax code.

Moral of the story? Don't try to avoid paying the paltry capital gains tax by being "crafty." Keep the craftiness to the knitting circles.

Whole Life Insurance

Isn't it a reaffirming name? "I want my life to be whole, thank you very much."

This is your grand-daddy's insurance policy, without bells, whistles, apps, or rss feeds. It's where the insurance company says, "You there. Yes you. I like the cut of your jib. If you give me $50 a month, I'll pay whomever you want (as long as you're not planning to immediately or eventually kill them) $1,000,000! Deal or no deal?"

And, yeah, while that nice huckster-man in the last example is giving a super simplified version, that's basically what whole life insurance is...as long as the monthly, biannually, or annual premium is paid. Otherwise, the policy "lapses." All these policies typically have a given lowest-rate-of-return, and unlike variable insurance policies, the rate is stable. Either way, the amount the customer pays is always the same.

It's more solid than "universal life" and is way more solid than "universal variable life."

Wrap Account

Jay-Z's brokerage account. Or something.

In a wrap account, you pay an annual fee (based on a percentage of what's in the account), and the broker manages the account for you. The fee you pay covers commissions and extra expenses (but not the costs exchanges or the SEC charge). You don't pay extra commissions each time a trade is made in the account, which prevents brokers from making trades just to earn more commissions. 


If Jay-Z gives his broker $100 million under a wrap account that charges 1%, he'll be charged a million bucks a year in return for handling all of Jay-Z's trading, wiring, account, and a whole bunch of other services.

For many large brokerages, wrap accounts allow for their clients to be able to buy various flavors of funds (mutual, hedge, index) at "wholesale" prices; that is, if the fund is a captive fund maintained by the brokerage, the wrap account allows the client to buy with no commission or upfront charges.


Shakespeare was one. But in this case, "writer" is the person who sells an option. They're called a writer because years ago sellers of options probably had to write up some of the sales contract. By hand. By the light of a candle. 


We have shares of Google (GOOG) that are trading at $500. We write you a call option that gives you the right to buy a share of GOOG from us for $550 a share. If you decide to exercise that option when Google is trading at $600, we'll sell the stock to you for $550, and you'll make a nice profit. If Google drops to $400, you might not want to buy, and we get to keep the money you paid us for the option. 

Yankee Bonds

We're safe. We're sound. We're sane.

At least that's how we look financially when compared with most of the rest of the world. That's why a bunch of countries issue their own bonds denominated in U.S. dollars. Ours is a "hard currency" in that we don't or at least haven't historically created massive 10% a month inflation to deflate our own currency and make it super easy for our government to pay off its debts.

Because there exists that trust, the rest of the world often values our own currency higher than its own. When they issue, say, Argentine bonds payable in U.S. dollars, that's a Yankee bond.

We are the yanker; they are the yank-ee.


Yield is just the dough you get back after investing an initial sum. It can come in the flavor of bond yield—like a coupon—paying whatever percent face value, based on par value. That is, for a bond trading at par, with face yield of 5%, that bond pays the investor 25 bucks twice a year for that 5% face on a grand invested. 

Got it? It is just the percentage rate of return on a bond.

But what if the price of the bond got cut in half? Maybe something bad happened to the company—patent law suit or CEO caught in bed with an alien from Mars—so investors suddenly feared for the creditworthiness of the company. And they sold heavily their bond positions. Now the bonds are selling at 50 cents on the dollar or $500 a unit instead of the standard $1,000. The bonds still have to pay the 50 bucks a year interest but now they yield 10%... 50 bucks of the grand at which they were created.

But yield is also derived in the land of equities. Coca Cola stock trades at 50 bucks a share and pays a $1 dividend. It yields 1/50 = 2%. You get 25 cents 4 times a year for each share you own. And another big note: Equities pay dividends 4 times a year while bonds pay twice.

Yield Curve

The Yield Curve (YC) is just the graphic representation of what investors think will happen to interest rates in the future. The most common YC that gets put in books and in the news is the yield curve of U.S. Treasury securities. This YC can impact the YC of other markets (like mortgage YCs).

Here's what a yield curve looks like: 

Yield Curve

Notice a few things about it. The vertical axis is the interest rate paid and the horizontal axis is time. Notice that over the short term, money is cheap... around 1% for 1-year paper. But also notice that as we move out 10 years, the yield curve is flirting with 4%. What this curve is saying is that investors believe that 10 years from now, odds are best that bonds will be trading around 4%. The curve is now said to be positively sloped because rates today are lower than they are expected to be in the future. 

Yield To Call

If a bond is callable, the issuer can call in the bond early—meaning you might not get the full amount of money you would have gotten if the bond went to its maturity date.

How much can you make with a callable bond? The answer will depend on when the bond is called. You can figure out a minimum yield by calculating the yield from the day you get the bond to the first possible date that it could be called. 

Whether the bond will be called will depend on what interest rates do. If they drop, it's likely that the bond will be called early because the issuer won't want to pay the higher interest on the debt. If the rates stay the same or go up, just calculate yield to maturity. It's cheap borrowed money for the company at that point so they probably won't call the bond early.

Yield To Maturity

This is the yield that a bondholder will receive by holding the bond until it matures. This assumes that the interest payments are all reinvested, so yield to maturity will change over time as the reinvestment rate fluctuates.


You buy a bond for $1,000 (i.e. at Par) which has a face yield of 6%. That's it. Simple. It's yield to maturity is 6%. 

But it's not. Not really, anyway. 

Why? Because when YTMs are calculated they assume that the 6% is REINVESTED and returns that 6% face value. But, in fact, that's usually not what happens. You get your 30 bucks twice a year on the grand you put down with your broker and... you spend it. On whatever. But you spend it—oh, and you spend it after you are taxed on it. So it's...less. 

What happens if you pay a premium for your bond? Like, you've paid $1,100 for a bond yielding 6%—your YTM will be LESS than 6% because you've paid a premium—but the calculated rate would be as if you reinvested the money at 6% so that YTM number usually overstates the real value you'll derive from that bond. 

Might not seem like much...until you're retired and living on a budget and need every penny to buy toys for your bratty grandkids at Christmas. In this case, note that the yield is in the low 5%s which means that the prevailing rates are lower than they were when the bond was likely issued...so it would be very hard to replace the full 6% interest rate returns when that semi-annual cash coupon came in. 

Zero Coupon Bonds

Bonds that do not have any stated coupon rate are called zero-coupon bonds. Instead of paying regular interest, these bonds are issued at a large discount to their face value, and pay the face value at maturity. The difference between the issue price and face value represents the interest earned on the bond.


Why would you want a bond like this? Well, they usually pay more. Why? There's usually more perceived risk in a Zero, in that you get NONE of your money back until the very end.

In a normal "vanilla" bond, you at least get the semi-annual interest payments along the way so if the company goes bust and really can't pay you back for your sweat, toil, and savings you invested, then at least you got the interest. And that interest can mean a lot to retirees and others who need the cash to live on (so many of them don't buy Zeros in the first place).

But Zeros are great if you already have lots of cash as they are "illiquid." Until they are very liquid—meaning that when they come due, say, on a given issue, 10 years later, you get a mountain of cash. To wit, if you bought a bond maturing for $1,000 in 10 years, that had a face value of 6% yield, you'd put down today $558...and get almost double your money back in a decade. 

All from our hero, Zero.

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