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Try a couple of yoga poses before showing up for your exam. Downward facing buffalo, anyone? Mind the tuft.

Vocabulary

1035 Exchange



Definition
Why don't they give these things a name? Like what pathos is there in a number? It makes your life miserable remembering all of them - and frankly doesn't make our life any easier writing pithy epithets about them either. But here we go: A 1035 exchange is a swap. More specifically, it's a swap relating to life insurance annuities or policies. Ever read Pygmalion? That's the basic idea, insurance style - I swap my life insurance policy/ annuity / whatever - for yours. Tax free. Taxxxx freeeee (Insert Homer Simpson drool sound.)

12B-1 Fee



Definition
A 12b-1 fee is a fee tacked on by mutual funds quarterly to pay for the administration, paperwork, mailings that it incurs as a normal part of running its business. The 12b-1 fees were initially provided for as part of the 1940 Act that created the regulations behind the mutual fund business. The belief then was that these marketing fees would make the fund industry grow and under scales of economy, it would let them charge lower fees to customers. With the huge popularity of index funds and ETFs, the mutual fund industry is in gradual decline now - the 12b-1 fees have become an important element in helping the industry "die more slowly" as other vehicles have simply become more popular investing vehicles. See index funds vs. mutual funds.

1940 Investment Advisors Act



Definition
Wondering why you're taking this exam? This is why! After people claiming to be "investment advisors" scammed a lot of innocent folks, this act established the rules you have to follow to become a registered investment advisor. For the test, note that if an advisor bills outside of the trading relationship with the client, they do not need to be registered.

200 Day, 50 Day Moving Averages



Definition
Moving averages are a series of snap shots of stocks' closing prices over a given trailing 200 day period when the market actually ran (or walked). Traders using technical analysis follow the 200 day and the 50 day closely, looking for resistance lines both as floors and ceilings on securities. Since "everyone" follows the same charts, and often those are the buyers and sellers making markets in the stocks, in the short run, the moving averages matter. Stocks don't always follow them - and when they don't it's called a break out and is not related to Oxy 5 or 10 or Jessica Simpson.

2001 USA Patriot Act



Definition
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism. Youch, what an acronym. This was a series of laws enacted after 9/11 to prevent terrorists from laundering money and using the stock market to fund their illegal activities.

401(k), Roth 401(k) Or Just 401k Plan



Definition
Mr. Roth was a very smart man. He realized that Social Security alone was not going to cut it so that workers en masse could retire with dignity. He wanted to shift the onus of that financial burden onto the employees themselves with some help/love from the corporations for whom they were working.

In 1978, the Roth 401k plan was created. Specifically, the 401k plan is "qualified" meaning that you don’t automatically get it just for showing up. A bunch of hurdles you and your company have to jump through to properly structure the beast. The 401k is also a "defined contribution plan", meaning that the money the employee puts in and money that the employer puts in are defined – not open ended. This concept stands opposite "defined benefit plan" wherein the company is on the hook for investment return minimums rather than sharing that risk with the employee.

The basic idea here is that a 401k is a great deal for the employee because for every buck she saves, her employer may give her another buck – tax deferred – until she retires (and then taxed like a screaming IRS banshee). Like a twofer on your investing dollar before you even start investing the dough.

403(b) Plan



Definition
See 401(k) for structural details but 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.

409a Valuation



Definition
A valuation basis placed on the company's common stock (which sits sadly inferior to its preferred stock) which is oft used to set strike prices for employee stock options.

75-5-10 Rule



Definition
Diversification. "75! 5! 10!" is not what a quarterback screams to signal a roll out pass. Rather, the term refers to a formula investment managers may use to market or advertise their funds: To qualify for legally being able to claim that their fund is diversified, the fund must have 75% of its holdings in no more than 5% positions in any one security. And it can't own more than 10% of any one company's outstanding securities. But note that for 25% of the portfolio, the fund can "violate" the diversification rules tagged under the 75% umbrella - a common test question relates to the maximum that a fund can own of one security and still call itself "diversified" and the answer is usually 30%.

A-Shares



Definition
A-shares are just the standard shares sold with commission by a mutual fund. Commission is paid up front and the maintenance fees are low - those are called 12-b1 fees. Over time, the marketing people inside of mutual funds came up with all kinds of crazy ways people could pay - as if that made a big difference to their eventual investment results... that is, you can pay when you redeem, along the way or get "no-load" funds where instead of paying 1% for the management fee, you pay 2% per year instead - but your initial commission is low. Woot?

Above Full Employment Equilibrium



Definition
Short fancy men and women in fancy suits called "economists" believe in fancy. Lines of supply and demand meet. And the notion of "equilibrium" is like a religiously shared ideal. In theory, there is a natural balance of the employed and the unemployed and at that rate we have economic Satori. That is, there should always be some percentage of unemployed people out there. If we have fewer than that unemployed number (or, said another way), there are "too many people gainfully employed and working", then we likely have inflation as the economy is "too hot".

Above Par



Definition
This is not about a bad day on the course for Tiger (when he was playing well). Rather, it's about bonds. Bonds are usually price quoted as so many cents on the dollar. That is, if a bond has a face coupon of 8% and it is trading at 100 cents on the dollar, or par, it is yielding 8%. But if the Street is nervous that the bond might not pay off, or that rampant inflation is coming and 8% might be only paltry returns, or for a host of other reasons, then the bond might trade down to only, say, 90 cents on the dollar.

The Corporation who issued the bond still owes the 8% returns, only now the bonds are yielding 8 / 0.9 = 8.9% roughly. But let's say inflation fears are just smoke on the water and the issuing corporation is doing well, then the bonds might trade up - say, to 110 cents on the dollar. In this case the 8% coupon bonds are yielding only 8 / 1.1 = 7.3%, roughly. At anything over 100, they are said to be trading above "par". If you haven't guessed it already, bonds play on a par 100 course.

Account At Maintenance



Definition
See margin maintenance. This is the yellow flashing light equivalent in your brokerage account. Danger, danger, Will Robinson. If you have a brokerage account with a 50% margin maximum and you have $30,000 in equity in there - but you have borrowed $14,500 from yourself - you only have about 500 bucks of room in there to spare. If the Fed Chairman sneezes and the market goes down a percent or two, you will suffer a margin call and be forced to sell securities likely just at the wrong time - i.e. when the market is down. Kids, don't let this happen to you.

Account Executive



Definition
Fancy name for "broker."

Account In Trust



Definition
In Account We Trust. When Uncle Joe manages the account for little Sally. Sally trusts Joe. She is also a minor and knows that Joe will manage the account for her with all due good intent until she turns 18 and can then go shopping for Beemers. UTMA is an example of an "Account in Trust."

Accounting Period



Definition
An accounting period is usually a statement of what happened financially in the last quarter or year. Wall Street reporting matters. Tax status matters. Employee contracts matter. Union contracts matter. It all needs to be reconciled and reported on a regular basis.

Accounting Rate Of Return



Definition
What's a given business or subdivision or investment worth over its lifetime? See hurdle rate, discounted cash flow, and net present value. Those terms explain the concept better than we can here. The problem with ARR is that it ignores the time value of money - remember that a buck today is worth more than a buck tomorrow. ARR methods of valuing things are also problematic in that they focus on profits - which are definable many ways - rather than cash flows, which are usually much less subject to accounting shenanigans.

Accounts Payable



Definition
You bought it but you haven't paid for it yet. Think "MasterCard."

Accounts Receivable



Definition
The other side of the accounts payable trade. Your seller sold it to you and expects you to pay him at some point. Preferably sooner than later.

Accredited Investor



Definition
Accredited investors are simply investors who qualify to do a certain investment. Usually accredited" means that they have... credit. Or assets. Or wampum. Or "chee" (knowledge, balls) which means that they are big boys and girls who are able to invest a large amount of money in a risky venture.

Officially, they are 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



Definition
Accrual accounting refers to the practice of accruing costs (or revenues) as they become more likely/certain to occur. let's say an employee gets a $12,000 bonus at the end of the year—in the past 5 years they have earned all of their bonus so it is highly likely that this year will be no different. You would accrue that bonus cost as the months of the year go by at the rate of $1,000 a month. overly simple but you get the idea.

Accrued Interest



Definition
Wesley owes money to Lenny. Lenny has lent Wesley a Baseball Bond* which requires payment on January 1 and July 1 each year. The bond yields 8% annually and is compounded semi-annually. So Wesley owes 4% twice a year. But Wesley is now wearing stripes (not a referee reference) and a court has ordered him to pay off the bond entirely as of April 1, no Foolin'. That's half way to the halfway point of the semiannual payment of the 8% Baseball Bond. So Wesley has accrued interest of 2% during those 90 days and will pay it off in cash, not cigarettes. For literally every day that ticks by, Wesley will owe Lenny interest on that bond, those bonds, in this bondage.

*There is no such thing as a Baseball Bond. There is, however, a Barry Bond, plural.

Accumulation Period



Definition
You are funding an annuity. Know what that means. But funding an annuity takes time. It builds. For most, that annuity is funded over time and funding for it accumulates over a... yes... period. This process happens in the form of accumulation units, which are bought in stages over time. God this is dull.

Note additionally that over long periods of time, markets go up and generally speaking, the more aggressively you save during the accumulation period or phase, the more money you'll have when you want to play golf and show up for the blue plate special dinners at 4:59 pm.

Accumulation Units



Definition
An accumulation unit is a rite of passage in the world of fancy shmancy life insurance. As you pay money in to a life insurance policy, you are 'accumulating' value in it (duh). But that accumulation is usually broken into distinct sub sections either by time, money, or both or other elements - that is, a unit might be described as a hundred grand; or first 6 months. The "unit"-ness of that accumulation makes for a discrete start and stop point in defining what value is there, should you one day mange le dust.

Act Of 1933



Definition
Also known as the Securities Act of 1933, this established the requirement that in general, securities that will be offered to the public must be registered.

Act Of 1934



Definition
This is known as the Securities and Exchange Act of 1934, and it extended the securities policing regime to government regulation of the exchanges. It also established the SEC as well as limits on the usage and amount of margin.

Active Investing



Definition
Active management of money. You buy shares in a mutual fund, which has hired theoretically smart analysts and portfolio managers who spend all day looking at stocks and bonds and make investments in them or sell them on your behalf. For a small fee. The other side of the street is passive investing which is just buying an index fund, which doesn't really have a portfolio manager per se - more like a rebalancer who just makes certain each period (usually quarterly) that the index still reflects what you think you bought in the first place.

Active Risk



Definition
In a portfolio, which is actively managed (like a mutual fund, a hedge fund, etc - but NOT an index fund or ETF), "active risk" refers to the risk in the portfolio taken by the actively managed investments. It ignores market risk in its assessments. Well-managed active risk, i.e. good risk adjusted returns are a key component in producing "high alpha" which is like the Good Housekeeping Seal of "smart" investing."

Ad Valorem



Definition
Fancy Latin phrase for property tax. "Valorem" means "Value" if you went to Latin class or survived catechism. Given what it does, you'd think it would have been named minus valorem, though.

Adjustable Rate Preferred Stock



Definition
Okay, first see preferred stock for the gist. Preferred stock acts like a bond in that it pays interest. Most preferred stock is convertible though into equity. So, there's this "adjustable" word. How is it adjustable? Adjustable to... what? Industry practice defaults rates to T-Bills. That's common in the land of ARPS.

Adjusted Closing Price



Definition
Why would anyone have to adjust anything for a closing price of a stock? You go to Google Finance, type in the ticker and you get a number. That's the closing price, right? Why adjust?

Well, a pickle is not always a pickle - sometimes it's just an old cucumber somebody dropped in salt water. There are corporate actions like dividends, stock splits, and a bunch of other weird hybrid things that companies do to make your life miserably complex.

The closing price then gets adjusted to reflect said actions - and we need to favor adjusted historical returns" because without the adjustment, history gets cloudy - a famous example is the one time enormous dividend made by MSFT when Bill Gates retired from the CEO role - if you ignored that huge dividend and just looked at the closing price of MSFT, its returns would have looked less spectacular than they really were.

Guys, hike up your jeans and adjust.

Adjusted Gross Income - AGI



Definition
AGI matters for a whole host of reasons - but the most popular time the cavalry of AGI is called in is for home mortgage debt limits. Most banks have maximum multiples of AGI under which they will loan money so it's an important number.

Basically AGI is your normal salary and bonus bucks plus passive income like net rents you get from that small apartment building you now own (thank you dead uncle Harry) and dividends on stuff like GE stock AND capital gains from mutual fund distributions. The way AGI gets defined by the IRS - God's financial quarterback - is that it is whatever you pay taxes on.

Adjustment Bond



Definition
An adjustment bond is sort of like an open marriage - the couple can choose to be faithful or not with no comeuppance either way. Similarly, an adjustment bond can choose to pay interest or not at will. If the responsible party for the bond punt a payment, they don't' go into default - they just keep rollin' over.

Advance Refunding Or Prefunding



Definition
The concept is arcane. But you gotta understand the basic concept of Prefunding. Bad things sometimes happen, even to good people. So in the case of "safe" bonds or bonds where an Administrator is worried about the cash actually getting to the people to whom it was intended, a Prefunding feature can be required. That is, when a bond is issued, a chunk of money is tucked away safely in a nice Escrow account with a bank or trust company so that the odds of the money actually being there for a distribution or a call provision are high. It's extra netting under the financial high wire.

Advance/ Decline Ratio



Definition
It's an index. Just an index. It doesn't mean that much other than that it is an index widely quoted in the financial press. Specifically, it is the number of stocks which are up vs. the number which are down (hence the catchy "advance" and "decline" nomenclature). 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 Olive Oyl flat.

Advisor



Definition
The money-whisperer. The folks who actually manage the money. Perhaps oddly, in a mutual fund for example, the distribution company (which was responsible for bringing in the dough to manage) hires and fires the investment advisors or managers. The hot shot portfolio managers actually work FOR the people pouring coffee for the stock and fund brokers.

Advisor Account



Definition
You're an at-least-semi fat cat. You think you have some Buffett in you (Warren, not Jimmy). You want to be intimately involved in managing your money. You trust no one, like David Duchovny.

So you set up an Advisor Account. The advisor works directly with you, the client, to figure out where you're puttin' your dough. The cost? Well, if you get really nice Lakers tickets, you know you've over paid - but generally these are set up like wrap" accounts where you have a fixed percentage fee based on the assets you have under management with your Advisor. See breakpoints.

Affiliated Person/ Investor



Definition
See covered party too. An affiliated person is someone who has special knowledge, relationships or hooks into a given public company so that they are treated different from Joe Sixpack the Plumber when transacting in securities of that company. If you are the CEO of GE, you obviously should be treated differently from Joe if you are buying or selling stock. The "affiliate" tag extends to board members, other C-level officers... and extends to "affiliated investor" restrictions for those who own more than 10% of the stock of the company (sometimes) and a bunch of other "privileged knowledge" people.

Aftermarket Securities Transactions



Definition
When stocks trade past the normal 4pm NY time closing for jingoistic Americans who think the world revolves only around New York. (The term also applies to other countries where their main exchange closes but hten securities trade elsewhere after the close.)

Agency Bond



Definition
Fannie Mae needs money. It has gotten the A-OK from her own managers to issue bonds - but the FEDERAL government doesn't want to be involved, or at least not guarantee the bonds the way they do T-Bills. What's an agency to do? They pay a little higher interest. Fannie, Freddie and other quasi-governmental agencies come under the "agency bond" tent this way.

Agency Broker



Definition
Honey, baby, cookie, lovey - that's the hello of a different kind of agent, the guy in the bright yellow suit with awesome Hollywood hair.

But a broker agent or agency broker is just an agent for a fund, or typically any large agency, which places big block orders on exchanges - the key issue is that the agent must try to get his client the best prices. Lots of ways to corrupt the system - see front running and kickbacks for the gory details.

Broker-dealers are self-dealers - they buy on behalf of themselves. They aren't agents and they are obligated only to fulfill orders they commit to executing.

Ciao, baby.

Agent



Definition
Collects 10% from movie stars; But with regards to an IPO, the agent is the one who gets commission for placing or selling the securities.

All Or None



Definition
It's a kind of security offering. Either the whole thing gets done - or nothin' gets done. It applies to IPOs and stock block trades. All or none block trades are issued this way by the buyer in cases where they are either famous or known for trying to buy out a company entirely. Imagine if Warren Buffett bought 2.3% of Netflix (yes, it would mean the world is ending but that's a separate story). NFLX stock would almost certainly shoot up a ton. So if Warren wanted to own 10% of the company, he'd go out to brokers for an all or none order with that 10% "all" figure. Once he has already bought his stock in the amount he wants to own, if NFLX then shoots up, fine. No sweat. Thanks for the easy money. But if he owns 2.3% then he's in a kind of "no man's land" and either has to pay up a big price for the remaining 7.7% he wanted to own. Or turn around and sell the 2.3%.

Alligator Spread



Definition
There are two definitions here - one relates to the centerfold out glossy pages of PlayGator magazine. At Shmoop, we are fans of the new Go Green theme.

The other definition relates to a situation where broker commissions "eat up" any profits that would have been available to making a trade, usually in reference to a derivatives trade involving put options and call options. The commissions in this case were so high that the trade doesn't make sense to execute.

Allocational Efficiency



Definition
If markets are efficient, capital will get allocated efficiently. That's the theory anyway.

Alpha Risk



Definition
Wall Street loves to assign Greek letters to things to make them sound almost mythological. "Alpha" is no different. Alpha is all about how well your portfolio manager is picking stocks relative to his index slice of the market, risk adjusted. That is, if your manager was up 30% in a year when the market was up 10%, that's great - but how did he get there? Was it speculating in options on high flyer internet stocks? Or did he just get the fundamentals right on Dow Chemical? High Alpha good; Low Alpha bad. Cold Alpo: A brand of dog food.

Alternative Investment



Definition
Not stocks, bonds or cash. Alternative investments include things like hedge funds, real estate, commodities and fancy derivatives. Alts are usually only owned by "accredited investors", aka, the wealthy.

Alternative Minimum Tax - AMT



Definition
AMT was invented by the IRS and Congress in reaction to rich people who came up with clever ways to avoid paying their fair share. See Warren Buffett's recent diatribes on this subject for more gory details on the effects of aging on one's brain. AMT evolved into an onerous burdensome tax structure that is now being reconsidered in Congress.

Specifically, AMT adds back items into the "adjusted gross income" line that everyone fills out on their forms for the IRS. Some things that used to be deductible aren't deductible any more like charitable contributions over a certain percentage of your income, etc.

For The Seven, all you really need to know about AMT is that it's neither "minimum" nor "alternative."

Alternative Trading System



Definition
ATS is just eBay for stocks. It’s another way to buy and sell shares other than being on NASDAQ. It’s sort of the off-Wall Street version of those guys who have homes dug in the ground 12 feet deep, with a year’s supply of canned foods and a few rifles in ‘em. Northern Idaho. Off-grid.

ECNs, crossing networks and other fancy market exchanges are all ATSs.

American Callable Bond



Definition
Them silly Americans.... Callin' their bonds any time they want. That's what an American callable bond is - the issuer can call it at any time prior to its coming due. Usually the call provision carries a premium - that is, the caller (the issuer) of the bond pays 103 cents on the dollar to call the bonds... using advanced Shmoop calculus B/C, that's a 3% premium.

Why would an issuer call? Not because they were lonely but rather because they had issued their bond paying 9.5% interest and then their credit status got better, they were upgraded by Moody's from CCC to BBB and the prevailing interest rates went down. If the company could buy back and reissue new debt paying just 7% interest, why wouldn't they?

American Depository Receipt/ ADR



Definition
Sony wants its shares to be traded everywhere it can - more buyers, more demand, higher-stock price (usually). So instead of just listing its shares on the Nikkei in Japan, Sony lists in the U.S. as well. How? Well, a bank or series of banks essentially buys its shares in Japan and then a nanosecond later turns around and sells them in the U.S. on, say, the New York Stock Exchange for some conversion price. If they are 40,000 yen in Japan, they might be $28ish in the U.S. Note the subtle issue here - not only are investors buying shares in a foreign company but they are buying the shares with dollars and the U.S. investors buying these shares really only care about dollars - so if the yen goes the wrong way and Sony stock doesn't go up to accommodate for it, U.S. investors get doubly hosed.

American Stock Exchange



Definition
The AMEX is a private intentionally non-profit company, which sees about 15% of all trades in the US. Its competitive brethren are NYSE and NASDAQ. And hundreds of ECNs emerging from the bulrushes. An exchange is like a coffee shop for stock trading – there is a barista and a set of urinals.

American Style Stock Option



Definition
There are a few flavors of stock options - most of the sugaring has to do with when the option can be exercised. An American style option can be exercised any time from when it is bought to when it expires. A European Style Stock Option can only be exercised on the day it is to expire.

Amortization



Definition
The process of assigning costs or revenues across time. Example: You license 1 year of house-sitting duties on an as-needed basis for $1200. You are paid all $1200 up front. But you might be fired after 3 months. Or you might quit after 9. You amortize the value of that contract as $100 a month over the life of the license.

Amortized Bond



Definition
See amortization. A bond comes due in 10 years. It has a coupon of 7%. Over the course of its life it will pay 10 x 7% x whatever the amount of issue of the bonds. Three years into the ten years, the bonds will produce less yield than they did on the date they were issued. One way of accounting for that differential is to think of bonds as a depreciating asset.

Analyst Expectation



Definition
This dicey little phrase is also called Street Numbers", "Reuters" (which runs a poll of analyst estimates and reports the numbers), and "Whuh?" The phrase refers to a company's quarterly earnings or other estimates that the Wall Street community has come to believe said company would print when they actually release their results.

To wit, Cisco has told the Wall Street analysts (employees who work for brokerage houses to provide "expert" advice to investors) that it expects to earn 40-45 cents a share on $10.5-11 billion in revenues. One analyst publishes that they expect 43 cents on $10.652 billion; another analyst publishes that they expect 40 cents on $11.1 billion, etc. See Whisper Number ,Buy side, and Sell side for more gory details.

Analyst Sponsorship



Definition
Most stock brokerages employ analysts. See sellside analyst for details. Despite being wrong well over 50% of the time, these analysts continue to write buy, sell, hold opinions of stocks and publish financial models and...talk. And Wall Street still listens. And pays for that research in the form of commissions/trading dollars.

So when a sellside analyst sponsors a stock (or writes positively about it), that stock usually goes up. And the bigger the brokerage, the more the stock usually moves on a big recommendation.

There is a hierarchy among sellside analysts as well. Someone from Goldman will usually have dramatically more impact on a stock's price than someone from a smaller regional firm. The top dog analyst in a given stock is called The Axe or The Hammer, don't axe us why.

Annual Return



Definition
Annual return is simply what you get back each year from your investment each year. You owned Smooshem Ketchup Company last year on Jan 1. The stock traded at $50 a share. By New Year's Eve the stock was trading for $55. But it also paid a $2 in dividends through the year. Its annual return, in simple terms (i.e. not worrying about the time value of dividends paid at different times of the year) was $7 total from a base of $50 or 7 / 50 = 14%.

Annualized Total Return



Definition
Geometric average of the total returns annually of an investment - that is, asset appreciation plus dividends or other distributions in cash and/or stock. This method of evaluating returns misses the volatility of the investment - did it double then get cut 80% then go up a lot at the end of the year? Or was it Milwaukee Ski Slope flat and nicely boring during the year? Most investors who don't like the taste of Pepto-Bismol prefer the latter.

Annuitize



Definition
Annuitize is when a lump sum converts into a series of set income payments delivered on a regular basis over a given period of time. This most commonly happens with retirement plans or life insurance. So you write SnoopyInsurance a check for $500k, and in return they agree to annuitize that amount and pay you $2500 a month for the rest of your life, no matter how long you live, but the benefits stop the moment you do. Eek. If you're one of those people convinced you're gonna Highlander it and live forever, great. However, if you think you might be on the losing end of a Clamor and bite the dust sooner than expected, clearly you aren't going to get the best return on your investment.

Annuity



Definition
It's 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 starting letters in annual - as in the payments happen annually. These payments either come in one plop or are "accumulated" over time. This type of payment is kind of an insurance policy. In theory, it has less risk vs. 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.

Annuity Due



Definition
See annuity, annuitize. This is different from Annuity Dude who is the guy who sold you the annuity in the first place. An annuity due pays at the beginning of the period, so if you get a monthly check and it's from an annuity due, start looking in your mailbox around the first of the month, rather than at the end.

Anti-Dilution Covenants



Definition
Dilution and delusion are generally bad things to the original owners of securities or a brain. An anti-dilution clause keeps pro rata ownership flat, even for subsequent investment rounds. Those who own this valuable clause usually get stock options or warrants or share grants to maintain their ownership percentages.

Anti-Money Laundering Laws



Definition
You're not supposed to launder money. "Laundering" usually refers to hiding money from the government, whatever government in theory is... governing. There are lots of ways to launder. 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, voila, the movie theater business shows itself to be hugely profitable with repeated "sold out" showings, and the bootlegging profits are now hidden.

Antidilutive



Definition
First see dilution. Don't look at Delusion. Then understand why dilution is a bad thing for existing shareholders and why an investor might want an "anti-dilution" provision in a contract.

Consider a perspective on dilution from that of the eyes of an entrepreneur: The eventual goal in any company is to create wealth for shareholders. In the beginning, the founder owns all of the "wealth" or at least the shares in the company. Over time, that founder gives away pieces of the company in the form of shares to various flavors of investor who give him money in return for shares of his company. The challenge in high capital cost companies for the founder is the enemy of all capital backed companies: dilution.

A new tractor company requires several hundred million dollars to start. By the time he is done with 11 round of financing, the founder likely owns less than 2% of the company after having started with 100%. Conversely, a company built from software (computer code) often requires a very small amount of money. That is, Yahoo! required only a little over $1MM of total capital until it reached break even. It chose to take on more capital because it believed that the dilution was worth the incremental capital raised so that it could take advantage of market opportunities. eBay was about the same. The great fortunes of the internet era were made in part because the founders suffered so little dilution that at the end they had tens of billions of dollars of wealth via their large percentage ownership stakes in the companies they founded.

So what would be an ANTI-dilutive act? How about the company buying back its own shares?

Approved List



Definition
Active money managers keep an approved list" around to purposely limit the securities they can pick in a given fund. Let's say the theme of one fund is "Senator Approved" - that means no "sin stocks" - no tobacco, no adult entertainment stocks, no ... caffeine? No... polluters? No... Republican CEOs? That list could get pretty narrow pretty fast.

In large mutual fund complexes, sometimes an analyst will come across inside information and they must halt trading or the potential of trading in a given name. e.g., they hear in the hallway that Microsoft is about to buy Disney directly from Bill Gates, whose high pitched voice distinctly cuts through long hallways. They must take DIS and MSFT off the approved list (their traders usually have electronic gates managed by in-house lawyers so that they are physically prevented from trading in a restricted security) until that information comes public.

Arbitrage



Definition
A sure thing. Easy money. No sweat. That's what arbitrage is... or at least is supposed to be. It's a great word to use at cocktail parties so you should know what it means. Arbitrage is the business of finding 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. Arbitrage is "riskless profit". In the deal above, 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.

With the advent of high-tech global electronic trading, the opportunities for "arbing" have fallen drastically. Note also that there are usually commissions and/or overhead costs involved in making these deals so there must be a pretty wide spread in prices for it to be worth the arbers while to deal. See alligator spread for details.

Consider it this way: in the gold example above, 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. Arb is not arb until the check clears and cash actually shows up in your account.

ARM



Definition
(yes, long definition but worth every penny!)

The key letter in ARM is "a" and it stands for adjustable as in adjustable rate mortgage.  Adjustable means that the mortgage payment is a moving target. The interest rate can be adjustable. The payment terms can be adjustable and the time to bankruptcy can also be adjustable. In times when interest rates are expected to increase, adjustable rates are typically lower than the prevailing fixed interest rates and the opposite is true as well. 

A typical ARM has a low interest rate, a guaranteed period of time for that interest rate, an index (like LIBOR) against which it is adjusted, a step up percentage (how much the interest rate will likely grow each period) and hopefully a cap (the maximum rate it can be raised in a given period). 

Sometimes an ARM can be in the form of interest only for the first few years. There are very low payments but no principle is paid down. The buyer is making a bet that interest rates in that timeframe will be less than they are today and that the buyer’s income will go up.  

An ARM at a 3.75% guaranteed interest rate for the first 5 years, a .25% step up and a 12% cap has a schedule that looks like this: 

Year Interest Rate Monthly Payment Annual Payment
1-5 3.75% $1,111 $13,338
6 4.00% $1,141 $13,693
15 6.50% $1,399 $16,526
30 10.00% $1,572 $18,864 

The reason people buy an ARM in the first place is because they are cheap or appear cheap to the borrower. Sometimes they are actually cheap to the borrower.

Often they are not. Bank consortiums, which price mortgages, are usually smarter about the pricing of mortgages than Joe the Plumber. Yet there is always a guy who wins the lottery. What happens if the interest rate steps up at intervals of 1% instead of .25%?

Year Interest Rate Monthly Payment Annual Payment
1-5 3.75% $1,111 $13,338
6 4.75% $1,232 $14,790
15 12.00% $2,146 $25,753
30 12.00% $2,146 $25,756 

Let’s compare this to a fixed rate 5.25% mortgage. 

Year Interest Rate Monthly Payment Annual Payment
1 5.25% $1,325 $15,903
6 5.25% $1,325 $15,903
15 5.25% $1,325 $15,903
30 5.25% $1,325 $15,903 

Notice, you are making a trade-off between low interest in the early years (ARM) and certainty (Fixed) in the later years.

Ask



Definition
(as in bid-ask, and not Jeeves) It's what the seller wants to sell for. Think: The "s" in the middle. The ask price includes the commission or market from the dealer. Synonym without sin: "Offered".

Assessed Value



Definition
As in "of your home". In some states, property tax is based on a formula and there is no assessing going on. In the People's Republic of California, property taxes are 1.25% of the purchase price. They then rise roughly with overall inflation over time. No assessor need be involved. But in many other states, each year your home is re-assessed often by VocabWord#305 and your taxes go up. The assessed value may have a disconnect from market value - i.e. market value (what you get from the Joneses if they want to to buy it) is often higher than the assessed value and usually if you whine enough, the assessor will make an adjustment so that for that year at least, your tax bill can come down.

Asset Allocation



Definition
This concept is about where you put the stuff (assets) you have. The notion of "allocation" is a brokerage-y concept that attempts to optimize the risk-reward issues that investors encounter in volatile markets and climates. How much time do you have until you need to consume your investments? If you have a very long time, you can afford much more risk in your portfolio than if you are an old geezer and... don't. If you're somewhere in the middle, what about bonds - how exposed are you to them and to the negative effects on bonds of high inflation? What about real estate, the stock market, private investments? The structure most brokerages use in discussing the allocation of assets among these various categories is tactical (e.g. what's the market gonna do the next few years?) and strategic (e.g. how long do we have to bail us out if we are wrong? How much risk we can take? How much volatility can we endure without pulling out what's left of our hair?).

Asset Backed



Definition
A security backed by a specific physical asset like an airplane issuing bonds against its hull. Cozy.

Assets



Definition
It's just wut u got. For the average orthodontist married to a school teacher in Peoria, IL, their assets consist of $253,432 in a Schwab One brokerage account, a home valued at $643,000 with a $300,000 mortgage (their equity in the home is $343,000), $20,000 in a B of A account. And $92,302 in a teacher's retirement pension account. And $12,000 worth of crap in their garage that really should be sold on eBay. That's it. Oh, and they have love.

For corporations, the numbers are bigger but the idea is the same (minus the love unless you work for Southwest Airlines - look up the ticker).

Assets Under Management



Definition
The dollar amount managed by a given mutual fund, hedge fund, or whatever fund.

Associated Person



Definition
It sounds so devious. Like who or what are they associated with"? A criminal element? The dark underworld? Nah.

In reality, "associated person" means a registered representative or someone who is a principal of a FINRA covered firm. They are "associated" with it and thus held to a certain set of standards in their behavior and golf game. Yawn.

Asymmetric Information



Definition
Asymmetry happens when one side is unequal to the other. Uma's eyes. Gramma's breasts. Any number times 2 then minus 1.

In Series-7-land, it refers to the dissemination of information relating to stocks and bonds and other securities wherein one set of players - maybe those closest to the company - get the information first, can trade or act on it, and then that information gets out to the rest of the world. This is illegal. Do not do this.

At Par



Definition
See Above Par. At par = 100 cents on the dollar and 72 strokes on most courses.

At-the-Close Order



Definition
An order to happen at the close of the market and generally at the closing price. If Big Mac prices changed every minute, and you ordered one at the close (midnight in most McDonalds), the burger flippers' clerk would scream your name at 11:59. Whatever the price for BigMacs was at that moment is the price you would be charged.

At-the-Money



Definition
At-the-money generally refers to stock prices relative to the strike price of the stock options that an investor has bought. That is, Joe Shmoe has paid 3 bucks for the right to buy a share of KO (Coke) for $80. That option expires in a week and the stock is at $76 a share today. If the stock climbs to $80.00 a share (the bid), then it is said to be "at the money" or at the strike price. If it climbs above $80.00 then it is "in the money" and below $80, it is "out of the money", honey. Note that KO could be $82.50 and the call option buyer has still lost money on the trade (she paid $3 for the call and KO ended up only $2.50 in the money so she lost half a buck.

At-the-Opening Order



Definition
Order to purchase or sell a security at the closing price of a given day's trading.

Auction Market



Definition
Exchanges are auction markets unlike the OTC where prices are negotiated. The New York Stock Exchange is an auction market - prices are set and adhered to. Buyers and sellers transact simultaneously so in essence two transactions are happening at once.

Auction Market Preferred Stock - AMPS



Definition
Think: Drunken Dutch Auction. In AMPS, an auctioneer resets the preferred's dividend about every 7 weeks. AMPS are useful for large investors managing through inflation, among other forces that favor adjustable interest/ dividend payouts (i.e. where liquidity needs change often).

Authorized Stock



Definition
Big fat hairy deal vocab word and a key question on the 7 and others. Authorized are the number of shares a company can issue by charter. So... 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. Company XXX is not meant to refer to a producer of internet porn.

Authorizing Resolution



Definition
Basically, the decision of a company's board of directors to undertake some specific corporate action.

Automated Client Account Transfer (ACAT)



Definition
Your client gets a bunch of shares in OpenTable as part of a venture capital investment distribution. The shares were delivered to Credit Suisse. But your client doesn't want an account set up there - he has his primary account with Goldman Sachs. So he wants the shares wired to his GS account whenever there is a venture capital distribution. Instead of having to grind through endless paperwork each time there is another distribution, he sets up an ACAT once and is done. The ACAT is respected by the brokerage community who comply with the processes of delivering customer assets like cash and stock and Christmas nut cakes to the core or main target account.

Automatic Reinvestment



Definition
See distribution reinvestment. The key feature here is that the customer gets to reinvest dividends and distributed gains back into the fund without paying commish. Not all mutual funds offer this nifty feature but most do.

Average Cost Basis



Definition
It's a tax issue. You liked AT&T at $40 a share. You bought 500 shares. You liked it even more at $35 a share and bought 1,000 shares. You loved it at $30 a share and bought 2,000 shares. You adored it at $25 a share and bought 5,000 shares. Your average cost basis is $28.24 (forget commissions). The stock then went to $50 and you sold half or 4,250 shares. How much gain was there? Well, you take the average cost in for half of your shares - and you match it with the average cost out. In this case, you are realizing gains per share of $50 - $28.24 or $21.76 times 4,250 shares or $92,480.

Away From Market



Definition
You want to pay $19.46 a share but the best price you can get from the various exchanges is $19.62. Your bid is said to be away from the market.

B-Shares



Definition
See A-Shares.

There are A, B and C shares and a few other flavors out there. The basic idea behind B-shares is that the buyer of the mutual fund pays his fees only when he sells the mutual fund. The advantage in part is that the commission he would have paid up front is now deferred - he pays it on a bigger lump of assets but he got to compound all of that time without the load, which came ahead of his investment.

The technical jargon around this name is "contingent deferred sales charge".

Back End Load



Definition
This is the common term for the Contingent Deferred Sales Charge, which applies to mutual fund B-shares. Many people think about this concept if they are standing outside of Curves. But for better details, see b-shares. "Load" is commission - think of it as a "weight" on your investment returns. "Back end" means that it is paid at the end of the holding period of your mutual fund - that is, it is paid when you sell the fund, as opposed to when you buy.

Backdating



Definition
Ooh. This is bad. Scandals. Jail. Silicon Valley soap opera. There was a time when stock options were free and easy or at least perceived as such. Some semi-clever CFOs, noting that their stock prices were quickly appreciating, used overly favorable dates upon which to set strike prices for options granted to employees. See call option.

When a key employee is hired into a young company, they are typically given a modest salary and bonus plan - and a generous option plan as young companies generally don't have lots of cash with which to pay employees. A package might include the salary and bonus details but then also 100,000 options.

The options usually have a 4 year vest provision (the employee must be in good standing at the company for 4 years to end up owning those options) and they must be sold within 10 years or so of them being granted. They are also granted with a strike price, which is usually determined as something like the average closing price over the last 120 days of trading or something generic like that.

So in the case when the stock is rocketing, there is a big different in taking the average trading price or the price that the stock was at 120 days ago. This was a core issue in the backdating scandals that hit Silicon Valley in 2008/9. And the numbers are big.

XYZ stock was at $80 a share 20 weeks ago - now it's at $200. In 4 years it might be at $400. The employee getting the $80 strike price on 100,000 shares will have appreciated $320 per share times 100,000 shares or $32 million. But if the employee had received as their strike price the average of $200 and $80, assuming an arithmetic set of closing price gains, the strike on their options would have been $140. The gain would then only" be an appreciation of $260 or $26 million.

Since the scandals the laws have become dramatically more stringent and clear and little has been heard about backdating since then.

Backing Away



Definition
A no-no. A market maker offers to buy 100,000 shares of MSFT from you at $26.12 - then says "um, no". That's an NASD violation. In practice, trading is done among generally trusted and known parties so if a player backs away from trades, the rest of the field simply stops doing business with them and they wither and die.

Balance Sheet



Definition
A balance sheet in common parlance is just the assets a company has. From an accounting perspective, there are many more details of value but from a simple perspective a balance sheet is just the net cash a company has on hand. Think about a chocolate pretzel stand.

Your daddy gives you $100 to start one. After 3 weeks, you have burned through $50 dollars on advertising, chocolate, pretzels and a stand. At that moment on your 22nd day, given that the residual value of your chocolate, pretzels and stand is $2, your balance sheet should show something like $52 of tangible worth. You have $50 in cash, presumably no liabilities and $2 in net recoupment in scrap if and when you go out of business.

Balanced Funds



Definition
A mutual fund which has both stock and bonds in its portfolio.

Balloon Loan



Definition
Like if you want to buy 99 red ones. Think about the shape of a balloon on a string on a still non-windy day. There's a long steady string - then this big fat thing. That's a balloon loan - if you owe one, you make a long steady stream of payments and then a big fat one at the end to finish things off or conclude your debt.

Balloon Maturity



Definition
When a balloon loan comes due. Usually it involves a large amount of money as balloon loans are structured so that the majority of the loan is paid back at the very end of the loan term instead of in little pieces along the way.

Bankruptcy



Definition
The big BK. Kapoot. Financial death. There are several flavors. Ever see Night of the Living Dead?

Basis Point



Definition
One hundredth of one percent. That is, if mortgage rates are quoted today at 6.274% and then next week are quoted at 6.284%, they have gone up one basis point. If they moved two weeks later to 6.074%, they have gone down 20 basis points from the original quote.

Basis Quote



Definition
Esoteric. It is used with futures contracts and refers to a quote for one futures by referencing another futures. Example: The October futures contracts for widgets is quoted at $20, and the November contract is at $30. A basis quote for the November contract would be "October + $10."

Bear Market



Definition
When the market goes down. Technically a bear market is a prolonged period of falling stock prices accompanied by general investor pessimism. If it’s a short period of declines followed by price increases, it’s called a correction. What’s “prolonged?” It’s in the eye of the beholder, or to be more specific, it’s how the talking heads on CNBC define it. ‘Nuff said?

Bear Spread



Definition
Porn shoot in Yosemite. Yogi-boy. It also refers to a stock option position where the trader is betting that the underlying security movements will be bearish. It limits both risks and rewards.

Bearer Bonds



Definition
Bonds that are owned by whomever has physical possession. Not as common today, especially in developed countries, an owner has very little recourse if the bonds are stolen.

Best Bid



Definition
On a professional trader's computer screen, there is a "ledger" or set of numbers separated by a fine line - buy offers and sell offers. A client wants to buy a million shares of GOOG on a "best execution" basis. The trader looks at the offers to sell GOOG which are all over the place: $582.34, $582.12, $582.23, etc. He is obligated to take the "best bid" or best price for his client. That is, the cheapest price. But sometimes the cheapest price is only good for 100 shares. In that case, the trader takes the smaller chunks in pieces starting from best bid until he can fulfill the million-share order.

Best Execution



Definition
It was probably Anne Boleyn. But it might also have been Braveheart. Or maybe the last part of The Lottery. Those forms of execution are all great in the Town Square. But on Wall Street, best execution refers to giving the client the best price and service that the broker handling the trade can give. And best price alone might not always be the best deal - say the client wants a million shares. You can offer 100,000 at $23.13 but there is an offer to sell a million at the higher price of $23.18. If those million are sold to someone else and suddenly there is no supply in the market, the stock likely pops - so the client has 100,000 shares at $23.13 but now the best offer is $23.40. Was that best execution? No. A million shares at the $23.18 was the way to go.

Beta



Definition
Think: Volatility. Beta is the number associated with volatility. Not related to a 7 mile breakers run around the Golden Gate in San Francisco.

Bid



Definition
The price at which a buyer is willing to buy a security. See Ask for the other hemisphere.

Bid-Ask Spread



Definition
This is a quote consisting of two prices that dealers give to potential customers. The Bid" is the price at which the dealer will buy the security. The "Ask" is the price at which the dealer will sell the security. The bid price will be lower than the ask price; the difference between the two prices represents the dealer's profit for the transaction. An example would be "20.00 - 20.50." The dealer is saying that he will buy at $20 and sell at $20.50.

Black Scholes



Definition
A mathematical computation commonly used to price the value of stock options.

Block Trade



Definition
Fidelity wants to sell 100 million shares of their Cisco holdings in one shot. They don't want to wait for the quarter to be announced and are nervous about the whole market. They call their friendly broker and ask for help in finding a buyer or three. The broker makes a bunch of gentle inquiries to buyers with whom he regularly does business and who he knows have pockets deep enough to pay Fidelity the couple billion dollars they'll want in return for the shares. When buyers have been found and a price agreed to, the trade happens in one big fat block.

Blue Chip Stocks



Definition
High quality stocks. Think: Disney, American Express, Coke. Basically anything Warren Buffett owns.

Blue-Sky Laws



Definition
Blue-Sky laws are the collective group of state-by-state regulations involving the marketing and sale of securities. 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 more onerous than others.

Bond Anticipation Notes



Definition
Didn't Carly Simon sing about this one? When bonds are "certain" to come due, those desperately needing cash liquidity today will sell securities against those bonds, i.e. pay us now and you can have the proceeds from the bonds when they come due.

Bond At A Discount



Definition
A bond that is selling for less than its stated value. Think: Light bondage; yarn, not rope.

Bond At Par



Definition
Par value is the stated value of the bond when it is issued. For example, a company might seek to raise $10MM. It issues bonds at an 8% compound rate which it is obligated to pay, effectively renting the $10MM for the price of $800,000 per year.

Bond At Premium



Definition
A bond that is selling for more than it stated value. Investors might be certain the bond will pay off or its credit rating has been upgraded since the bond had been issued. In that case that 8% par value bond could be bought for $600,000. It still pays $40,000, its effective yield is $40,000/$600,000.

Bond Components



Definition
Principal - the original amount that you borrow that you eventually have to pay off. When people quote the size of their mortgage, the number they are quoting is usually the principle and it is your pal.

Interest rate - The percentage of the principle that you owe.

This number is usually compounded and amortized. Compounding - The process of computing interest owed. In the case of bank interest for example, you might deposit $1,000 into a bank with a 5% savings account rate. That money is compounded daily as the marketing slogan toots of the bank is .05/365 * principle. So after one day your thousand dollars is worth $1,000.14

Bond Duration



Definition
Duration refers to the length of time from which a loan is made to when it is paid off. Loans which have a very long expiration (Disney has issued 100 year bonds) will reflect prices that are much more volatile than bonds that come do in a few years. Over 100 year period, one would imagine that bond prices would be affected greatly by inflation, credit risk worries and individual corporate issues, all of which make prices in bond swings volatile for high duration bonds.

Bond Fund



Definition
A mutual fund that invests in - yep, you guessed - bonds. Bond funds can be diversified, meaning that they will invest in many different types of bonds, or more specific. Some funds invest only in Treasuries, others only in municipal bonds, etc.

Bond Point



Definition
This measures the price of the bond relative to its par, or face value. A bond that has a face value of $100, and is currently trading at $90, is said to have a bond point of 90% of face.

Bond Rating



Definition
An evaluation from a rating agency such as S&P, Moody's or Fitch as to the relative strength of a bond. The highest rating indicates that there is miniscule risk of default, either as to interest or principal. Lower ratings indicate gradually greater default risks. In the S&P world, BBB is the highest rating for an "investment grade" bond. Anything lower than BBB is considered junk, er, high-yield. Caveat emptor.

Bond Ratio



Definition
The percentage of a company's capital that is represented by debt. If a company has total capital (debt plus equity) of $100, and $30 of that consists of bonds, then the bond ratio is 30%. As a very general rule, any bond ratio over 30% shows a highly-leveraged company, but this is not uniform. Some industries, like the airlines, traditionally have much higher bond ratios.

Bond Yield



Definition
Think: The cost of renting the money. That is, a bond is a loan - if a corporation is producing a bond, they are "bonded" by their word to pay it back (or secure the loan with assets they have like their secret sauce recipe). The yield is the money the loaner gets from the loanee.

Bonds



Definition
No longer the hippest spy in the world (taken over by Matt Damon or Dragon), the dictionary definition takes bonds from its Latin roots is just "an agreement." " A bond is a man's word."

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, 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) in your life.

Bonds - Major Classes - A Long-Form Definition



Definition
Just like ice cream and horny clowns, bonds come in flavors.

Senior Debt - senior debt typically is the most safe and secure type of bonds in a corporate balance sheet. If the company ever ran into bankruptcy problems, the first type of bond to be paid would be the senior obligation bonds. Just below that would be junior obligation bonds. There are other bonds that are backed only by specific assets of a company. For example, airlines typically have separate bonds secured only by the airplanes they lease themselves. If you had a chain of chocolate pretzel stands with a unique formula for chocolate that you knew See's would pay you $1MM to have, you could likely borrow half that or so in the form of a bond backed only by your grandma's secret formula. These types of bonds are called asset backed.

Another common form is a debenture. Debentures are the lowest on the priority stack of bonds should something go wrong. Debentures are backed only by the full faith and credit of the company, meaning the company promises to pay back the bond (unless it can't). Why would a person ever loan money only based on the company's promise and nothing tangible? If a company ever refused or couldn't pay any form of bond, it usually spells the end of the company's credit or trust from all of the company's vendors, shareholders and board. A debenture not paying is more or less as cataclysmic to a company's financial health as any other form of bond.

Because debentures are low on the risk stack, they typically come with one other Baptist feature: Convertibility. That is, $1,000 of United bonds might be convertible into 50 shares of United Airlines Series A common stock. Doing fancy math, that means that if the share price ever went meaningfully above $20, it would make sense for the bondholders to convert their bonds into equities and make a nice profit.

A Zero Coupon bond is a type of bond, which pays no cash interest along the way (hence the zero coupon or zero payment). At the end of the bond's obligation period, both the principle and all of the accrued interest come due. For example, if you borrowed $1,000 for 6 years, at 12% rate of interest (see Rule of 72), you would get nothing along the way and roughly $2,000 at the end in one lump sum payment. Zero coupon bonds are perceived as being more risky because coming up with that final lump sum payment at the end is sometimes difficult for corporations. To stem some fears, most corporations create what is called a sinking fund, which is an amount of money, they "sink" into a piggy bank for the day that money comes due. In the case of a seven year zero, the company might put 1/7 of that money into its own bond which matures when the rest of the bond matures so paying off the accrued interest and principle is less painful.

Book Entry



Definition
Securities that are registered in an electronic form rather than through physical paper are known as book "entry" securities. Book entry is the way all companies register securities today. You can't get any actual bond certificates and very few stock certificates. But that's progress...

Book Value



Definition
A balance sheet term. It's what things garner at liquidation, "net of costs of selling". 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.

Borrow



Definition
The term refers to the cost of borrowing shares when an investor short sells a stock. Technically, the investor has to borrow the shares from the brokerage, paying high interest costs on them for the privilege. Those costs are "the borrow".

Bought Deal



Definition
When the underwriter buys the shares directly from the issuer before the filing of the prospectus and the IPO. The advantage to the company is that they are guaranteed to sell all of their shares. The advantage to the underwriter is that they get a discount on the price of the shares and can thus offer them at a lower price (which means it won't be as difficult to sell them).

Bowie Bond



Definition
Yep. It's about David Bowie. Shaken, and stirred. In 1997 David Bowie the rock star legend, now with "Sir" before his name as in Loin of Beef pioneered a new kind of bond: He pledged the copyrights of his music library to back a loan - an asset backed bond. He had recorded 25 albums prior to 1990 and they were the collateral for his loan. For all the noise they made (rockers... grr...) the bonds were for only $55 million - a microscopic drop in the bucket in the scheme of all things bond. But it's Bowie. So it got play.

Brand Equity



Definition
Brand equity is the value your brand has. That is, if nobody has heard of you, your "brand" ain't worth much. Or, uh, sorry, you don't have a brand. Similarly, you can have negative brand equity like, AL Qaeda Brand Aspirin likely wouldn't sell a lot, at least in America. "High brand equity" = a name you have heard of and trust. Think: Ferrari. Yeah, think a lot Ferrari.

Break Out



Definition
Oxy 5 and 10 both fight this one. But it also refers to a stock which has "broken out" of its expected trading pattern. That is, the stock traded in a very flat U shaped pattern for the last 10 months between $17 and $19, then, suddenly with their recent earnings announcement, the stock's first print at 9:30 a.m. NYT is $26. The new pattern created from that $26 is a break out. Like Oxy 5 and 10, things have... popped.

Breakpoints



Definition
In a mutual fund, there is scale. That is, buyers get volume discounts. For example, 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.

Broker Call Rate



Definition
The interest rate broker's pay on the loans they take from the bank which they in turn loan to customers buying on margin.

Broker Loan Rate



Definition
The price of money to brokers who borrow.

Brokerage Account



Definition
Brokerage accounts are where you buy and sell stocks and other liquid securities. Setting up a brokerage account is easy and for an investment amount of usually less than $2,500, you too can trade stocks like a tie-wearing Wall Street guy. If you have the extra money to be able to invest then this part of Shmoop finance is really not for you.

Brokerage Fee



Definition
What the broker gets for making a sale happen between buyers and sellers. Commission, flat fee, spreads can all be ways of calculating the fee. Fi fo fum.

Bull Market



Definition
A securities market that goes up for a sustained period of time.

Bull Spread



Definition
In the vein of an alligator spread, see the fold out in BullBoy Magazine. A bull spread is a bet that the market will go up, using options to create a vertical spread. Traders can create a bull call spread or a bull put spread but this gets fancy and confusing.

Butterfly Spread



Definition
A butterfly spread trade is one based on the belief that volatility in the market (and thus the premium investors pay to expose themselves to options trades) will go down or up in the future - but be different from the current volatility conditions. Most butterfly trades are relatively low risk, low reward sets. The "butterfly" nomenclature is there because these trades tend to "land soft" - i.e. you don't make a ton; you don't lose a ton.

Buy And Hold



Definition
Buy and Hold is a style of equity investing. Using complex language decoders, we can decipher that the concept means that you "buy" stocks - and then "hold" them. Convoluted idea, we know. The King of Buy and Hold is Warren Buffett, the Tiger-when-Tiger-was-Great of the investing business. Except that Warren has been around longer than Tiger and is way wealthier.

The strategy for most buy-and-hold investors is to concentrate their portfolio on owning just a relatively few names - less than a dozen for most of the world - and then just own those companies "forever". For years, this strategy came under fire from stockbrokers who don't make any money when you just hold stocks and don't transact or trade them.

The core skill in this strategy revolves around getting the company right. For a while, AOL looked like a "forever" stock to some, only to die an ignominious death. Coca Cola might be a "forever" stock - Buffett bought it in the mid-1970s and has owned it ever since - and it's been a fabulous stock. Nothing like addictive substance and Teamster-blessed duopoly distribution economics to keep margins high.

The other big plus in the buy and hold strategy zone is that owners "never" realize gains - which means that they don't pay taxes. That is good - unless you are an IRS employee or a Communist. Or just stupid. The downside? Volatility. Owning a concentrated portfolio means that you will go through many more ups and downs than you would if you owned 100 names. Some people worry about the shorter term - and if you're 78 and retired, it's a valid concern.

But if you can handle air pockets and speed bumps, and you can identify great companies (as opposed to great stocks) the buy and hold strategy is hard to beat.

Buy Limit Order



Definition
You want to buy MSFT at $24 or better. The stock is currently trading at $24.12. So you wait. And wait. And you wonder, "will this trade ever happen?" (It may not.) But then there's a big market down-draft day and the stock kisses $23.99 for 20 seconds. If your broker is good, he'll pass along that extra penny to you - i.e. buy the shares for a total cost of $23.99 to you, not $24. But at worst, you'd pay $24.

Buy Side



Definition
There are two sides of Wall Street - Buy - and - Sell. Duh. Why are there two sides like this? Because the antagonistic" nature of pricing for securities works, for the most part. The "sell-side" comprises the stock broker community, people who sell used companies. That august group includes investment bankers, capital markets makers and more or less all of the people who wear ties at Goldman Sachs.

The people who don't wear ties at Goldman are a sloppy division which runs mutual funds for Goldman or GSAM - Goldman Sachs Asset Management. The "buy-side" are people like mutual fund managers, hedge fund managers, pension fund managers. "Fund managers" is the key phrase there.

They are the ones responsible for the money. They have to report to shareholders whether they have made or lost money and how much risk they took to get there, for hedge fund managers, especially. Unlike the broker community of sell-siders, the buy side has a broader fiduciary obligation to their investing clients.

Buy Stop Order



Definition
Typically used to cover a short. You shorted MSFT at $24. If it goes up a lot, you don't want to be crushed. So you put a buy stop at $27 so that the most you can lose (forgetting the cost of the borrow and commissions) is $3 a share.

Buy-in



Definition
If a seller fails to deliver the securities, and the buyer must enter into another transaction to buy them, this is referred to as a "buy-in." The seller that caused this situation is liable to the buyer for the difference between the price that the buyer ultimately had to pay and the price the buyer would have paid.

C-Shares



Definition
See A-Shares and B-Shares. Then share. And share alike. And know that C-shares are for "come and go" investors. They charge a level load 1% for the 12b-1 fee usually and there are other fees that hit if they exit the fund in less than a year or so.

Calendar Spread



Definition
Options come due the 3rd Friday of each month. Calendar spreads seek to arbitrage pricing differentials in timing of these due dates.

Call Loan



Definition
Think: Margin account loan. Margin and call loans are very short-term loans in nature, usually with interest rates "good" for just one day. That rate is the call loan rate. But they are generally pretty safe bets for the brokerage as the securities themselves are used as collateral on the loans and most margin accounts have strict limits - i.e., many brokerages won't loan more than twice the equity value of an account in margin. Your whole portfolio of securities would have to drop 50% in one day for them not to get back the money they loaned, so they figure that the risk is negligible. Usually they're right but baloney does happen. But because the odds of it happening are relatively low, call loans usually have a low interest rate.

Call Option



Definition
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 instead cloudy all day, the stock sinks back home on the range to $100 and my $13,000 has turned into $10,000. Sad face.

For the same $13,000 though, if I feel really spicy and aggressive and long, 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 Premium



Definition
It's the amount you pay for a call option.

Call Protection



Definition
Sort of a condom for your bond returns. CP is a term built into the fine print of a bond offering that generally prohibits the company issuing the bond to repay the premium before the scheduled maturity date until after a certain period of time has passed (in practice, this tends to be 5 years). Consider a high interest rate environment where a company has to raise money and pay 8% interest on 20 year bonds. Then the Fed lowers rates and the company could reissue new bonds and just pay 5.5% interest. It would want to call its 8% bonds and issue new cheaper ones. The investor in the bonds is "protected" with call protection which might, say, prohibit the company from calling its bonds for 5 years from issuance.

Call Provision



Definition
See call protection. It's just the language that spells out if or how a bond is callable by the issuer. Let's say Nike wants to buy a bunch of grammar schools in India and it doesn't have the cash on its books to do so. It would issue debt to the public, but 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. Consequently, Nike offers the bonds at a high rate - 8% - but there is a call provision. That is, they can buy the bonds back at 102.5 cents on the dollar at any time after the first two years have passed. The investor makes a little premium if Nike does redeem and Nike is happy because they have less debt outstanding (and smaller interest payments).

Call Risk



Definition
Your phone might ring in the middle of the night. If it does, the fear in a call risk is that a bonds or preferred stock will be called due to a big move in interest rates. The price of the bonds is inversely correlated to the interest rate environment and their coupons. That is, if your bonds have a coupon of 8% and prevailing rates fall, the price of that bond should go up - yield hungry investors will bid up the 8% payment streams. But if rates go up a lot then the bond price should fall and if it hits a threshold (many hedge funds for example, buy bonds levered with lots of margin/ borrowings to do so), the bonds could be called either by the company or by the brokerage, who will no longer allow huge margin draws to the client.

Callable



Definition
Refers to bonds. The paper may say it'll pay 9% for 30 years but in the fine print it notes that the bond is callable in 3 years at 102 cents on the dollar. Oh well. It woulda been nice.

Callable Preferred



Definition
Just see callable. Relates to preferred stock papers as well.

Capital Appreciation



Definition
Yes, we all appreciate having some money. But this term applies to when the value of the capital goes up or, well, appreciates. Note that the appreciation doesn't have to be realized or sold to be recognized as having appreciated. That is, the stock for which you paid $32.59 a share is now trading for $46.98 a share. You've done nothing with it. Haven't sold it. Haven't trimmed even a share. It has appreciated $14.39 a share, which you appreciate, especially since no taxman cometh until you do in fact sell.

Capital Asset Pricing Model



Definition
(CAPM) A model that prices securities in terms of the relative risk and return offered by the security.

Capital Gains



Definition
There are basically 2 forms of tax - ordinary income (think: high rates) and capital gains (think: less high rates). Generally, if you hold a stock a year or more and it appreciates, you have a capital gain. The idea is to reward people for investing money rather than spending it by giving them a lower tax rate.

Capital Gains Distribution



Definition
You're an investor in a mutual fund. The fund has realized long-term gains on 10% of their portfolio. At the end of the year, they distribute those gains back out to shareholders in the form of cash - which is now taxable by the kindly loving folk at the IRS.

Capital Markets People



Definition
The people who live to have their bony little fingers on the pulse of trading activities around the world in their domains (i.e. tech, healthcare, real estate, etc.)

Capital Stock



Definition
The total common and preferred stock that a company is authorized to issue.

Capital Surplus



Definition
See Paid-In Surplus.

Capping



Definition
Seen Mob Wives? Don't get divorced this way. Capping also refers to a market violation where selling pressure is placed on a stock to either lower the price or keep the price below some threshold.

Cash Dividends



Definition
Stocks usually pay their dividends in cash. Sometimes they pay a dividend in stock which is odd because the company just gets diluted with more shares out. But some companies do this.

Cash Equivalent



Definition
Balance sheet item. It's the just the cash or cash-like investment things like T-Bills or money market funds. The common thread is that cash equivalents can be quickly and easily converted to cash because they're liquid. It doesn't include things like the corporate campus which is certainly convertible into cash but not in a quick easy 30 day cycle.

Cash Flow



Definition
This is a really cool term thrown around by financial analysts and bean counters hither and yon to refer to profits, but in the Old School definition. Meaning, how much actual cold, hard lucre is your business generating.

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.

In fancier parlance, cash flow has a few other tags. Some quick and very dirty accounting, giggity. Bob.com streams his life from a webcam at his bed. People pay to watch. Bob buys a computer for $3,600. By law, he must depreciate" the value of the computer by $100 per month. By law, computers are worth zip at the end of 3 years. Yet Bob's computer will last way more than 3 years. While Bob shows a loss of $100 each month for computer amortization, he's not really losing $100. In fact, his computer is likely to last 72 months in which case he has "over-amortized" the computer costs by 50 bucks a month - on his income statement he'll show $50 less in real cash profits - or cash flow (wink- wink) - than he has in reported earnings.

Cash Settlement



Definition
When a trade is made, it gets "settled". See regular way. Cash settlement is not the normal way trades get cleared. And to be clear, when a trade is made, it involves a lot more than "sold at $103.24". Papers must be signed. Documents must be filed. Notations of commissions and other risk factor issues must be mentioned. Much of this happens electronically today but legally for a trade to be good/ accepted/ recognized by the law, it must be settled properly.

CBOE



Definition
The Chicago Board of Options Exchange. This is the main exchange where listed options on publicly-traded companies are bought and sold. Note that the options are "plain-vanilla" calls and puts, and all such options are American-style, meaning that they can be exercised at any time up to expiration.

CBOT



Definition
Chicago Board (bored) of Trade (tirade on angry days)

Certificate Of Deposit



Definition
An unsecured promissory note issued by a bank. They can be either long- or short-term, bear interest at a fixed or a floating rate, and be issued in large or small face values.

CFO



Definition
Chief Financial Officer, rarely also known as chief fun officer.

Chinese Wall



Definition
Ironically this concept was named after the Chinese icon, The Great Wall, because it was perceived to be impenetrable. The Chinese Wall is supposed to represent the highest of ethics and securities regulatory respect so that an investment bank's traders are fully walled off from its M&A and other finance people. The latter regularly have access to inside information and are almost always totally prohibited from trading to take advantage of their knowledge. The bank's traders, however, are trying to trade "smarter than the market" - it's their job to go make profits. The Chinese Wall is supposed to be the barrier so that the two sides don't leak information. At the risk of understatement, it doesn't always work out that way.

Churning



Definition
That feeling in your gut when you're long and the market is going down. But for The Seven, it is an illegal activity that unscrupulous brokers do to garner ill-gotten commissions. Churning is making more trades than are justifiable economically; churners "over trade" a client's account so that they can collect more commission than they should. Registered Advisors have a fiduciary duty to clients to act in the clients' best interest. You'd think that shouldn't have to be made explicitly but sadly it does.

Clearinghouse



Definition
An agency of a futures or options exchange that is responsible for settling trades, collecting margin funds, regulating delivery and reporting relevant data. A clearinghouse acts as the counterparty to all futures and options contracts, so it guarantees performance.

Closed End Fund



Definition
See mutual fund. A closed-end fund is not required to purchase its shareholder's shares at NAV each day. Instead, the fund issues a fixed amount of shares as an IPO. Those shares then trade on an exchange. The price of a closed end fund share depends on supply and demand, so it is possible (and often happens) that the price could be at a premium or discount to the Net Asset Value ("NAV") of the fund's holdings.

Closed Indenture



Definition
A loan that has reached the maximum amount of borrowed funs. The bank is closed, folks, you'll need to find another way to pay for your dentures.

CMO



Definition
Chief Marketing Officer

COGS - Cost Of Goods Sold



Definition
It's the onions plus the oil plus the bottling plus the delivery plus the other bulk packaging plus the basic insurance needed and a few other things... think: the cost to get crap out the door.

Coincident Indicator



Definition
When stuff happens that is generally aligned with other stuff that happens at the same time. For example, if the weather turns cold, gas consumption rises; they are coincident.

Collateral



Definition
Stuff that you offer to the person lending you money so that if you miss a payment and default on your debt obligations, the lender has something that can be sold to satisfy the debt.

Collateral Trust Bonds



Definition
Kind of like throwing your daughter's hand in marriage into the betting pool while playing poker. Sure, you might have the right (if this is the 18th century) but should you really? Actually, this is more legit than the previous example, it's when a company takes shares they own of another company, locks them in an escrow account and uses them as collateral for raising funds.

Collateralized Mortgage Obligation



Definition
A bunch of mortgages are packaged together. The package pays interest, which comes in from Joe Sixpack's mortgage payments. The package pays distributions based on when various tranches of the mortgages come due. CMOs are complex - kids, don't try this at home. Actually, given that the subprime meltdown was precipitated by these beasts, maybe it would have been a good idea if the professionals hadn't tried it, either.

Collection Ratio



Definition
You'd think after the IRS snagged Al Capone and however many other master criminals in the name of "tax evasion," people would realize dodging the tax man is futile. Unfortunately this isn't always the case. The collection ratio measures the amount of taxes a city or government is supposed to take in versus the money they actually collect.

Commingle



Definition
Like goes with like. Two legs good; four legs bad. Accounts of a given purpose must be kept separate from accounts with a different purpose.

Commissions



Definition
It's the lifeblood of stockbrokers. What gets commissioned and how it gets commissions is an R-rated story, however. See wrap account; Churning; Sell-side analyst. One key theme is that commission rates have come down. A lot more shares trade today versus 30 years ago, but commission rates are a fraction (like 0.5-3%) of what they were in 1980.

Commodities



Definition
Commodities, technically are things you find anywhere, can buy and sell easily and have low margins (but often high volumes) for the people who broker them. Commodities are things like copper and oil and sugar and coffee beans and evil lawyers (ha).

Commodities generally are very sensitive to global macro" incidents - i.e. a bomb in the Suez Canal likely restricting the export of oil from Saudi Arabia will send oil prices up a lot. A frost in Florida killing citrus will make frozen concentrated orange prices go up. The U.S. discontinuing the penny should crush copper prices because there would be lowered demand for copper (yeah, we're ignoring that pennies are mostly made from zinc, but you get the idea).

Commodities are also very sensitive to inflation. When the marketplace fears that prices are about to go up, companies, investors and other buyers tend to hoard the commodity, so supply is suddenly constrained and the price soars until, those inflation fears are "baked in" to the price - and then things plummet. The key idea is that it's a volatile mean nasty world out there. Hold on to your wallets.

Common Stock



Definition
Equity ownership in a corporation. Common shareholders are owners of the entity. As with owners of any business, they are the last to be paid if the company fails, but the attraction in owning shares in a company is the potentially unlimited upside.

Common Vs. Preferred Shares



Definition
The name generally gives it away. When something is common, it has the stench of the sweat of bricklayers, plumbers and people who actually work for a living, i.e., the commoners. They live at the bottom of the food chain. Yet, they are the most powerful force in structuring society. Common shareholders function the same way. They are the last to receive payment if a company defaults but if a company does extremely well, it is the common shareholders that make the fortune.

Preferred shares occupy a higher position on the corporate food chain. They are considered equity, but preferred shareholders stand in line before the commoners in a liquidation. Most preferred shares have a fixed dividend which the company cannot alter without the preferred shareholder's consent and they usually have the right to be paid in full on their dividends before the commoners are entitled to any payouts. In practice, preferred stock is almost always convertible into common stock at a given price. So, while preferred stock looks somewhat like a bond in that there is an obligation for the corporation to pay a fixed dividend on that stock, in non-convertible preferred, those pieces of paper are really more like debt in cross dressed clothing.

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Competitive Bid



Definition
When syndicate groups compete against one another to underwrite the IPO for a new company. They compete to offer the lowest or best bid.

Competitive Underwriting



Definition
See negotiated underwriting. The underwriter will submit a bid for a new issue to the issuer. The issuer selects and underwriter based on a combination of best price and contract terms.

Conduit Theory



Definition
If you try really, really hard, you conduit. Sorry, we couldn't resist. Conduit Theory relates to the tax treatment of an investment company - the basic idea is that if the vehicle passes through 90% or more of its net income to its shareholders, then it won't be taxed on its income; instead, the income (and losses, if any) will be attributed directly to the investors.

Constant Dollar Plan



Definition
A way of investing in mutual funds where the investor ponies up a constant sum each month (or quarter) that is used to purchase more shares of the fund.

Consumer Price Index



Definition
or CPI

A distant cousin of the shiny gold guy from Star Wars, CPI is an index, which tracks inflation. And see inflation. See it twice. It’s important. 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 gas and food are just too volatile and are seen to cloud the "real" inflation numbers.

Contingent Deferred Sales Charge



Definition
See B-Shares. A-, B- and C-share mutual funds have some kind of sales "load," or charge, tacked on to the NAV price. A-shares have a front-end load; you pay around 8% on top of the purchase price which goes to the selling broker. Aggravating, but it's over and done. B-shares, on the other hand, were marketed with the lure that there's potentially no load - but there's a catch (yes, campers, there's always a catch): You have to hold those shares for a minimum period. If you sell early, then the sales charge applies on the back end. That's the contingent deferred sales charge. It's computed on a sliding scale, so you pay more the earlier you are into the period, such as 7% in the first year, 6% in the second year, and so on. The SEC has really clamped down on these in recent years because most mutual fund investors hold shares for a period less than the CDSC period and the regulators thought that to be unfair and abusive. After the CDSC period has passed, B-shares just convert to being A-Shares - "no load", but there's no further sales charge.

Conversion Privilege



Definition
The privilege is about being able to "convert" your policy, which expires this month into a similar policy, which continues for 3 more years, or something like that. Conversion privilege is a big deal for people with dicey health issues as the policy can't be cancelled for health problem reasons (and premiums generally stay the same).

Conversion Ratio



Definition
A minister dips a lot of heads in a river. The number who actually adopt his believes relative to the total dunked is his conversion ratio. The term also refers to the number of shares a bond is "convertible into" - that is a $1,000 par value bond might convert into 100 shares. At ten bucks a share, the conversion is break-even-ish.

Conversion Rights



Definition
The right to convert. Refers to a bond converting into shares of equity, usually.

Convertible Bonds



Definition
We all wish we could have a convertible bond we could go cruising down the PCH with...oh wait, we meant a convertible and a blond. A convertible bond is a bond that can, at given times and prices, be changed into straight up equity. Like the bond is a Twinky and there's a yummy stock option cream hidden inside.

Convertible Stock



Definition
Refers to the notion that convertible preferred stock might convert into so many shares of common. So lets say you have par value $25,000 in a preferred stock. It converts into 1,000 shares of common. So if the common is above about 25 bucks, you'd want to convert. Hal E. Lujah.

COO



Definition
Chief Operating Officer

Cooling



Definition
There is a cooling period in high school. Some guys smoke. Some girls wear cheerleading outfits. There is also a cooling period after an offering memorandum is circulated. The law wants to protect hot buyers from getting too excited about the fine salesmanship of the snake oil men in suits.

Cooling-Off Period



Definition
Hot buyers need chillin' time. Legally, at least 20 days must pass after a company files a registration statement with the SEC to sell stock or bonds. The company can't advertise during that period - when the 20 days have passed and assuming the company (and its underwriters) have behaved themselves, the SEC will issue a "release" so that the securities can be sold to the public

Corporate Bonds



Definition
A bond backed by a corporations credit and/or assets.

Corporation



Definition
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.


Definition
A legal entity doing business for profit.


Definition
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.


Definition
A legal entity doing business for profit.

Corporation



Definition
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.


Definition
A legal entity doing business for profit.


Definition
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.


Definition
A legal entity doing business for profit.

Cost Basis



Definition
What'd it cost ya'? It matters because of the man who cometh (taxman, not iceman). You bought 1,000 shares of IBM at $100 and sold it 2 years later at $140 net of commissions. Great job. You made 40 grand. You get taxed on said 40 grand. But you wouldn't know it's 40 grand if you didn't know your cost basis of 100 grand. You laid out $100/share for 1000 shares. Even without the fancy calculus, that works out to a cost basis of $100,000.

Coterminous Debt



Definition
This is municipal debt which was incurred in connection with some asset that benefits more than one municipality's citizens and which is a joint obligation of more than one municipality. An example would be a public park with a border between two cities running through it, and which is used by citizens of both cities. (Imagine Minneapolis-St. Paul, except there's a park instead of the Mississippi River between them.) If they issued debt to pay for upkeep in the park, the debt would be coterminous in that it would be owed by the citizens of both cities.

Coupon



Definition
They're on the back of cereal boxes and today found at coupons.com en masse. You fight with a scissors to clip them out and mail them in - those who bother to make that effort save money. Coupons also apply to bonds. A normal vanilla bond pays its interest twice a year. A $500,000 , 8% coupon bond pays $20,000 twice a year.

Coupon Bond



Definition
A bond which pays a coupon or interest. See Zero Coupon which pays no coupon until the very end.

Covenants



Definition
Nuns hang out there. Oh, wait. That's different. A covenant is just a promise - usually a security is backed by a series of covenants or guarantees from the issuer.

Covered Call



Definition
See covered put, above. "Call" here is from the famous call option land. Covered calls relate to writing or selling a call option. That is, you are selling to someone the right to buy a stock from you at a given price by a certain deadline, aka, shorting a call. You can imagine that if you had sold a call on some hot internet stock, and it then went to the moon (up a lot), you would have gotten killed. Example: Yahoo came public at $22. For $3 a share you sold someone the right to buy the stock at $30 at some point in the next 8 months. The stock then goes to $200 five months later. They stretch out their open sweaty palm and say, "Okay, deliver unto me said shares." You then have to go out and buy them for $200. Each. Ouch.

Covered Options



Definition
Selling options where you have a sufficient position in the underlying security to shield you from adverse price movements. If you sell call options and have the underlying stock, you aren't going to be happy if the stock rises because you'll lose the stock, but at least you won't have to "cover" in the market at a higher price.

Covered Party



Definition
At Angelina and Brad's wedding, it rained. There was a big tent.... The term also refers to liability. Example: A couple is married. The husband buys and sells stocks on behalf of the money he and his wife have saved. His wife hears inside information about a big merger happening with her company, where she is CFO. The husband trades on this information and makes a bundle. Unfortunately there aren't co-ed prisons for this kind of thing. Since he was a covered party, the insider trading laws that applied to her, applied to him and then them collectively as well. So they both lose everything they had and date Bubba and Bubbina in prison for 5-10 with time off for good behavior.

Covered Put Writer



Definition
Writing is another common term for "selling." They mean the same thing. Writing a put is selling a put. The best way to visualize this is that for every buyer of a put option, there has to be another party that sells that put.

Let's walk through a transaction, but we'll start with a covered call because it is easier to understand: In a covered call trade, the trader buys shares, believing they will go up (duh) and then also sells a call against them. That is, she buys IBM at $130 a share and then for $4 a share, sells call options with a $150 strike which expire in 4 months. If IBM rockets upwards to $180 in the time period, the trader makes $20 a share from the shares that went from $130 to $150 - and also makes $4 from the call option she sold for a grand total of $24 in gains. But if she had just owned the stock and played golf the whole time, she would have made $50 in just owning the stock, nothing fancy.

In a covered put, things happen in reverse. She shorts IBM at $130, thinking it's going down like a horny teenager on a Saturday night. But she is nervous so she sells put options to go along with this trade. Here, she might sell puts with a strike price of $110 strike for $4, which expire in 4 months. That is, the buyer of the put has the right to "put," or sell, IBM back to our friendly female trader here at $110 a share. So if IBM tanks amid fraudulent accounting rumors and goes to $80 a share, our trader makes $20 a share from the decline from $130 to $110. And then she pockets another $4 from the put premium she sold. At $80, her IBM shares will be put to her but she will be "covered" because she has the shares that she shorted in the first place. That is, the risk is less. And the reward is less too: If she'd just shorted IBM and played golf, she would have made $50 from IBM's decline from $130 to $80 in that time period.

Crash Of 1929



Definition
It was bad. So sad. Made yer grampies mad. They felt had. There was only a Pretty Good Depression beforehand; the Crash fostered The Great Depression, a sizeable upgrade.

Credit Agreement



Definition
The legal handshake that occurs between the borrower and the lender.

Crossed Market



Definition
A situation where the bid price is higher than the ask price. In other words, somebody is willing to pay more for a stock than the price at which the seller is willing to part with it. Crossed markets are almost always due to input errors on the by either the bidder or the seller, but they can create some excitement until the error is resolved.

CTS



Definition
Consolidated Tape System

Cumulative Preferred Stock



Definition
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. In theory, the company could stiff the preferred holders forever, but eventually the common shareholders will revolt and throw the bastards out of those cushy jobs. Self-preservation usually trumps continued jerk-dom.

Cumulative Voting



Definition
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 put all of the votes behind just one director. That is, if you have 500 shares of XYZ Corp., and there are 5 directors up for election, you have 2,500 votes to allocate and you can put them all behind your cousin Billy.

Current Asset



Definition
An asset that will be used (or converted to cash) within one year.

Current Liability



Definition
Debt owed within the one year. Not about risky raisins. Or Glenn Close for those of you who remember.

Current Ratio



Definition
"Current Assets/Current Liabilities This is just a measure of wut we got against wut we owe, based on current (short-term) assets and liabilities. Accountants divide assets and liabilities into short and long term sections. It’s a long story as to why they do this and for this discussion it doesn’t really matter. These are both balance sheet items. 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 says a lot about our cash liquidity.

But there’s another thing to look at here—what if our current assets were $100 mil and current liabilities $30 mil? Same ratio but much, much bigger numbers. Imagine the pressure on cash for such a tiny company. What if most of our sales are on credit and something happens so that we can’t collect bills for a while. We could find ourselves in a 1-3 ratio fast with a lot of money involved. This high volume CA/CL situation happens in commodity types of businesses and in banks. So in being a good banker you not only have to look at the ratio itself but the relative size of the gradients relative to what your competitors are doing.

Current Yield



Definition
Think of it as "market yield": 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%

CUSIP Number



Definition
It's like the bar code on a security. You need long hairy numbers to be assigned to each security to prevent confusion. Many stocks have multiple flavors - some have higher voting rights or other non-economic interests attached to them. Others have ADRs or non-US elements. For many bonds, there are a dozen or more series, many of which have barely discernable differences in terms and having a unique CUSIP allows for the securities to be individually identified so when you thought you were buying a cow, you actually got a cow and not a bunch of magic beans.

Custodial Account



Definition
Richie Rich can't place his own trades but his custodian can. If Richie is either a minor or mentally incapable of doing the deed, a custodian has to give the green light to execute. Custody isn't a flavor comparison to yellow pudding.

Customer Statement



Definition
Well, they should say, "I love my broker!" But technically a customer statement is a piece of paper (electronic or dead tree) which simply outlines what the customer did during the month: the trades they made, what their account is now worth, what they currently own, etc. The SEC requires quarterly notification but most brokerages send customer statements monthly - sort of a marketing thing.

D&A



Definition
Depreciation and Amortization. A method of valuing assets usually in decline.

Dated Date



Definition
The date at which interest begins to accrue on a fixed-income security. Investors who purchase a fixed-income security between interest payment dates must also pay the seller or issuer any interest that has accrued from the dated date to the purchase date, or settlement date, in addition to the face value.

If the fixed-income security's date of issuance is the same as the dated date, the dated date is also the issue date.

Day Order



Definition
A security order good for only the day in which it was placed.

Dead Cat Bounce



Definition
The market has fallen from 5,000 to 1,200. Now it's at 1,400 and you think it's headed to below 1,000. That uplift of 200 points from 1,200 to 1,400 is the "dead cat bounce" - and with macabre tones comes from the notion of dropping a cat off of a high building. It hits the cement - is dead - and bounced a bit before a wet thud. Yeah, gross. (PETA: No cats were harmed in the production of this question.)

Dead Money



Definition
Slang expression for funds that aren't earning interest, or investments that have little chance of gaining in value.

Debenture



Definition
A bond-like instrument backed only by the promise of the issuer that it will pay back the dough.

Debt Per Capita



Definition
In a given country, it is a ratio for the amount of debt per person in that country. That is, Greece has a lot. Dubai has a little.

Debt Service



Definition
It's the interest you have to pay to "service" a debt.

Debt Service Ratio



Definition
This ratio measures cash flow to total interest payments owed. A company could be bringing in tons of cash, but if it's leveraged up to its eyeballs, it won't have a lot of wiggle room.

Debt-to-EBITDA



Definition
Debt-to-EBITDA is a ratio used by bankers and investors as one key data point in determining how leveraged a company is - or rather, to determine how easy it will likely be for the company to pay back the debt it has taken out. EBITDA is basically a proxy for the company's cash flow and debt of more than 3 or 4 times cash flow is considered very high on most planets.

Debt-to-Equity Ratio



Definition
A very closely-watched metric by analysts. The percentage calculated by dividing a company's debt by its owners' equity. In general, a high D/E ratio is considered dangerous, because the company has borrowed a lot and this increases its chances of default and ultimate bankruptcy.

Deferred Annuity



Definition
You want to wait until you collect your money? Really? Okay, well, then this is the annuity for you. You store your money in the piggy bank, deferring gratification for a certain period of time, at which point you can break that piggy bank open and retrieve your annuity all at once, or tip it upside down and shake your annuity out in a dribble of coins over a period of time.

Deferred Interest



Definition
While she wanted to date him, she preferred to play "hard to get" and deferred interest when he asked her to join him on the water slide ride. Also refers to a bond where interest payments are deferred for some period of time. The deferred interest accrues its own interest, so the net payments to the bondholders will be the same. Commonly used by start-ups as a way to conserve cash.

Deferred Load



Definition
When mutual funds began selling, the managers paid commission to fund brokers in the form of a load, which customers paid up front when they bought the fund. That is, they might invest $2,000 and would have paid a 5% commission so that after day one, they had lost $100 on their investment, which now showed up as $1,900 on the books. There was an additional headwind effect here in that they had a smaller base from which to compound against over time.

To mitigate the weight of this load, funds began to allow customers to defer when they paid their commissions. For some funds, it was when they redeemed. For others it was after some set period of time or when assets had reached a certain level, etc. The key idea for the 7 is that the commission in a deferred load mutual fund transaction, is paid simply "later".

Defined Benefit Plans



Definition
A retirement plan where the employer guarantees some form of retirement plan. The participant does not direct or control investments, so the employer bears all responsibility if the pension assets underperform.

Defined Contribution Plans



Definition
Retirement plans that are primarily funded through employee salary deferrals. The employee (also called the "participant") is offered a choice of investments, mostly in the form of mutual funds. The participant is responsible for the performance of the account - the employer bears no responsibility for a participant's investment choices.

Deflation



Definition
The opposite of inflation. That's it. Okay, we're just teasing. When your purchasing power is increasing, that's a good sign the currency is deflating. That means less money buys you more stuff.

Delisting



Definition
Taking your company public is commonly also referred to as "listing it". It gets placed on the long list of already public companies. Un-doing that is delisting. That is, the company is no longer public either because it went bankrupt, violated minimum pricing covenants on an exchange like NASDAQ or it got bought.

Delivery Vs. Payment



Definition
(DVP) A settlement convention where the seller of stock is not required to release it to the buyer until the buyer has paid for it. Payment and delivery occur simultaneously.

Depletion Allowance



Definition
When miners mine, they deplete the land of its minerals. At some point, those once lovin' minerals will be gone and we'll have to look elsewhere. We have to allow for that eventual demise from an accounting perspective.

Depreciate



Definition
The process of assigning the decline in value of a license or product over time. You buy a computer for $3600. The law says that you MUST depreciate it $100 a month for 36 months until, on your books, it is valued at zero. The thinking is that at the end of the period then you "know" you have to buy another computer. Many computers last more than 3 years though so the numbers get all messed up.

Depression



Definition
When you peoples start making a lot of money, it'll happen right around April 15th each year. Economically 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.

Diagonal Spread



Definition
When the strikes (vertical) and the expiration dates (horizontal) are different, the spread is diagonal (both directions at once!). In other words, the dates and the prices on the spread are different.

Dilution



Definition
If you pour a bunch of milk into black coffee, you dilute the blackness - it becomes brownish with gloppy things in it. Same deal with stocks. If a company has 50 million shares outstanding and grants 10 million options with a low strike price for this example, it has diluted itself about 20% because the options will be exercised and - presto! - the company now has 60 million shares outstanding. Early stage start-up companies usually have stock option plans so most "suffer" dilution as employees get paid low salaries on the promise of wampum from equity appreciation.

Direct Participation Programs



Definition
(DPPs) More commonly known as limited partnerships, these entities raise money from investors called limited partners and then invest those funds in ventures involving real estate, oil and gas exploration, or equipment leasing. Or sometimes all of the above, although that's not very common. These tend to be high-risk, high-reward ventures with a long time horizon. They're usually available only to very wealthy individuals and institutional investors.

Direct Public Offering



Definition
An alternative to an underwritten issue, where the company sells its shares directly to its own customers, suppliers, employees and others whom are closely affiliated with the company. These are less expensive than underwritten offerings but tend to be used only by large, established companies.

Discount Bond



Definition
Disney issues a bond with a 7% coupon. Then one day nobody watches sports anymore and ESPN's ratings go to zero. Suddenly Disney's ability to repay its bonds is suspect. There is credit risk. The bonds "trade down" on the open marketplace or at a discount of just 90 cents on the dollar. The new yield on them is .07 / .9 = 7.77%. These are now discount bonds because they trade "at a discount" to their par value of 100 cents on the dollar.

Discount Cash Flow



Definition
A dollar today is worth more than a dollar tomorrow. Money in the future carries a discounted value from what money is worth today. How much it is discounted is called the discount rate and DCF in particular refers to the way many companies are valued on Wall Street. That is, when you buy shares of Facebook at the IPO, there isn't enough cash flow today to justify a very high valuation. But the expectation is that in the future the company will generate gobs of cash - there is risk that the company won't generate the cash and then it'll come in the future so you have to discount back the value of those streams of cashola.

Discount Rate



Definition
Investments carry risk. How MUCH risk they carry is where the discount rate comes in. The concept gets mapped to the concept of Present Value. Just read it.

Discretion



Definition
If you have clients, the presumption is that you know how to keep your mouth shut. You don't talk about how much money they have at Sheila's wedding. You don't blog your client list. You don't feather your own cap. Discretion: It's the better form of valor.

Discretion also means that your client has given you the right to decide for him what to buy and sell, and at what price. It's a big responsibility. Clients do sue if you're wrong—they claim their losses were caused by your abuse of discretion. "Sometimes it works."

Discretionary Account



Definition
An account where the fiduciary or manager of that account can do whatever she wants with it.

Disintermediation



Definition
When you really criticize intermediation.

Diversification



Definition
Gravity causes baskets to fall. And when they fall, the stuff in there breaks. So why would you put all of your breakable stuff in just one basket? Diversification mitigates risk - if one stock crashes, you still have a few dozen more that are hanging in. And diversification means more than just having a range of stocks. It can push you to have a range of investment categories - like bonds, real estate, commodities, non-U.S. assets, etc. (A wide range of shoes stored in a closet does not count as diversification.)

Diversified Mutual Fund



Definition
A continuation of the concept of diversification. Mutual funds that are diversified will hold a lot of different assets. If it's a stock fund, there will be a lot of names, but usually the prospectus will provide that the mutual fund can hold a percentage of stuff besides stocks. Usually this means bonds.

Dividend



Definition
The “thrown off” value from common equity. It’s not the same as interest on a bond, which is a fixed percentage and non-discretionary. Dividends are discretionary and the company must decide from quarter to quarter whether or not pay one. There are a lot of reasons why companies want to be consistent in their dividend policies, but just know that a dividend on common stock is not a legal requirement. The middle of the fairway definition of a dividend is rooted in equity investments in stocks. Heinz ketchup, ticker: HNZ, pays a $1.92 dividend per year. It is a roughly $50 stock. It’s “dividend yield” is $1.92 / $50 which is 3.84%.

Dividend Payout



Definition
A company has $100 million in profits. It pays dividends of $65 million. Its payout is $65 million. It's payout ratio is 65%.

Do Not Reduce



Definition
Normally a limit order will be adjusted downward to account for any dividends paid until the limit price is reached. Do Not Reduce means that the limit price is not adjusted for dividends.

Dollar Cost Averaging



Definition
This is a strategy for mutual fund investing. You invest a fixed dollar amount each month in the fund. The theory behind this is that if you buy when the price is declining, you will buy more shares each period, so that when the rebound happens, your overall investment will be worth more. Of course, it takes a big leap of faith to keep buying in the face of persistent declines. Your broker will tell you that "it's a GREAT investment" but if it's so great, why is it falling? Is it a good deal for you, or for the broker? You make the call.

Domestic Equity Funds



Definition
Domestic Equity Funds are index, mutual or other types of typically long only funds which invest in U.S. domestic stocks (not bonds). That is, a portfolio for a domestic equity find might have a million shares of Dow Chemical, 2 million shares of eBay, 500,000 shares of Ford, etc.

Don't Know Notice



Definition
(DK) Notice Sometimes a purchase of securities has no corresponding sale. In that case, the clearinghouse sends a DK notice to the purchaser's broker indicating that it can't match up the transactions. This can happen due to inaccurate trade symbols, price per share or quantity transacted.

Double Barreled



Definition
This is as municipal bond term. A double-barreled muni bond is one that is backed both by specific revenues, like bridge tolls, as well as the issuer's tax receipts, which is a general obligation bond.

Dow Theory



Definition
Based on editorials written by one of the founders of the Down Jones Industrial Average (guess which one, Dow or Jones? Ha ha, it was Charles Dow) . The theory is all about analyzing trends and averages in the market.

Due Dilligence



Definition
Studyin' up on a company's books and business ties to be sure that the thoroughbred is really a thoroughbred and not a donkey.

Dutch Auction



Definition
Uh, an auction held in Amsterdam? Well, maybe. But in the land of The Seven, it's a public offering where the offering price is only determined after reviewing all bids and determining the highest price at which the total offering can be sold. In a Dutch Auction, investors place bids for the amounts that they are willing to buy in terms of both quantity and price.

DVP



Definition
This stands for "Delivery v. Payment." If you're selling stock, then you won't be keen on shipping it to the buyer until you've received the buyer's cold, hard cash. At the same time, the buyer ain't likely to part with the cash until it has the stock. A dilemma, indeed. It's resolved through the use of a clearing agent, who functions as the middleman and ensures that both parties get what they bargained for.

Earned Income



Definition
As opposed to income from ill-gotten-gains! This is just another way of saying "the company's earnings".

Eastern Account



Definition
An eastern account requires that each member is responsible for their own accounts, as well as the accounts of all other members.

EBITDA



Definition
That is, Earnings Before Interest Taxes Depreciation and Amortization. This seems like a 5-eyeballed purple fish out of a Simpsons' 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 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.

ECN



Definition
Electronic Communication Network. An ECN is a trading platform where computers match buyers and sellers of securities "off market" - that is, not as part of the registered group trading on the NYSE.

Efficient Market Theory



Definition
The theory says that you can't beat Mr. Market, that markets are in fact efficient and that new information pukes out into the marketplace like a burp in a small room. Everybody gets wind of it and digests it and reacts. The consequence of the efficient market theory is that all information is already reflected in the stock price, so you can't earn more than the market average returns from analysis or past price performance. In the "strong form" model, even insider information is said to already be reflected in the market price. Evidence, however, suggests that there is some validity that in the "strong form" markets are not efficient as insiders can (and do) earn higher-than-average returns from trading their companies' stock.

Emerging Market



Definition
China was once viewed as an emerging market. Now that it owns a huge chunk of our debt, we can all agree that it has emerged. The notion of an emerging market is one that carries political and economic risk - but great reward potential in that its intrinsic economy is growing at a rapid rate.

Employee Stock Options



Definition
ESOP - stock options granted to employees to entice them to work for what is usually below market levels of cash salary.

Enterprise Value



Definition
The value of the whole enchilada…er…um…enterprise. That is, "what would it take to replace this thing right now?" Consider your home because that's easier to tackle intellectually as an enterprise. Your parents bought it last week and just paid, say $200,000 as the down payment and then took out a loan for $600,000. The equity value of the home is $200,000 but the enterprise value is $800,000—that's what it would cost to replace that home, more or less. Same applies to companies with debt (or cash).

Entity



Definition
Thing. That's what it means. Really.

EPS



Definition
Earnings Per Share. Earnings or Net Income are the famous "bottom line". Insert ill-fitting panties joke here. To get the number, you take the total earnings of the company and divided it by the number of shares outstanding.

Equipment Trust Certificates



Definition
Basically a bond backed by equipment. See Asset Backed. See those 40 tractors. On eBay we think they'd fetch a hundred grand. Can you loan us fift grand against them for 8% a year?

Equity



Definition
Ownership. Equity is about stocks and owning a sliver of the big fat pie called Corporate America. This is in apposition to debt, which is a loan to Corporate America, usually done in the form of bonds.

Equity Capitalization



Definition
It's a hybrid of the ubiquitous "market cap" term. Equity cap usually refers what investors are paying for a company's earnings power - i.e. 'ignore the cash on the balance sheet' calculation.

Equity Funds



Definition
Equity Funds are mutual or index funds comprising mostly stocks. Equity funds come in a range of flavors where various investment themes are stressed, e.g. "income equity funds", "growth equity funds", "fun equity funds", and so on.

Equity Income Fund



Definition
See Equity Funds. A form of equity fund which stresses income usually coming to shareholders in the form of dividends paid by relatively mature companies. A typical equity income fund holding might be Heinz or AT&T or Pfizer which are all well-developed companies growing at relatively slow rates but who have lots of "excess" cash to give back to investors.

Equity Market



Definition
It's just a market where equities are traded like marbles, Pez dispensers or livers on eBay. NASDAQ is an equity market. So is the New York Stock Exchange.

Equity Options



Definition
See options. "Equity options" refers to options where the underlying security is equity share of stock, rather than a bond.

ERISA



Definition
Employee Retirement Security Income Act Federal legislation that strives to protect retirement accounts through rules that govern appropriate investments, segregation of plan assets, etc.

Escrow



Definition
Something held by an independent third party on behalf of the buyer and seller in a transaction. Securities and cash are often held in escrow pending confirmation by the escrow agent (the guy who's holding this stuff) that both sides have fulfilled their obligations; the agent then releases the assets to the respective parties.

ETF - Exchange Traded Fund



Definition
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 (more poignant lately), 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? Is that reflective of a NASDAQ portfolio? (AAPL is currently about 5% of the NASDAQ composite). It depends on the original documentation of the fund and the fund manager's job is to rebalance" over time.

ETFs (exchange-traded funds) don't do this. They are a set basket of stocks, which just live on more or less indefinitely, drifting away from their original indices as various stocks perform differently from the market and weightings change - sometimes dramatically over time.

European Style



Definition
Slow dinners. Fancy loafers. Disgust over the acoustics of the room. Cigarettes. Unshaved pits.

European Style" also refers to options that can only be exercised on the date that they expire. See "American Style" (as in Love). American style options can be exercised at any time until they expire.

Ex-Date



Definition
Sort of like JDate, only with former relationships being the entire dating population.Ex-Date also refers to the deadline for when an investor is entitled to receive the declared dividend on a given stock. You have to own the stock by a certain date, which the company declares in advance. To own it, you have to account for the settlement process, and in the U.S., settlement occurs two days after the trade. If you buy after the ex-dividend date, you won't receive the dividend; the seller will. If the record date is October 15, you have to actually buy the stock on or before October 13. If you don't, you won't "own" the stock on October 15 Also known as the "ex-dividend" date.

Ex-Rights



Definition
Without rights. Warrants are often attached to bonds as a little pot-sweetener to entire otherwise skittish bond investors. The warrants are separable from the bond and can be sold on their own. A bond trading "ex-rights" means that if you buy it, you don't get the warrants; either the seller is keeping them or has already sold them.

Exercise Price



Definition
It's not about how much you pay to get in to your gym. It's about the strike price of the stock option you own. Let's say you joined GerbilDating.com in its infancy. You were granted 100,000 options at a $2 strike price. It's now publicly traded on NASDAQ. The stock just hit $40. You can exercise your options, paying $2 to GerbilDating.com to buy out that share of stock, and then sell it for $40 through your broker to net $38 in gain per share.

Exercise Settlement Date



Definition
ESD refers to the date at which an option has been converted into equity (exercised)—shares of stock—and that conversion trade is now being settled.

Expense Ratio



Definition
The expense ratio of a fund is a fraction. In the numerator are the fees charged to the investors and in the denominator are the total assets under management. A high expense ratio means that the investor is being charged a lot for services rendered - so the performance better be really good.

Expiration Dates



Definition
Options expire the 3rd Friday of each month. Those dates are the expiration dates. Like the numbers on the top rung of milk cartons and low fat cottage cheese.

Extended Trading



Definition
When the world was older and slower, trading during "normal hours" went from 9:30 until 4:00 New York time. Today, the world's markets drink lots of Red Bull. "Extended hours" means in theory 24/7. In practice, most after-hours trading dries up around 8PM and most pre-market trading begins around 5:30 A.M. Money never sleeps.

Face Value



Definition
What's your face worth? Guess it depends on your face... It also refers to the numbers on the front of a bond or other debt-like certificate.

FACs



Definition
Bonds on sale! In this case a company guarantees to pay whatever is on the face of the bond - yep, the amount. Catchy.

Family Offices



Definition
The super wealthy set up their own family office to manage their money. They can deduct a wider range of expenses and have other tax and control benefits.

Fast Market Rule



Definition
Fast markets is a term used when a market is exhibiting both heavy trading volume and high volatility. In fast markets, some rules that govern broker behavior, such as firm quotes, can be relaxed.

Fast Tape



Definition
When prices are moving quickly in heavy trading, the ticker can give a range of recent trading prices rather than discrete prices. This usually happens in futures markets that utilize trading pits for transactions.

Feasibility Study



Definition
Can we actually build the buidling over this lake bed or will the driveway kill the Republican salamanders? The answer comes from a feasability study.

Federal Funds Rate



Definition
The rate charged by the Fed to its best bank borrowers.

Federal Reserve Board



Definition
Our nation’s central bank. Acts as a regulator of money supply and is a big driver of interest rates. It was created with three mandates: (1) control inflation; (2) enable full employment; and (3) promote stability within the banking system. It also serves as a lender of last resort to banks.

Federal Reserve System



Definition
The United States is divided into different districts, and there is a Federal Reserve Bank branch located within each district. Collectively, this is the Federal Reserve System. Each district has a governor, and the governors meet from time to time so that the Fed Chairman can tell them how they should vote on interest rates. No? You mean, these governors actually possess independent thought? Well, damn! It sure doesn’t seem that way.

FFCB



Definition
First Financial BanCorp

FHLMC



Definition
Federal Home Loan Mortgage Corp, aka, Freddie Mac.

Fiduciary



Definition
The one financially responsible for oversight.

FIFO



Definition
FIFO = First in First Out. It is an accounting term which refers to the method of accounting for inventory. Let's say you live in a high inflation time and you have stocked yacht bolts (they last forever) in your warehouse. The bolts you made 10 years ago cost $2 each; the 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.

Financial Advisor



Definition
Another term for registered representative. A little bit of marketing hype, because "financial advisor" has a more refined image than "stockbroker." In reality, most brokers don't have additional qualifications that would make them true financial advisors.

Financial Planner



Definition
A financial planner is someone who advises individuals about their overall financial situation. Planners can work on a "fee only" basis, where they do not recommend any specific financial product, or they can offer general advice in conjunction with a sales effort that revolves around different classes of products - stocks, bonds, mutual funds, etc.

FINRA



Definition
So. Okay. You should really know who these people are, as they are the ones putting you through the hell of studying right now. But it's the Financial Industry Regulatory Authority.

Firm Commitment



Definition
The Underwriters are making a firm commitment to the IPO by agreeing that they'll be on the hook for any unsold shares.

Firm Quote



Definition
A dealer is asked for a price upon which she will transact to trade 100,000 shares of XYZ, makers of zipper examiners for the masses. The dealer will give a price at which it will buy, and a slightly higher price at which it will sell. This is the "firm price" so if the other party says "I buy," then the dealer has to sell at the quoted price. Note that firm prices are only for 1 round lot of 100 shares. In this instance, a trade this large would involve some negotiation on the price.

Fixed Annuity



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

Fixed Assets



Definition
These weren't broken at one time. Rather, "fixed assets" refers to assets that are "hard items" like property, plant and equipment. That is, these are assets that the company paid for in cash (99.999% of the time) and now carry an asset value on the company's balance sheet. These are also considered "non-current" assets as they aren't expiring soon.

Fixed Dividend



Definition
Was it broken? The dividend is set or glued or fixed. Preferred stocks generally have fixed dividends.

Floor



Definition
The lowest acceptable limit as established by the parties to a particular transaction. In an underwriting, the floor is the lowest acceptable IPO price. In other contexts it could refer to the lowest interest rate that a party will pay.

Floor Trader



Definition
This is not someone who sells tile at $5.30 and buys linoleum at $1.72. Rather, a floor trader is someone who general lives on the floor of the NYSE (there are other exchanges but the New York holds the most floor traders) and places buy and sell orders on behalf of clients of the trader's organization. A "two-dollar" broker is an independent floor trader.

FNMA



Definition
The Federal National Mortgage Association, aka Fannie Mae. Jointly owned by the government and the public, with the goal of encouraging banks to offer more mortgages. Because we always need to measure more things. No? That's not the kind of gauge they're talking about?

FOK



Definition
Fill or Kill. FOK is a way to place an order to trade securities. Either the broker/dealer has to fill the entire order - or kill it. JoeBob places an order for a thinly traded, illiquid stock - GumboNation, ticker: GBN. GBN only trades 300,000 shares a day and the order is for half a million - the broker has to deliver all 500,000 shares to JoeBob - or he gets no order to fill. He tries to fill and not get FOK'd. FOK usually comes with a time element: FOK by noon today.

Forward Pricing



Definition
This is an SEC regulation that requires open-end mutual fund companies to price all of their fund's shares at their next Net Asset Value. Investors who want to buy or sell shares in a fund cannot use a previous NAV as the price, so an investor who wants to sell shares on Tuesday morning cannot use Monday's closing NAV; she would have to wait until the NAV is calculated for Tuesday and the sale would transact at that price.

Forward Split



Definition
This occurs when a stock splits so that the shareholders own more shares after the split than before. A 2:1 split is an example of a forward split; your holdings double in size. Just remember that the company isn't worth any more after the split. For your shares to be worth more, the pie has to grow. All that a split does is cut the same pie into more slices.

Fourth Market, Instinet



Definition
There is one. It's called Instinet. Clever, with the whole "instant" riff too. Primarily established to enable transactions involving international parties.

Free Cash Flow



Definition
Companies generate earnings. But often a dollar of earnings is only 70 cents or less of free cash flow. Why? Because a lot of a company's profits have to be redeployed into capital expenditures like a new bottling plant or 30 year distribution licenses in Brazil.

Free Trade



Definition
Kinda like it sounds - unfettered trade. No taxes. No friction. Let the markets rule. Adam Smith, baby.

Freeriding



Definition
A no-no. Freeriding is where a customer buys securities and then sells them without paying for the original purchase. It also refers to a syndicate member withholding some of a new issue and sells it later for a higher price. Both activities are illegal. Engage in them and you could win a 5-year date with Bubba.

Front End Load



Definition
See A-shares and deferred load. The term applies to mutual funds - buyers of funds pay their commissions up front, hence the load or weight on the investment return happens at the beginning.

Front Running



Definition
Front running is a really mean thing to do. But it's often such a lucrative practice that it is a constant problem for banks and money managers to deal with. Here's the problem: Giant Mutual Fund X wants to sell 50 million shares of Exxon. Their trusted Giant Broker Y is happy to handle the order. In a fair world, Giant Broker Y would solicit bids for blocks of shares ideally small enough so as not to move the market" or bring the price of the stock down more than a dime or two in the process.

But what if Giant Broker Y has its own funds, which it manages for itself on behalf of the partners of its firm? And what if Giant Broker Y could make $2 a share on 50 million shares by using options in a transaction which it executes ahead of Giant Mutual Fund X's order.

As with many things in life, the problem is the money. If "all they took" was a commission for being an agent on behalf of Giant Mutual Fund X they might make 5 cents a share or $2.5 million. Hmm... $100 million vs. $2.5 million... How much is a trader's soul worth?

Full Faith And Credit



Definition
Nowhere is this term defined, but everyone knows what it means.

It's like the instruction in the Talmud that after the wedding ceremony, the bride and groom shall "retire." Nobody asks what "retire" means; everyone knows what it means.Full faith and credit is the United States' unconditional guarantee to pay all interest and principal on every bond that it issues. It can make this guarantee because it can crank up the printing presses to Warp Factor 8 and literally print money to pay everybody back. Note that there's no guarantee that the money would actually be worth anything; you're only assured that you'll get pieces of paper in full payment of the obligation.

Full-Service Broker



Definition
A full-service broker does "everything", that is they don't have one niche like currency trading or muni bonds that they really only sell. A full service broker typically offers all financial instruments, including options. They usually are paid through commissions, which tend to be higher than brokers who just exist to fill orders, so their long-term success can also depend on their ability to offer tea and sympathy when their clients' investments head south. Some also dispense back rubs on bad market days to their bestest clients.

Fully Bought Deal/Bought Deal



Definition
When an investment bank takes a company public, they commit firm to buy all the shares of that IPO (a nanosecond later, they turn around and flip them to cardiologists in the mid-west who all want to buy 100 shares of whatever.com is hot.)

Fully Registered Bonds



Definition
There was a time (not from Les Mis) when bonds traded almost like cash. You could go to a bank window and buy a bond with cash and the teller gave you the bond and a book of coupons, which you clipped and mailed snail-mail in to the corporation who then sent you a check, which represented the interest payment for that period. And then things changed. Bad dudes like Al Qaeda started to take advantage of this anonymity.

Today, bonds are sold "registered". That is, the U.S. Government wants to know who is buying them. It makes recordkeeping a lot more burdensome, but now if you buy any security in the U.S., there will be a paper trail and we can track who bought it and when. Yes, we're watching you. Be afraid. Be very afraid.

Funded Debt



Definition
When bonds aren't due for 5 years or more.

GDP



Definition
A widely cited economic indicator and measurement of productivity. The GDP measures the total market value of all goods and service produced within a country (by citizens and foreign residents) during a specified period. In comparison, the Gross National Product measures the total market values of all goods and services produced by a nation’s citizens regardless of where they live.

General Obligation Bond



Definition
A municipal bond where the interest payments and principal repayment are backed by the full faith and credit of the issuing municipality. "Full faith and credit" refers to the municipality's ability to assess and collect taxes that service the debt.

General Partner



Definition
In a DPP or limited partnership, the general partner makes all the operating decisions. Not because he necessarily WANTS to (although it's likely he does), but because it's legally required that he do so. General partners will have some financial interest in the limited partnership, but a lot of their compensation is based on their management and investment responsibilities. General partners also have unlimited liability, in contrast to limited partners whose liability is limited to the amount invested.

Gift Tax



Definition
Yes, there is actually a tax on gifts. Any tea left in Boston Harbor?

GNMA



Definition
Government National Mortgage Association, aka, Ginne Mae. Likes to go on picnics in the country with Freddie Mac and Fannie Mae. But unlike the other two, Ginnie Mae focuses on making housing more affordable.

Good Delivery



Definition
If a security that is traded on an exchange meets the requirements to permit it to be transferred from seller to buyer, then the transfer is said to be of good delivery." For example, if a share of stock is restricted so that it cannot be transferred, then "good delivery" of this share cannot be realized."

Greenshoe Option



Definition
A provision in an underwriting agreement that allows underwriters to sell an additional amount of shares if demand for the issue is higher than expected. The additional amount typically is 15% above the original allotment.

Gross Margin



Definition
(Revenue - Cost of Goods Sold) ÷ Revenue

Gross Profit Ratio



Definition
The ratio obtained from first calculating the difference between Sales and Cost of Goods Sold (the "gross profit") and then dividing by Sales.

Growth And Income Fund



Definition
Funds come in many flavors, more or less whatever flavor can sell. So how about putting together a basket of growth funds - Coca Cola, Disney, Harley Davidson - mixed with a bunch of bonds and/or high yielding equities like AT&T, Pfizer, Heinz Ketchup, etc.? You get growth. You get income. "You get the best of both worlds." - Hannah Montana, 2008.

Growth Company



Definition
A growth company... grows. There are shrinkage companies, think: Buggy whip makers after cars were invented (and this doesn't include the Castro District of San Francisco or The Combat Zone in Boston). A core element of growth companies is that they take money that they would normally give back to shareholders in the form of dividends and instead spend it on inventing and developing new products, line extensions, acquisitions and other ways of expanding their footprint or pricing power.

Growth Fund



Definition
See growth investor. A Growth Fund is just an agglomeration of a bunch of growth stocks. Or at least what the manager who put the fund together perceived as being growth stocks. AOL was a growth stock for a decade. A lot of people thought it was a growth stock in 1999. But then it turned out that it was a shrinkage stock. Who knew?

GTC



Definition
Good (Un)Til Cancelled. When a client places an order to buy or sell a security, they set limits around the order, either with a given price or a given minimum amount or something else. There must be a time axis placed on a good order as well, e.g., "this order is binding as long as you fill it by the end of the day; or the end of the month; or until I call you and cancel it."

Hedge Fund



Definition

High Octane Stock



Definition
A volatile stock but one that is perceived to generally be very "growthy", hence the octane in the gas tank.

High Yield



Definition
This term refers to bonds, which pay a high level of interest - usually because they have to. That is, they are considered relatively risky. 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.

Holder



Definition
The holder of stock options is the owner of them.

Holding Period



Definition
Right after sex. For most couples, it's about three minutes; less clingy people want it to be two. As the term refers to tax treatment, if a security is held a year or more, it usually gets long term gain tax treatment which is a lower rate by a lot, usually, than shorter term holds which are treated as ordinary income.

Hurdle Rate



Definition
In the Olympic finals, it will be fast. On Wall Street, the hurdle rate refers to a minimum per cent return on investment that an opportunity must surpass in order to get funded. That is, "we think this building will cost $100 million all in and in 7 years we'll sell it for $200 million. Our cost of capital is 5% and our hurdle rate is 7%; in this case the investment would return 10% so it passes our hurdle rate. Let's do it, baby."

Hypothecate



Definition
To pledge. Perchance to guarantee. When you want to borrow (margin), you need collateral. Hypothecate means that the lender has an interest in the securities purchased with the borrowed funds, but does not actually take possession of that collateral.

Hypothecation Agreement



Definition
Really, a margin agreement. The borrower pledges the securities to the lender as collateral, but the securities stay in the borrower's account until the borrower defaults. If that happens, the lender can swoop in and grab the collateral.

Immediate Annuity



Definition
An immediate annuity is a twisted version of a life insurance policy. In a typical life insurance plan, say it's term life, you pay $75 a month "forever" and when you die, your wife and the pool boy she later marries get a million dollar check. In an immediate annuity, you write a big check to the insurer up front who then pays you in partial payments over time. That is, the annuity "annuitizes" immediately. Yes.

Immediate Or Cancel Order



Definition
A type of order fulfill request to a brokerage. "Now or never."

In Street Name



Definition
Kermit. Bert. Ernie. Cookie Monster. When you purchase securities, you can have them registered in your name or in the name of your representative's institution. In other words, the shares can be formally registered to Merrill-Lynch, or Goldman Sachs, or whomever, to be held in an account designated for you. This allows Merrill to lend your stock to people who what to sell it short.

In The Money



Definition
See at-the-money. The basic idea is that if you have a stock option where immediate exercise results in a profit. That is, you own a $65 strike KO call option. KO is trading at $75. You are $10 "in the money".

Income Fund



Definition
See Equity Income Fund. Income funds are usually the domain of old people. Or just retired people. Or people scared of their own shadows... or at least scared of the market. An income fund's goal is to produce income. Most income funds are comprised mostly of bonds. They don't grow. They just produce cash, which gets distributed back to the shareholders. Sometimes income funds consist of dividend-paying stocks.

Income Statement



Definition
The infamous P&L or profit and loss statement. This shows a company's revenues, expenses and earnings. Note that these are prepared based on accounting principles, so the link between what they report and the company's "real" financial situation can be tenuous. See Enron, WorldCom, Adelphi and a host of other financial catastrophes.

Indenture



Definition
If you have fake teeth and they stay in your mouth, that's called an indenture.

An indenture is also the paperwork behind a loan. You are "indentured" to pay it off or you more or less lose the land with which it was secured.

Index



Definition
An index is a collection of securities that have similar characteristics. An index can be very broad, such as the Russell 3000 or an index comprised of Sri Lankan agricultural producers.

Index Fund



Definition
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, porn, 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):

Alcoa  American Express Boeing  Bank of America Caterpillar
Cisco Chevron EI DuPont Walt Disney General Electric
Home Depot Hewlett-Packard IBM Intel  Johnson & Johnson
JP Morgan Kraft Coca-Cola McDonald’s 3M Merck
Microsoft Pfizer Procter & Gamble AT&T  Travelers
United Technologies Verizon Wal-Mart Exxon Mobil

Index Funds - Why Buy?



Definition
Myth: People don't get rich in index funds but they don't usually go broke Truth: They do get rich and they do go broke. As with everything, it depends on how long you hold and when you have to sell. The secret to getting rich is often compounding and as well as NOT doing stupid things. If you have a reasonably long time horizon and you don't over-leverage yourself so that if things decline, your bank won't call and take all your money away, you can get very wealthy on index funds. Each year, your index fund on average grows 8%. If you reinvest that money, you can double roughly every 9 years.

Index funds tend to be more volatile than mutual funds, mainly because they do not hold cash. A typical mutual fund during any rocky climate will hold between 3 and 10% cash. In down markets this cushions the downside (and funds have to hold cash because every day people fire them and people hire them as money gets wired in and out and they need the buffer and on many days when cash is wired in, the fund managers can't find anything to buy selling at prices they like). But over time, markets go up - so holding cash is a drag on performance.

Index Options



Definition
Options on an index fund.

Individual Account



Definition
An account owned by one, individual person. For the introvert in you who wants to say, "No touch, mine!"

Inflation



Definition
When a dollar buys less today than it did yesterday, it has suffered the ill-effects of inflation.

Initial Margin



Definition
This is the amount that your broker will lend you to purchase securities. The minimum margin percentage is 50%, which is required by Regulation T, but brokers can impose higher margin. If a broker has a 60% margin policy, that means that you have to put up 60% of the purchase price; the broker will lend the balance.

Initial Public Offering



Definition
The first sale of stock by a private company to the public. The company will select an underwriter, which helps it determine the optimal sales price and when to sell.

Inside Information



Definition
See Approved List and Chinese Wall. Inside information is knowledge you have which lets you invest with an unfair advantage over everyone else who would normally be buying or selling related securities. You happen to be at Verizon having lunch with a buddy who did something bad in a former life and now works in the business development office. While he whines, you leave to take a wiz. While you are standing there streaming broadband, you see the CEO of Verizon who you recognize from the distinctive comb-over, stand and stream next to you in stereo. He has one hand on the steering wheel and the other is holding his iPhone (white). Its volume is turned up loudly. Nobody else is in the men's room there and you can hear the voice on the other end say, "Okay, it's confirmed. Goldman is committed now to helping you raise $20 billion to buy RIMM/Blackberry." The Verizon CEO says, "I'm very excited. Let's get this process started tomorrow."

Okay, that is inside information. You heard something you shouldn't have heard. You can't short VZ and you can't buy RIMM. Neither can any of the people you work with or friends or family. See covered party.

What do you do? You immediately finish the streaming, zip up, wash, using soap, and then phone your compliance lawyer and tell him to stop trading in either stock until you can come in and explain all of the facts and details to your compliance lawyers. Inside Information is not illegal to have - it's only illegal to use it as a basis to trade. And most newly minted investors believe that if they see Punxsutawney Phil's shadow when nobody else did, that they have inside information on solar power companies. So get smart - this vocab word is in our top ten most important to really grok.

Insider Trading And Securities Fraud Enforcement Act Of 1988



Definition
It has been illegal since the Securities and Exchange Act of 1934 (the '34 Act) to use inside information to trade on stocks. This 1988 legislation was basically Congress saying, "We're really serious about this." Provided some beefed-up penalties if you get caught. See Raj Rajnaratram.

Interest Coverage



Definition
This is a ratio that determines how easily a company can pay interest on its debt. The ratio is calculated as EBIT/Annual Interest Expense. The lower the ratio, the more questionable the ability to pay. Investors like this metric to be really high.

Interest Rate Options



Definition
Options on interest rate vehicles.

Internal Revenue Code



Definition
The Internal Revenue Code is the collection of income, transfer and excise tax laws currently in effect in the United States.

Internal Revenue Service



Definition
The IRS. The guys who bill you for your taxes.

Intrinsic Value (of An Option)



Definition
In the previous example, the intrinsic value of the KO call option is $10. There may be time left on the option before it expires so it is likely that the option would trade for more than its intrinsic value. There are two components to value in an option: intrinsic value and time value. Intrinsic value can never be less than zero. If the intrinsic value is zero, then any value in the option is strictly time value.

Introducing Broker



Definition
Some representatives don't actually handle client accounts. Instead, they know a lot of wealthy investors and will steer them to other brokers in exchange for a flat fee or a percentage of the commissions.

Inventory Turnover



Definition
This measures how often a company sells and replaces its inventory over a discrete time period (i.e., a year, a month, etc.). It is calculated by dividing a company's Cost of Goods Sold (COGS) by its Average Inventory. Average Inventory is calculated by adding its beginning inventory and ending inventory (as shown on the balance sheet) and dividing by 2.

Inverse Head-and-Shoulder-Chart



Definition
It's an upside down head and shoulders chart. Not the shampoo. But to visualize, think about the shampoo bottle being emptied by you. That should do it.

Investment Bankers



Definition
They sell used companies.

Investment Company Act Of 1940



Definition
This act regulates companies that create and distribute mutual funds to the public.

Investment Grade



Definition
This is really a grade, more or less. The USDA grades beef. Why shouldn't a bond rating agency grade bonds? Using the S&P system, all ratings at BBB and up are considered investment grade. For more information, see www.moodys.com.

Investment Objective



Definition
Well, we all wanna make money, right? Duh. But the question revolves around how we wanna make money. As a registered adviser, you have to know what your client is trying to accomplish, and this requires you to know something about the client's age, current life situation, attitude toward risk and other variables so that you can guide him to appropriate investments.

Investment Policy Statement



Definition
This is related to "know your customer." Once you determine the investment strategy, an investment policy statement is a written document that serves as your road map going forward.

Investment Style



Definition
What is the investment strategy? Growth? Income? Some blend of both? Value? The answers will indicate the investment style.

IRA



Definition
Retirement. That’s what the IRA is about and we don’t mean new Goodyear’s. Whether you realize it or not, your parents have probably paid into an IRA much or all of their working lives. They will live off of that nest egg (rather than off of you) until they are Gone. The IRA was set up to wean American workers away from the ‘retirement-to-grave’ pension structure that American corporations were so desperate to shed.

Irrational Exuberance



Definition
A well-publicized pithy maxim about the stock market in the late 1990s. Alan Greenspan was Chairman of the Fed in those heady days and he couldn't figure out why stocks traded at such high multiples relative to their earnings. Or maybe he was just torqued because his buddies were making the sick money and he wasn't. Anyway, he testified before Congress and uttered his deathless opinion that valuations were "irrational" as the exuberance of the market had pushed the S&P 500 to trade at all time high multiples of about 27x earnings. For a few days, the markets collapsed, but then exuberance again took hold and the markets continued their rise.

Issued Shares



Definition
Issued shares are the shares outstanding which represent ownership in the company who issued them.

Issuer



Definition
IBM wants to raise debt to buy a competitor. It issues debt - and it is the issuer who is on the hook to pay it back. Facebook wants to raise equity capital to further suck time from web users. Facebook sells shares of its stock on an IPO - it is the issuer of that stock.

Joint Account



Definition
Many states are legalizing the distribution. The magic dragon, he did puff, uh huh.

A joint account is also one that is held in more than one name and therefore has multiple owners.

Joint Tenants With Right Of Survivorship



Definition
Here's a hint: If you married someone significantly more attractive than you and twenty years younger, or someone who may or may not be on the "FBI's black widow" list, this may not be the brokerage account for you. In a JTWROS account (the acronym just flows off the tongue) the partner automatically gets everything in the account on the death of the other account-holder.

Junk Bond



Definition
See high yield bond. Junk is just a "sexy" term from the 1980s when bad hair was in.

Keogh Plan



Definition
A tax-deferred qualified retirement plan that is utilized by self-employed individuals.

Kickbacks



Definition
It's a flying butterfly karate move on a karate mat but on Wall Street and in corporate America, it's illegal. Specifically, a kickback is when a buyer who is supposed to be buying on behalf of the best interests of her company, gets money "under the table" or privately (think: briefcase full of cash exchanged on a wharf at midnight) in return for placing a big buy order with the seller.

Know Your Client



Definition
You should. And you are legally bound to do so. Before opening the account, you need to know with whom you are dealing (note the exquisitely proper grammar). And "know your client" also applies to the investment advice that you render. You need to know your client's overall situation to determine the appropriate investment strategy.

Large Cap



Definition
As in large market capitalization companies - lots of shares times lots of dollars per share. Most mutual funds these days define large cap stocks as those with market caps over $15 billion. AOL used to be a Large Cap ($100 billion+ market cap; Today its market cap is about $2 billion).

Law Of Supply



Definition
This fundamental economic principle states that as prices rise supply will increases, and as prices fall supply will decrease.

Lead Manager



Definition
The quarterback investment bank in an IPO.

LEAPS



Definition
LEAPs are "long-dated options". They are used for hedging positions with longer term holdings. Example: Crazy Uncle Fester died and left you his fortune, which amounts to 10 million shares of GE. (He had a thing for light bulbs.) You are very happy being worth a few hundred million dollars and just don't want to lose that money. But if you sell the shares, you will pay a tax because the IRS views that process as a "constructive sale". But you would likely be able to construct a LEAP which hedges your position and allows you to play golf all day and quit the burger flipping gig you used to have.

Legal List



Definition
This is a list kept by fiduciaries of specific investments that they are allowed to make on behalf of their beneficiaries. Legal lists apply mostly to the Prudent Man Rule but are not used much today.

Letter Of Intent



Definition
(LOI) A signed document by an investor purchasing shares in a front-loaded mutual fund that will allow the investor to achieve a lower sales charge (see sales load) immediately, even if the investor has not actually purchased enough shares to qualify for the reduced charge. The LOI indicates the investor's intent to buy additional shares in the future, but note that it does not require the investor to do so. To ensure that the investor actually follows through, the mutual fund company will hold some of the shares in escrow and if the shareholder ultimately fails to purchase enough shares, it will sell those escrowed shares. End result: the mutual fund company is not getting screwed in this arrangement.

LIBOR



Definition
London Interbank Borrowing - LIBOR is the rate at which the British banks loan money to their safest customers.

LIFO



Definition
Last In First Out - it refers to an accounting system where inventory is assessed based on the most recent purchases.

Limit Orders



Definition
This is a method for buying or selling securities wherein the buyer sets a limit on how much he will pay or how little he will sell a given security. So aptly named. 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 got the ride.

Limited Liability



Definition
Refers to a business having a corporate structure wherein the company shelters the individual from unlimited liability.

Limited Partnership



Definition
A Limited Partnership is a financial gathering of investors who come together for a purpose. A common and popular form of limited partnership is a venture capital investment company. The guys who invest the money are called the General Partners and the suckers - er, people who give them the money are called Limited Partners. Limited partnerships have a lot of potential tax goodies but only if the limited partners are truly passive - they can't participate in the management of the partnership. Being a limited partner can require a lot of faith and a very strong stomach.

Line Of Credit



Definition
A commitment from a bank to lend money to a borrower. Basically, the money is "available" should the borrower decide to borrow the money. The borrower typically pays some fee to the lender in return for extending the commitment. Loans made pursuant to a line of credit can be either secured or unsecured, but usually they are unsecured.

Liquid Market



Definition
A market with lots of volumes - investors can convert their holdings into cash quickly.

Liquidity



Definition
Liquidity is the ability to convert an asset into cash. Generally speaking, an enormous 30,000 square foot mansion in Idaho is not very liquid – there just aren’t that many buyers so it might take years to sell. But a small home in Palo Alto is almost always liquid – at the right price – as there are always tons of buyers of a 2,800 square foot ranch home. Liquidity applies to stocks as well – Microsoft shares trade in the tens of millions per day; other small caps have days where only a few thousand shares trade. So if you own 100,000 shares of that small cap and need to get out, you’ll pay a dear price as the stock craters on your volume trying to get liquid in a security that ain’t.

Listed Stocks



Definition
Securities that are listed on an exchange, such as the New York Stock Exchange or the London Stock Exchange.

Load Fund



Definition
A mutual fund which charges a (usually up front) commission or load to get in. It then usually has lower fees as a result of the load up front.

Lockup Period



Definition
See bondage. But also note that "lockup period" refers to the time during which investors in a company cannot sell their shares, usually after an offering to the public has occurred. For example, in most cases, a "standard" lock up is 6 months in the case of venture investors in an IPO, for example.

Lockup Provision



Definition
In most IPOs, there is a required lock up provision for insiders. Those people are the earliest investors in the company, its senior management and others of similar ilk. The required lock up is an integral part of the 144a laws which tried to prevent insiders from dumping their shares on the unknowing public 5 minutes after the stock went public - and they knew that the company was a total dog who'd miss its earnings numbers but a lot. For most lock ups, the provision is a minimum of 6 months' hold time before insiders can sell.

Long



Definition
Some guys brag about this. Others just keep it to themselves.

Long in the stock market generally refers to believing a security will go up or increase in value. Being short is the opposite and some guys compensate by driving convertible sports cars fast.

Long also means that you own something outright.

Long Gamma



Definition
A s tock option trader term in which they make a bet that the market is going to get more volatile or that the VIX will go up.

Long Term Capital Gain



Definition
Long term capital gain is a type of tax on investment gains. It happens when an investor holds a security for 1 year or longer and the tax rate is meaningfully less than its ugly step-sister, the short term capital gain. At the Federal level, the current Long term capital gain tax rate is 25% but this figure is likely to change when/ if Congress finally tackles the issue. There is usually an incremental tax at the State level on these gains. The goal of this system is to encourage investors to be more patient, to hold their investments longer, the broader gain being, in theory, a more stable stock market. See Short Term Capital Gain.

Management Company



Definition
A management company is the group of professionals hired by a mutual fund distribution company to manage the money that the distribution company has raised. The management company may or may not be related to the distribution company, but in either case will receive a fee for the management.

Management Fee



Definition
The fee that the investment manager charges for, yes, managing the investment. Shocking.

Margin



Definition
See Margin Debt. You are borrowing from your broker for a portion of the investment. If Schwab is offering up to 50% margin and you have opened an account with them for $100,000, you can buy up to $200,000 worth of securities. The margin is the amount you have to put up; the broker lends you the rest. In this case, your $100,000 would represent 50% of the purchase price of $200,000 in stock.

Margin Accounts



Definition
An account in which an investor can borrow against his or her own securities.

Margin Call



Definition
If you are on margin and your position gains in value, that's great. But if you're losing ground, remember that your broker who loaned you part of the purchase price is along for the ride. That losing position is the collateral for the loan, so if the collateral is eroding, your broker will call you and demand that you put more money -i.e., more collateral - into your account or else the broker will close out that position.

Margin Debt



Definition
Margin debt usually refers to the notion of borrowing from yourself. More or less. Here's how it works in practice: You want to buy a car, a new one. You can do one of three things really.

One: Sell stocks that you've owned "forever" since your Bar Mitzvah and pay a lot of tax on them because they have huge gains. It's nice that they have big gains but net of the taxes, they look cheap to you and you wouldn't want to sell them if you didn't have to because you think they can double in the next couple of years.

Two: Borrow money from the auto dealer to buy the car. You know what kindly loving people auto dealers are, right? They'd give you the loan cheap and the car cheap because you are their friend...right. You want to be able to negotiation hard and with your own cash rather than have to turn your pockets inside out and beg. So rather than have your pockets picked by the friendly auto dealer, you try Door Number Three:

Three: Borrow from yourself. Yeah, you can do that. Set up your shares at a Schwab or E*TRADE or Scottrade or any other brokerage. You pledge your $50,000 or so of stocks (most brokerages will let you margin up to 50% of the total). So you could borrow in theory up to $25,000 from yourself.

Now the brokerage will charge you margin interest but that price is almost certainly less than the auto dealer would charge you and by coming in with cash to buy the car you almost certainly get a better deal. The big risk in margin debt like this is borrowing "too much" - that is, if you borrow $25,000 and your stock portfolio goes down 2% the next day, you will suffer what's called a "margin call" and will be forced to either find cash from mom or some other source to make up the difference or sell stocks, pay taxes on them and then meet your margin minimums.

Specifically, a 2% loss on a $50,000 portfolio is a loss of $1,000.

Margin Interest



Definition
The cost of renting the cash to borrow against your own securities in a margin account.

Market Capitalization



Definition
The number of shares outstanding times the stock price gives you this figure. It's the value that the market is placing on the company.

Market If Touched



Definition
A limit order that becomes a market order when a certain price is reached, or "touched."

Market Maker



Definition
A market maker "makes a market" in a given security. That is, 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



Definition
Manipulating a market is a nasty thing to do and is illegal in the United States. (Good luck in other markets...) There are a lot of different schemes, such as wash trades, but the common element for all market manipulation is that they attempt to influence the price of a security or a basket of securities through buying and selling actions that have nothing to do with the fundamentals of the security itself.

Market Order



Definition
A market order is a way a customer places an order for a security. That is, she 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. It's yours here." "Market order" means that it's the price that the market is giving that moment for the securities.

Market Risk



Definition
There are various ways in which risk manifests itself. Company risk refers to the risk that an individual company blows up - that is, it turns out that vitamins are actually bad for you and the industry that sells expensive horse serum that contains some rare form of Vitamin X goes under. There is currency risk as well - you buy shares in a Brazilian real estate builder who does great, but the Brazilian currency suffers in the world market because of local inflation and the investment ends up sucking. Market risk is just the risk of the entire market going down.

Matching Orders



Definition
Illegal manipulation of a security's price by trading back and forth between two different brokerage firms without any economic rationale for the trading. The act of frequent trading would alter the price of the security to the detriment of other investors.

Material Information



Definition
In determining whether or not you have inside information which would preclude you from making a trade, you have to determine whether or not the information you stumbled upon was material - or worth anything. You're standing in a Manhattan elevator and you overhear the CEO's doorman say, "His chief competitor has been here every night the last 3 nights for poker. I bet they are merging. Both stocks should go up a ton." That's almost certainly not material. But if the CEO's wife is standing there with the doorman and nods slowly after he utters this hypothesis, then it's almost certainly material and you can't trade in either stock.

Maturity



Definition
What we don't have a Shmoop. It's also when a bond comes due and is payable. Like a fine wine, it matures". We hope to never get there."

Mergers And Acquisitions



Definition
Refers to the arena in investment banking that services the purchase and sale of used companies.

Minimum Maintenance



Definition
For margin transactions, the minimum level of equity that the investor must maintain in the account. It is calculated based on the market value of the securities in the account. In simple terms, "equity" in an account means the market value of the securities minus the margin loan. "Maintenance" is a percentage of the market value. If the minimum maintenance percentage is 25% (and it is, but most brokerages have a higher requirement), the value of the account is $20,000 and the equity (market value minus loan) is $4,000 (this means that the margin loan was $16,000), you first multiply the market value by the minimum required percentage, or $20,000 X 25%, which is $5,000. Compare the equity ($4,000) to the required amount ($5,000). If the equity is less than the required amount, the investor must either sell some of the securities or deposit enough money to bring the account equity back to the minimum requirement.

Modern Portfolio Theory



Definition
Think: Diversity is good. Risk equals reward. Modern portfolio theory builds a portfolio of securities that aims at offering a reward commiserate with the risk of the portfolio.

Money Laundering



Definition
The process of using legitimate activities to hide the proceeds of illegal activities. Investing in securities is one way how the bad guys "cleanse" their ill-gotten gains. Money laundering is highly illegal and, if found guilty, you will spend some time in the Crossbar Hotel. Don't do it.

Money Market



Definition
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, i.e., money in the bank.

Moody's



Definition
A ratings service for the credit worthiness of... credit.

Moral Obligation Bond



Definition
San Diego issues a bond and the state of California might decide to pay the bondholders if San Diego defaults. This isn't a legal obligation, but rather California deciding to "do the right thing."

Most Active



Definition
There is a widely quoted list of the most actively traded securities each day. If a security is active, it usually means that something is going on that investors should pay attention to - either the stock whiffed their quarter or is getting bought and arbitrageurs are buying the snot out of if or there is some new fancy product announcement that the Street gets all excited about.

Municipal Bond



Definition
A bond issued by a municipality - think: Parking facility, water rights, power, The muni bonds are often backed by the assets themselves and the big discerning feature of muni bonds is that they are exempt from Federal taxes.

Municipal Syndicate



Definition
The folks who get together and sell muni bonds to the public.

Mutual Funds



Definition
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



Definition
See covered options. To be "naked" means to sell options where you don't have enough of the underlying security to protect you against adverse price movements. If you have sold call options and don't own the stock, you stand to lose a boatload of money if the stock price rises, because you have to buy the stock on the open market in order to satisfy your delivery obligation with respect to the option.

NASD



Definition
National Association of Securities Dealers. Known by its acronym of NASD, this was the predecessor to FINRA and was established as an industry trade association. The SEC elevated its status when it gave NASD the authority to police its own members.

NASDAQ



Definition
The "electronic exchange." Dealers in OTC stocks and other securities indicate their bid and ask prices. Orders are submitted and filled electronically.

NAV - Net Asset Value



Definition
NAV is the price at which a mutual fund closes each day. See mutual fund and closed end fund. It is calculated by dividing the end-of-day market values for the portfolio by the number of shares issued.

Negotiated Deal



Definition
A type of binding contract that sets the standards under which bankers will underwrite an IPO - the deal is... negotiated. Duh.

Negotiated Underwriting



Definition
See competitive underwriting. A process where both the purchase price and the offering price for a new issue are negotiated directly between the issuer and a single underwriter.

Net Income



Definition
See Earnings. The infamous "bottom line" and not related to housewives shopping at Wal-Mart in overly tight spandex. Net income is the after tax earnings of a company.

Net Present Value



Definition
NPV is the summation of all of the discounted cash flows in the future plus a terminal value of the company. It is the net after time-value-of-money discounting has happened for what the company should be trading for (its valuation) today.

Net Worth



Definition
Having a lot gets you on the Forbes Top 100, and gets you lots of dates. But for a company, it boils down to assets minus liabilities. Nice and straight forward.

New Account Form



Definition
The form that the SEC and FINRA require for all new accounts.

Nine Bond Rule



Definition
Very esoteric. We love showing how much trivial information we know. The nine bond rule is a NYSE rule that says that all orders involving 9 or fewer bonds must be kept on the floor of the exchange for one hour. If the order is not filled within that time, the customer can ask the broker to try to fill the order away from the exchange, or Over The Counter.

No-Load Fund



Definition
One of the great financial marketing phrases of all time, "no load" refers to commissions paid when investors buy mutual funds (and index funds and other funds but when this term was coined mutual funds ruled the Earth like dinosaurs 80 million years ago). Ever hear of a free lunch? Ain't none. Same deal with this concept. Instead of paying a 2-5% commission up front and then having an investment management company manage the money for 0.8% a year in management fees, no load funds charged 0% commission up front but then investors paid 2% per year in management fees. So if they held their funds more than a few years, they screwed themselves by not reading the fine print. No load funds are fine if investors are trading mutual funds like stocks but most investors have better things to do with their time like put braces on kids' teeth and sink 12 footers to win the U.S. Open.

Nominal Yield



Definition
A bond may say, $1,000 par value, 8% coupon, due 2034. The bond may trade up or down from that $1,000 but its nominal yield is 8%. Nom" is name in Latin. We showed up in class that day.

Non-Accredited Investor



Definition
See Accredited Investor.

Non-Cumulative Preferred Stock



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

Non-Diversified Funds



Definition
Specialty funds - like a fund just in tech or healthcare or commodities. Think: Sector.

Non-Qualified Plan



Definition
See qualified plan. A non-qualified plan is a retirement plan that does not permit contributions to be made on a pre-tax basis. Instead, the deductions are allowed only when the employee begins withdrawing funds from the account.

Non-Voting Stock



Definition
Stock that doesn't carry a vote with it. Duh.

Not Held



Definition
Ever wonder why Mo'hmar Qadaffi (Chief Disney character of Libya) ended up being so mean? We're guessing that he wasn't held as a child.

But on Wall Street, not held" means that the broker can choose when to submit a trade for execution if he thinks that he can get the customer a better price later than what's currently being shown. Not held orders only deal with timing. The broker takes no discretion on whether to buy or sell, nor as to how much.

NYMEX



Definition
New York Mercantile Exchange. Trades commodities like cotton, oil, lawyers.

NYSE - New York Stock Exchange



Definition
The Big Board. This is the oldest stock exchange in the United States. Although companies still might want to be listed on this exchange, the advent of NASDAQ and electronic trading networks has diminished its importance over the past decade or so. But don't tell them that; they get very touchy about it.

Odd Lot



Definition
We are. Oh, man, how we are. But our spouses put up with us in spite of it.

But an odd lot also refers to an uneven number of shares traded in a transaction. Specifically, an odd lot is a multiple of shares that is less than 100. The reason odd lot is shouted out is that the transaction costs for a trade can be high and if the number is so small that the commission is a meaningful percentage of a given trade, maybe the trade isn't such a hot idea.

Odd Lot Theory



Definition
Small retail investors are so small that many can't afford a round lot of over 100 shares. Small retail investors usually suck. So the theory is that if you see a lot of odd lots trading, invest the other direction - it means lots of dental hygienists are starting to invest in complex technology stocks at 200x earnings.

Offer



Definition
See bid-ask. This is the price at which somebody is willing to sell you a security; the "asking" price, hence it represents the "ask" side of the bid-ask spread.

Omnibus Account



Definition
An account that has a number of investors. Similar to a mutual fund, but there are no formal shares issued; investor records are maintained internally by the fund. In theory, this provides anonymity to the investors.

Open End Fund



Definition
See Closed End Fund first. An open end fund is your typical vanilla mutual fund. That fund owns hundreds of securities and maybe millions of shares in them. Each day, the prices of those securities change and close at a given value. At that value, the fund then prices itself with a Net Asset Value which reflects the total value of the securities prices times the number of shares of each that the fund owns - then divided by the number of shares outstanding that are owned by investors in the mutual fund. An open-end fund must buy and sell shares in the fund at each day's NAV. Since NAV isn't determined until the end of the day, an open end fund will have no transactions in its shares during a trading day.

Opening Price



Definition
The price that is established for a security at the beginning of the trading day.

OPEX



Definition
Operating Expenses

Option



Definition
An option is the right to do something at a later date. It can be the right to buy or sell a security. Or it can be the right to date someone else.

Option Premium



Definition
Marybeth wants to buy $70 strike options in KO, which is trading for $67 a share now. The options expire in 3 months. She is willing to pay $6 for those options because she thinks KO will be at $85 or more in 3 months. The $6 she is willing to pay is her option premium.

Option Schedule



Definition
An option schedule is a listing of the different strike prices and expiration dates available for a given security.

Options Clearing Corporation



Definition
A clearing organization that issues and guarantees both exchange-traded options and futures. It is owned jointly by many different exchanges, including the American Stock Exchange and the Chicago Board Options Exchange. It is regulated both by the SEC and the Commodities and Futures Trading Commission (CFTC).

Ordinary Annuity



Definition
An ordinary annuity is an annuity where the payout is based on the end of the period. An annuity due is the same annuity, but the payment is made at the beginning of the period."

Ordinary Income



Definition
Ordinary income refers to a tax rate which is applied to individuals' earnings. There are two primary tax rates in the United States: Capital Gains and Ordinary Income. Capital gains are applied to gains from investments and generally speaking, if they are held a year or longer, rates about half of the Ordinary Income rates are applied; if they are held less than a year, then Ordinary Income taxes are applied. At press time, the top ordinary income rate is about 36% and is applied to every dollar earned over about $380,000 for a married couple filing jointly.

Ordinary Shares



Definition
Another term for common stock. "Ordinary," as opposed to "preferred."

Original Issue Discount



Definition
Bonds are usually issued so that the investor pays the face value. If an issuer is not paying interest on the bond, such as with a zero-coupon bond, then the issuer will have to reduce the upfront amount it receives. The difference between the face, or par value, and the amount received is the Original Issue Discount.

OTC - Over The Counter



Definition
Some babies are made this way. But on Wall Street, OTC refers to a marketplace which is entirely electronic. OTC transactions are not done through a formal exchange.

Out Of The Money



Definition
A stock option has a strike price of $88; then the CFO committed fraud. The stock is now at $5. The $88 strike options are $83 out of the money.

Overbought



Definition
A market that is too high - too many buyers - they need to "sell" to rebalance. The term is complete journalist b.s. but it sounds cool.

Oversold



Definition
See Overbought.

Paid-In-Capital



Definition
How much capital was invested in the company? This is that number.

Paid-in-Surplus



Definition
Paid in surplus is a balance sheet item. A company's common shares will have a par value. Assume that par value is $1. If it prices these shares at $10 on the IPO, the paid-in surplus is the difference between the par value and the IPO price, or $9.

Painting The Tape



Definition
A form of market manipulation. Two parties do trades back and forth with no economic substance. The trades appear on the broad ticker so it looks like there's a lot of activity in the stock. This is intended to create some buzz and attract "real" investors. Illegal. You can go to jail and marry Bubba for 3 to 5 years.

Par Value



Definition
The stated value, usually of a bond. Most bonds are sold in $1,000 increments - you'd say par of a grand (if you were too cool for school).

Pari-Passu



Definition
"On equal footing" - meaning that legally the deal terms are the same among pari-passu investment term sets.

Parity



Definition
Polly wants the exact same cracker that her sister got. It means that a and b are the same.

Participating Preferred Stock



Definition
PPS is a term popular in venture capital circles. It is preferred stock that also participates in the profits of the company. Think of it as common stock on steroids.

Pass Through



Definition
When an intermediate, like a Mutual Fund or a REIT, immediately passes through" all income made to the members in order to avoid double-taxation. "

Passive Income



Definition
You work all day hauling bricks for a living. You get paid $18 an hour for doing so. That is NOT passive income. The passive stuff happens every 6 months when you clip your coupon from the $10,000 of bonds you have bought which pay $400 every 6 months. It's income that you don't have to labor for directly.

Passive Loss



Definition
Occurs through investments in limited partnerships that invest in real estate, oil exploration, etc. These investments generate huge accounting losses at the beginning, which pass through the partnership entity to the limited partners. This could be beneficial to those partners who might have a lot of income from other sources and would love to offset that income with these investment losses. Sadly, the IRS has put a stop to that. Passive losses can only be used to offset passive income, i.e., the income that you get from those limited partnership investments.

Penny Stock



Definition
Usually associated with companies that are considered very speculative. Often, penny stocks literally trade for, well, pennies. But there is no uniform definition. In fact, the NYSE considers any stock that trades for less than $5 a share to be a "penny stock." 500 pennies, in fact. So you could have some very large companies that are near financial death be classified as penny stocks, while some very small, extremely speculative and wildly volatile companies could sell for more than $5.

Pink Sheets



Definition
Where the rock star sleeps. Raise your glass to ‘em, baby.

The “pink sheets,” however, are the arena in which shares of delisted or very small, thinly-traded companies trade. These shares tend to be highly illiquid and have (maybe) a single dealer. They are the financial securities equivalent of the alien outpost from Men In Black II.

Placement



Definition
See Regulation D. A sale of securities to a small number of investors rather than to the general public. These types of offerings usually occur under a Regulation D registration.

Portfolio



Definition
A portfolio is a basket of securities. An art student carries a portfolio of her work in a big fat folder. Same idea.

Pre-Emptive Rights



Definition
Rights that prevent something from happening or give the owner of those rights to do something ahead of others. Like you get to invest in the next 2 rounds on the same terms as everyone else - you have a pre-emptive right to invest.

Prearranged Trades



Definition
Another illegal activity (my, there seem to be a lot of no-no's). In a prearranged trade, a customer agrees in advance to buy or sell a security at a pre-agreed price.

Preferred Stock



Definition
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.

Preliminary Prospectus



Definition
Here's the Red Herring, light - it's not official. It's like kinda sorta like what the real one will have but things are so hot, that we have to put one light weight version out now or our marketing people will kill us.

Premium Bond



Definition
A bond that trades at a price higher than par value. This can happen if the bond has a higher coupon than the prevalent market rate.

Price Limit Orders



Definition
I'll buy 1,000 shares of KO at $85 and not a penny more." That's a limit order to buy at that price."

Primary Offering



Definition
An IPO where a company sells shares that it minted in its own little share-minting facility.

Primary Shares



Definition
Shares sold from a company which dilute other holders. See Secondary Shares.

Prime Rate



Definition
The best interest rate charged by banks to its best customers.

Principal



Definition
The guy at the school who yells a lot if you get sent there. Also the one who acts on behalf of the firm.

Principal Protected Fund



Definition
Nothing in life is guaranteed except death and taxes, right? A principal-protected fund can be added to that list - sort of. The investment managers guarantee that the investor will do no worse than get their entire principal back. There are some caveats, however. First, you have to hold the fund for a predetermined minimum period. Second, the protection is achieved through investing in zero-coupon bonds that mature at the end of the protection period. As a result, the overall return on the fund will be lower by design. As a rule, these aren't good investments - in fact, they're like the sucker bets that exist in casinos.

Principal-Only



Definition
Think of a bond as really being two parts - there is the principal from the bond which is due at some point in the future, almost like a zero coupon bond. Then there are the stream of coupon payments that happen monthly. Investors can strip out these two cash flows from bonds to suit their needs and then sell the bonds as principal-only.

Private Equity



Definition
That is, not publicly traded securities investing.

Private Placement



Definition
A sale of securities sold to private parties.

Pro Rata Rights



Definition
It means that you get to keep your proportionate ownership interest in the company in the next investing round rather than suffer dilution at the hands of other investors.

Program Trades



Definition
Computerized trades made by institutional investor. Program trades are generally for very large quantities and are done by entering the order directly into the market's computer systems. Because this can cause significant volatility, the exchanges usually limit the times when program trades can be placed.

Progressive Tax



Definition
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: Make less than a given amount, and the IRS lets you keep it all. Make more than a given amount, your income tax rate increases more and more.

Prospectus



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

Protectionist



Definition
If the US taxed 100% all imports, we would in theory be protecting" our domestic businesses - that policy would be protectionist."

Proxy



Definition
Somebody who is authorized to act as an agent on behalf of another. In the context of The Seven, a proxy is a shareholder or representative of the company who solicits another shareholder for authority to cast that shareholder’s vote at the company’s annual meeting.

Proxy Contest



Definition
A vote. Bad management and board out; good management and board in.

Proxy Statement



Definition
A written document that the SEC requires to be sent to company shareholders in order to give those shareholders sufficient information about matters that will be voted on at the company annual meeting.

Prudent Investment



Definition
Is an investment appropriate given the investor's life situation, financial means, tolerance for risk, etc.? For instance, Bubbie should not be writing naked call options. Too much risk that Bubbie can lose a boatload of money.

Prudent Investor Rule



Definition
An outgrowth of the "prudent man rule." Under this standard, fiduciaries are now permitted to invest funds in the same manner that a "prudent investor" would invest. As a practical matter, this now requires investing in a diversified portfolio, which means that stocks as well as bonds can be considered suitable investments.

Prudent Man Rule



Definition
A concept that applies to fiduciary responsibility. A fiduciary was required to invest funds entrusted to it in a manner that was consistent with how a "prudent" person would invest. The rule arose in Massachusetts and courts that interpreted it gradually accorded to it the meaning that the only "prudent" investment were in bonds. Equity was considered a totally imprudent investment. Most states no longer apply this rule, instead applying the "prudent investor" standard.

Public Offering



Definition
The sale of securities to the public. This offering can come in a few forms. There is an initial one - when a company has never sold that security to the public before, famously called an IPO. And there are also secondary offerings - a company's stock is already traded but it is either raising money for itself or a group of insiders want to sell as one block trade their shares to the public, seeking liquidity. "

Public Offering Price



Definition
This is the difference between the price you pay for a mutual fund and its NAV. The Public Offering Price is relevant only for mutual funds that impose a sales charge.

Purchasing Power



Definition
In the Golden Age of Times Past a nickel bought you a candy bar. You had the power to purchase twenty candy bars with one dollar. Now a Big Hunk costs you a big chunk of change, $1. So the purchasing power of a dollar declined from then to now. Purchasing power is a measure of how much one unit of currency buys in a certain place or time compared to what it buys elsewhere. How much candy could you buy with $1 in Quebec?

Put



Definition
A put is a type of option, which allows the holder to sell at a given price and by a given date a security to the gal who sold him the put.

Qualified Dividends



Definition
These are dividends that carry a maximum 15% tax rate. Restrictions apply. See manufacturer for details.

Qualified Plan



Definition
A "qualified" retirement plan means that your retirement plan is in compliance with regulations which make it tax advantaged.

Quotas



Definition
Harvard used to have a quota for how many... blonds and how many brunettes it would admit. They don't have that quota system any more. Quotas are limits on how many of a certain item can be imported at a time.

RAN - Revenue Anticipation Note



Definition
A form of a municipal bond. Very short-term. The municipality is borrowing money as a "bridge loan" until it completes a larger muni bond offering and part of the proceeds from the larger offering will be used to repay these notes.

Random Walk



Definition
A belief that the market is unpredictable - it will randomly walk where it wants to and you can't beat it. Don't tell Warren.

Realized Gain



Definition
You bought GE at 10 bucks a share. You have held it a few years now and it's at $30. Nice big fat hefty gain. The problem is that it now represents almost 30% of all of your holdings. So you want to sell half and take off some GE-specific risk. When you sell, you will "realize a gain" of $20 a share. Converting stock into cash is "realizing". If you'd just held and not sold, the gain would be "un-realized". You aren't taxed in the U.S. on unrealized gains (but you can be in some other countries).

Realized Loss



Definition
See realized gain. You bought GE at $30 and then sold it a few years later at $10 a share. You have realized a loss of $20 and likely also realized that you have no clue when it comes to investing in GE.

Red Herring



Definition
Alas, nothing to do with CSI IPO. A red herring is a preliminary prospectus, which is distinguished by the red language that must be on the document.

Redemption



Definition
When a person who did something bad, like Ghost Rider, does something good to make up for it, that's redemption. When your cousin Larry pays back that thousand dollars he borrowed over three years ago, that's also redemption (and a good way to keep the family on friendly terms). Redemption is the paying off of debt.

Registered Form



Definition
When a security is issued, it can take one of two forms - either registered or bearer. When in registered form, the corporation acts essentially as the transfer agent - that is, they know who has the security. If you sell it, they are notified and then keep a record of the new owner, how to reach them, how to beg them to vote YES on board resolution 19, etc.

Most securities today are issued in registered form - governments want to track who owns what in what companies. Shares of stock and store tremendous amounts of wealth as well - so evil-doers of the world have loved bearer form securities because they could hide the wealth in creative ways before unleashing their next attacks.

Registered Investment Advisor



Definition
RIA, an Investment Advisor registered with the SEC. See The Investment Company Act of 1940.

Registered Representative



Definition
A person who passes The Seven and who has good moral character (sorry, that previous meth lab conviction will be a problem).

Registration Statement



Definition
A document filed with the SEC prior to an IPO that includes the company prospectus and other vital statistics.

Regressive Tax



Definition
The opposite of a progressive tax, this is tax that affects the poor more than the wealthy. An example of a regressive tax is a sales tax--everyone has to pay the same amount of sales tax, no matter what they buy, but 10% extra for groceries is a much greater burden for the poor than the wealthy.

Regular Way



Definition
Refers to the way in which trades are settled.

Regulation A



Definition
Any offering valued at less than $5 million in any 12-month period is not required to be "full-monty" registered, but there is an abbreviated registration that is required.

Regulation D



Definition
This refers to private placement offerings, which don't need SEC registration. An offer of Regulation D securities can be made to an unlimited number of accredited investors and up to 35 unaccredited investors. Investors purchasing Regulation D securities are subject to Rule 144 lockup provisions.

Regulation FD



Definition
FD = full disclosure, not fire department. Although you'll need one if you don't fully disclose.

Regulation T



Definition
Imposed by the Federal Reserve, this nugget regulates how margin can be extended by broker-dealers as well as the limits on how much margin can be made available to investors.

REIT



Definition
Real Estate Investment Trust. Kind of a mutual fund for real estate investments.

Relative Strength Index



Definition
The stock was up 10%. Great. But the whole market was up 20%. That stock had low relative strength.

Reset Date



Definition
The date when the rate adjustment of a dividend is set. "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 day is the reset date and it has nothing to do with post-divorce match.com subscriptions.

Residual Claim To Assets



Definition
Common shareholders have this. If the company goes big bankrupt, they have a residual claim - basically after everyone is paid off, they get the residual.

Restricted Stock



Definition
A company will sell stock, often to a large investor, and not have to comply with the whole SEC registration stuff. The tradeoff is that the investor will not be able to sell that stock until it becomes properly registered.

Retail Investors



Definition
Average shlubs. Dentists. Lawyers. School teachers. People who are not sophisticated investors.

Retirement Accounts



Definition
Like an IRA, 401k, pension fund, etc. Key: not immediately or trading tax sensitive to short term gains.

Return On Assets (ROA)



Definition
Net Income/Beginning of Year Total Assets 

We’ve got to get this figure from the balance sheet. But there isn’t much that’s interesting going on with SnowPlow’s balance sheet (for this discussion) so let’s make some numbers up. The assets of the company are simply the things it owns—land, leases, brand name’s it has purchased, etc. This ratio begs the question: How well are our assets being used? Let’s say the assets of SnowPlow are $50,000,000.  Then the ROA is 16%. We have to ask what if these assets were used by someone else—could that other person use our assets better? Say SnowPlow’s assets consist mostly of the land its factory is on, the machinery to press the skis and a brand name “Rossignol” to whom it paid a lump sum up front plus royalties on sales (Rossignol doesn’t really do this but you get the basic idea).  

What if we found that mini-mall developers were getting 50% return on land adjacent to where our factory was sitting? What if we found other applications for our ski-pressing machinery—high tech ironing boards?—and that return competitors in the high-tech ironing biz were getting 50% return. What if we found that the low-bran ski maker also leased Rossignol’s name and was getting much better returns than ours? Maybe at this point we have to reevaluate our company. What if we just picked up our team and moved our factory elsewhere? Maybe it’s not such a good company after all (relative to our competitors) and the next market downturn we’ll be out of business.

   If we flip the number completely around so that it looks like we’re getting great ROA then maybe we can leverage ourselves a bit more based on our returns—maybe we can buy some other poor schlep’s lousy-running factory and land for a relatively cheap price (if he’s getting low ROA then we should be able to buy it for a low price). We can then turn those assets into better returns and we’re golden—this is sort of what Henry Ford did when he automated the car-making world.

Return On Investment



Definition
Put in a dollar. You expect to get more than a dollar back. If you invested a dollar and 3 years later you got back $3, your return was 300%. You made $2 in profits. But it's still written nomenclature as a return of 300%. If you invested $3 and 3 years later got back (like baby) just $1, your return was negative 67%.

Revenue



Definition
The bucks you get from sellin' your wares. Also called "top-line" in kitsch Wall Street circles.

Revenue Bond



Definition
A municipal bond that that pledges the revenues generated from the project that is built with the amount borrowed. Toll roads, municipal parking garages, etc., are examples of projects that are funded through revenue bonds.

Reverse Split



Definition
When a stock is sucking so bad, where it may be in risk of trading below a dollar and getting delisted, it reverse splits like 1 for 10 so that 100 million shares outstanding at a dollar each becomes 10 million shares outstanding at 10 dollars each.

Reverse Stock Split



Definition
Sort of like a stock regeneration. Instead of 1 share becoming 2, 2 shares become 1. Just like with regular stock splits, there is no economic impact from this action; it's really just window-dressing. If you had 20 shares at $10 before the reverse, you'll have 10 shares worth $20 after, but your investment is still worth $200.

Risk Averse



Definition
Grannies. Tea-totalers. And those afraid of their own shadows. They are all risk-averse people. They don't want to take unnecessary risk. So you look hard at putting them into T-bills, bonds, and other super safe stuff. A basket of leveraged small cap equities is likely not the right recommendation for them.

Road Show



Definition
When the band bangs a tambourine, hoping to get all the relevant investor to put in buy orders for an IPO.

Roll Up



Definition
Typically using debt, when a company buys a bunch of smaller companies to create market power in a domain - it can then raise prices and margins go up a load. That's the theory, anywya.

Round Lot



Definition
A hundred shares.

Rule 144



Definition
See lockup provision.

Rule Of 72



Definition
To calculate how long it takes your money to double at a given interest rate, divide the interest rate into 72. If you're receiving a 10% compounded return, you double your money in about (72 / 10) years, or roughly 7.2 years.

S&P 500



Definition
A broad market index of 500 major companies in the US. Most investors think of the S&P 500 index as being the market.

Sales Charge, Sales Load



Definition
The amount that mutual fund companies tack on to NAV to compensate the sales force.

Sandbagging



Definition
When a company "hopes" that next quarter they can do $82 million in sales - and then they actually print $114 million. They are said to have been sandbagging when they gave the $82 million guidance. Aapl is the most famous company in the world for doing this.

Sarbanes Oxley



Definition
Accounting laws enacted in the early 2000s era in response to accounting chicanery that befell some major companies and got a few CEOs and CFOs 10-20 year dates with Big Bubbah.

Savings Bond



Definition
Back in the day, this was your grandmother's preferred birthday present to you. Savings bonds are issued by the Treasury and are a simple and cheap way of lending to Uncle Sam. There is no stated maturity date, but interest would be paid for a certain period. After that period ends, the bonds no longer pay interest. Also, interest isn't paid each year; instead, it's tacked on to the existing principal, so when you cash it in for college (or that bitchin' '69 Barracuda), you receive the face value (they're usually sold with a $500 face value) plus all that accrued interest.

Scales



Definition
Do re mi fa so la ti do! The term also refers to the way companies can grow. If a company sells a widget for a buck and that widget costs them 85 cents if they make a million them a year; and it only drops to costing them 80 cents if they make a billion of them a year, then that company 'does not scale'. The opposite would be a software company which might cost $30 per unit for the first million units but might drop to $2 a unit on the next hundre million - if the retail price stays around 50 bucks, thats a lotta mega profit.

Second Market



Definition
An offmarket offering platform for selling shares of non-public companies. Facebook "made" 'em.

Secondary Offering



Definition
When a company sells shares after an IPO.

Sector Fund



Definition
Seems sort of obvious, yeah? A mutual fund that invests in a particular sector, such as semiconductor companies, or companies that supply equipment for oil and gas drilling.

Secured Bond



Definition
A secured bond is just a bond that has a specific element on a company's balance sheet that guarantees that should things go awry, that bond will be paid by liquidating that asset. The asset "secures" payment of the principal and back interest of that bond.

Secured Creditor



Definition
A lender who has taken a security interest in some asset of the borrower. Secured is better than unsecured because you have something to grab and sell if the borrower defaults. But you have to ask how real that security is: if you have a security interest in a nuclear power generator, just how easy is that thing gonna be to sell?

Securities Act 1933



Definition
The Granddaddy of all the securities law. Imposed a regime that companies had to register their offerings before they could be sold to the public.

Securities Exchange Act 1934



Definition
This law basically made the New York Stock Exchange a quasi-government entity. It also established the SEC as the watchdog for the industry. And made insider trading a no-no. And a few other things. But the ones we listed are the biggies.

Security



Definition
The generic term for anything that you can invest in. Stocks, bonds, mutual funds, REITS - all of them are securities.

Sell Limit



Definition
An order to sell a security, but you have restricted it so that it can be sold only at or above a certain price.

Sell Side



Definition
Brokers. Brokerages. People who SELL stocks for a living. Their counterparts are the BUY side who manage money for a living. The two arenas are tangential but vastly different in mindsets.

Sell Side Analyst



Definition
An analyst who covers a given area of expertise - like oil drillers or autos or internet media. They publish reports in hopes that because of their witty insights, clients will trade with their desk instead of those of the competition and pay nice little commissions many times over.

Sell Stop



Definition
If you have sold a security short, you lose money if the security goes up in price. To cap your losses, you would issue a "sell stop" order. This would close out the short position once the price reaches a certain point.

Separate Account



Definition
An investing account that is in the name or names of specific individuals or entities.

Settlement



Definition
The process of clearing trades, so that the buyer gets his stock and the seller gets her money.

SG&A



Definition
Sales, General and Administrative expenses - this is a key line on an income statement

Shareholder



Definition
One who holds a share. Duh.

Shares Outstanding



Definition
The number of shares a company has that are outstanding. That's not like "outstanding" as in amazing, mind you.

Short Interest Theory



Definition
This investing theory notes that stocks with lots of investors betting that the stock will go down—will in fact likely go the other direction. Part of the reason for this is that eventually the shorts have to buy back their short position or cover it so if they are "spooked" by good news, the stock should rock.

Short Sale



Definition
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.

Short Term Capital Gain



Definition
Gains on the sale of securities that you held for less than 1 year.

Short Term Capital Loss



Definition
Loss on the sale of securities that you held for less than 1 year.

Shorting Stock



Definition
When an investor makes a bet that the price of shares will decline. Being long a stock means just owning it.

Sinking Fund



Definition
A company with bonds outstanding will buy a portion of the bonds each year by making periodic payments to a trustee who then buys a portion of the issue on the open market. Investors prefer sinking funds since they greatly reduce the risk of the issuer's defaulting on repaying the principal at maturity.

SIPC



Definition
The Securities Investor Protection Act

Skew



Definition
When a line, rather than being flat, is angled vertically or horizontally, it's said to have a skew. Another way of thinking about it is a trend—where's the data headed? Options can skew vertically or horizontally, forward and reverse. The degree of the skew depends on volatility.

Small Cap



Definition
This refers to stocks that have a small market capitalization. Usually this means that the company doesn't have a lot of shares outstanding.

Sole Proprietorship



Definition
Not a Nike store. It's when one person just owns a company. Key issue: Unlimited liability should something go wrong.

Special Memorandum Account



Definition
(SMA) In transactions involving the use of margin, SMA represents the available credit that the customer is able to borrow from his account or use to purchase additional securities.

Specialist



Definition
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. This 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.

Spread



Definition
The difference between the bid and the ask price.

Spread To Treasuries



Definition
It's how bonds are priced, a high spread is like Treasuries-plus-a-thousand-basis-points or if Treasuries are yielding 4%, these risky bonds would be yielding 14%.

Stagflation



Definition
Imagine this as being the "perfect storm" of economics. The economy is not growing, so there is a lot of unemployment, low interest rates and general malaise, but at the same time prices are growing. A combination of stagnation and inflation - most assuredly NOT good situation to be in.

Statutory Voting



Definition
For every share you have, you get one vote. Yawn. Not nearly as exciting as other types of statutories...

Stock Dividend



Definition
The company might decide that it can put its extra cash to better use than paying it as a dividend, so it might instead decide to give the shareholders a stock bonus. Stock dividends don't have any effect on the shareholders' overall wealth. Yes, they own more stock, but the pie hasn't gotten larger; all that happened with the stock dividend is that there are more (and thinner) slices in the pie.

Stock Option Plan



Definition
A stock option plan is just the uh…plan…under which the company can issue stock options. That is, it specifies the number of options allowed to be issued, what the options are like - i.e. their vesting provisions (how many years before your work tenure has earned them), the rules they will follow for giving a strike price (i.e. 409a Plan), and the duration or life they will live (i.e. 7 years and then you use 'em or lose 'em).

Stock Split



Definition
See stock dividend. They are identical in result.

Stop Limit Order



Definition
See Stop Loss, Buy Stop, Sell Stop...hell, all the stop references. The wrinkle is that this type of order combines the features of a stop order and a limit order. If you're short the stock, you probably entered a buy stop to limit your losses. The "limit" is that you don't want to execute that buy stop at a higher price than the buy stop price.

Stop Loss



Definition
A trade order that is designed, as the name suggests, to stop the bleeding. See buy stop and sell stop.

Stop Order



Definition
See Stop Loss.

Straddle



Definition
An option trade that involves buying both a call and a put with the same strike price and expiration. You'd do this because you think the stock is going to make a big move, but you don't know whether it will be up or down.

Strangle



Definition
When those stocks are going crazy, straddle them! Or in this case, strangle them! A long strangle takes advantage of volatility. An investor must buy a call option and a put option with the call strike higher than the put strike. Capture that craziness!

Street Name



Definition
Shares are held in the name of the broker, rather than in the customer's name. It makes transfer easier when the customer sells them.

Strike Price



Definition
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).

Subordinated Debenture



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

Subscription Agreement



Definition
A written form that is used to determine if an applicant is suitable to become a limited partner in a DPP. The subscription agreement will contain item such as the applicant's net worth, income and past history of similar investments. It will also spell out the risks that are entailed with investing in the DPP. The lawyers who drafted the thing will use all kinds of weasel language that confuses more than enlightens, but basically you know going in that (a) DPPs are really risky, and (b) it's likely that you'll lose all your investment. Even if they don't really believe that it will be quite so bad, they'll make like it is. Like those annoying forms that fall out of your magazines, this is a form and an agreement that investors have to fill out in order to become members of a limited partnership.

Super-Voting Stock



Definition
Like the over-powered Superman, Super-Vote Stock owners have beefed up voting abilities above and beyond the rest of the stockholders.

SuperDOT



Definition
This is the trading system used by the New York Stock Exchange for limit orders, small orders and program trades. It is considered more efficient in that it routes order directly to a floor specialist for execution rather than through a broker.

Supply-Side Economists



Definition
A term applied to a series of economic theories that emphasize strengthening the economy through policies aimed at producers and suppliers of goods and services. Supply-side advocates support lowering business and corporate taxes and reducing the capital gains tax.

Surrender Charge



Definition
This applies to annuities. Most annuities require you to keep the investment for a minimum period (usually 7 years). If you surrender the annuity before then, the annuity company will usually charge you 1 - 5% for the privilege of doing so.

Surrender Fee



Definition
This is the amount of the surrender charge, usually expressed as a percentage of the original investment.

Surrender Period



Definition
See Surrender Charge, Surrender Fee.

Syndicate



Definition
A 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 quite nerdy, so strike that last one. Syndicates usually consist of a lead underwriter, like Captain America, investment banks, and smaller broker/dealers.

T+3



Definition
The T here is time. And the 3 here are days. The T+3 thing refers to the time period from when your order to buy or sell stock is executed until you actually have the stock or the money in your hot little hand.

T-Bills



Definition
The shortest maturity Federal debt. T-bills have maturities of 91, 182 or 365 days.

T-Bonds



Definition
Another form of Federal debt, but with a longer maturity. Anything that matures in 10 years or more is called a T-Bond.

T-Notes



Definition
Treasury securities with original maturities of between 2 and 10 years. Currently the Treasury issues T-Notes only with maturities of 2, 3, 5 and 7 years. Why not for 6 or 8 years? Who knows; the Treasury feels that's on a need-to-know basis but it seems that nobody is on that list.

Takedown



Definition
Usually calculated on a per-share basis, this is the profit that a syndicate member makes when selling a stock.

Tariffs



Definition
$5 word for taxes.

Tax Anticipation Notes



Definition
Tax anticipation notes or tans use the collateral of a tax which a city knows it is due to collect n months from now; they issue bonds today in anticipation of that tax collection so that they have cash today to pay the cops' pensions. cops gotta eat them donuts, right?

Tax Deferred



Definition
For certain vehicles such as qualified retirement accounts, all ordinary income and capital gains are not subject to taxation until the account owner begins withdrawals. Such accounts are said to be tax deferred.

Tax Equivalent Yield



Definition
You have a choice between buying a corporate bond and a muni bond. The muni bond pays 5%, but the income is tax-free, while the corporate bond pays 10%, but is fully taxed. You are in the 30% tax bracket. Which bond should you buy? Answer: The bond that puts the most dollars in your pocket on an after-tax basis. Tax-equivalent yield = (Muni bond yield)/(1-tax rate). Doing the math here shows that the tax-equivalent yield for the 5% muni bond is 7.14%. In other words, you should be indifferent to buying a 5% muni bond or a 7.14% corporate bond if your tax rate is 30% because you'll have the same amount of money after tax. With our example, the 10% corporate bond is the way to go.

Tax Exempt Bonds



Definition
Bonds whose interest is exempt from federal, state and local taxes. Municipal bonds are an example of tax-exempt bonds.

Tax Loss Carry-forward



Definition
It sorta is what it says it is: If you have a tax loss - that is, a loss in operating profits in one year - you can "carry them forward" into next year. In fact, GAAP states that you have 7 years in which to use tax losses.

Do the math: Company X - Scooby Dude - pays 30% tax and it is based in The People's Republic of California. It has been a taxpayer all along, profiting nicely from its van decal painting business. This year it lost $1M on $5M of sales. It had just enough money in the bank to keep going.

When a popular political candidate adopted Scooby Dude to paint vans as part of their media blitz, SD made $3M in profits the following year. Normally SD would pay $900K (30% of $3M) in taxes but because they had $1M in tax loss carry-forwards, they deduct the $1M loss from the $3M to show a taxable profit of $2M this year on which they then pay 30% or $600K. Get it? Got it. Good.

Technical Analysis



Definition
The process of viewing whether or not stocks are a good buy (or a short or whatever...) based just on their generally recent trading history. The 90-day moving average is a big deal for traders, many of whom have ‘algorithmically driven' trading strategies - that is, when certain variables are mathematically hit, a "buy" (or whatever) signal tells them to ... do stuff.

Tenants-in-Common



Definition
A type of account with multiple owners. Each owner's share is proportionate to the amount of money they invested, and if they die their share goes to their estate and not to the other owners/members/tenants.

Tendering



Definition
"Giving". Tenderly. A company might tender to buy back a million shares of stock from the public at $25 a share.

Term Sheet



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

The Maloney Act



Definition
Another one responsible for the exam you're taking today, this created FINRA, the CBOE, and the SRO.

Theta



Definition
Greek symbol for time, usually in reference to stock option trades. Why not just say "time"? Theta sounds way cooler.

Theta Decay



Definition
See Theta. When time decays or rather the stock option approaches its expiration date - the time value of the option "decays" over time.

Ticker Tape



Definition
That old thin streamy paper that used to be google finance in 1927. Stock prices were printed in ink on dead trees. When someone pitched a no hitter in a World Series game, they threw a lot of this stuff down on them in Manhattan.

Time Value



Definition
See intrinsic value. All options have two components of value. Intrinsic value is how much you'd make if you exercised the option right now - intrinsic value can range from 0 to infinity. Time value is just the difference between the current price for that option and its intrinsic value.

TIPS



Definition
Treasury Inflation Protected Securities. Exactly what they sound like, treasury securities designed to protect the investor from the negative effects of inflation. They are very low risk.

Trading Volume



Definition
How LOUD IT IS ON THE TRADING FLOOR!!!! But really, refers to how many shares trade in a security over a given period of time.

Transfer Agent



Definition
The one in charge of making sure that a sold security gets properly placed with its new owner.

Treasury Stock



Definition
When a company buys back its own stock, it holds it as Treasury Stock on its balance sheet.

Trust Indenture



Definition
In a bond contract, the trust indenture outlines where the money is coming from and what happens in the unfortunate case of a default.

Trust Indenture Act 1939



Definition
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, etc. "The Trust" in the act refers to the requirement that the issuer hire an independent trustee who acts on behalf of the bondholders.

Two Dollar Broker



Definition
An independent broker on the floor of the exchange who transacts business for other exchange brokers. Back in the day, they were paid $2 a trade.

UGMA



Definition
UGMA is what you say when your mother tells you to go wash your face. It is also the acronym for Uniform Gift to Minors Act which is a law that was enacted in the '70s which set out the code under which minors can receive gifts from others and the taxes they'll pay for the privilege.

Underwriter



Definition
This is the entity that brings new securities to the market. They act as middlemen by purchasing the new stock from the issuer and immediately reselling it to the public. They get a nice profit from it, too.

Unfunded Pension Liabilities



Definition
If a municipality offers a pension to its employees, often that pension results in obligations that won't come due for a long time, maybe several decades. It would be nice if the municipality put money in the bank on a regular basis to pay this obligation when it comes due, but there are two problems with this: (1) the municipality doesn't really known when this obligation will actually arise, and (2) it uses up money that politicians like to use for other things - things that get them reelected, for instance. As a result, the pension obligation is sitting on the books, but there's nothing yet going to pay for it. Until the city does start laying money aside, it's an unfunded obligation.

Uniform Securities Act



Definition
An act that lays out the requirements for registering securities.

Unit Investment Trust



Definition
Aka a UIT. This is like a mutual fund, but without the management and with an expiration date. Like buying a pre-assembled bundle of securities.

Unlimited Liability



Definition
It means you can have your pants sued off, literally. If you house your company inside of a corporate shell, there is usually not unlimited liability, i.e. if your asbestos truck blows up and kills a city, it's only your company that goes BK but you can take your own personal money and run.

Unrealized Gain



Definition
See realized gain.

Unsecured Bond



Definition

Uptick Rule



Definition
Outlaws short selling on a "down tick." In order to short sell a share, you can only by on a plus tick/up tick, or on a zero-plus tick. Meaning, you can only short sell if the price of the share is higher than the previous trade. No jumping on the the roller coaster as it begins to roll down the hill.

USTD



Definition
After sleeping around, don't the Jersey Shore people have this? Oh, it's also the US Treasury Department. Same dif.

UTMA



Definition
Uniform Trust to Minors Act was a law passed which allowed parents to reserve money for their kids in a tidy little legal entity which would then seamlessly pass to control of their kids by the time they were, say, 21. At that point, the kids can make their own mistakes investing instead of letting the parents make all the mistakes.

Valuation Analysis



Definition
What's it worth? Why? If you can answer those two questions, you can snatch the pebble from our hand.

Valuation Formats



Definition
A small menu of how bankers, investors and Cramer compare and value companies: 
  1. Multiple of Sales—The company does $100 mil a year in sales. Buy it for... twice?  Thrice times sales? What’s the industry standard? How are others trading?
  2. Multiple of Margin (Gross or Operating)—Same as above, only with margins instead of sales used as the delimiter.
  3. Multiple of Cash Flow—Often used in industries which don't really depreciate (like the entertainment industry—"Gone with the Wind" or "Snow White" might be worth more today than in 1932).
  4. Multiple of Earnings—the most common denominator. This valuation ideology is based on the precept that a company is worth the value of dividends it will throw off in the future. This means dividends paid to common stockholders plus the value of the company when the Argentineans buy it in 2009. 
  5. Establishing the Health of the Company (We're going to pick some of the McDonald "dirty" Dozen ratios to illustrate some valuation techniques)—We'll use SnowPlow and just focus on today. In real life you’d have to cover every single blasted year but we’re in Cyberspace now so it's all right to slide a bit. 

The McDonald "Dirty Dozen" Ratios:

RATIO

DEFINITION
Return on Sales (ROS) or Net MarginAfter Tax Profit/Total Sales
Gross Margin(Total Sales - COGS)/Total Sales
Return on Assets (ROA)Net Income/Beginning of Year Total Assets
Return on Equity (ROE)Net Income/Beginning of Year Shareholders’ Equity
Current RatioCurrent Assets/Current Liabilities
Quick Ratio(Cash + Stocks & Bonds… + Accounts Receivable)/Current Liabilities
Borrowed Debt/Capitalization(Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases))/(Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases) + Shareholders’ Equity)
Pretax Interest Coverage (times Interest Earned)(Pretax Income + Interest Expense)/Interest Expense
Asset Turns (TURNS): Sales/AssetsTotal Sales/Beginning of Year Total Assets
Days Sales Outstanding (DSO)(Accounts Receivable x 365)/Total Sales on Credit
Days Payable Outstanding (DPO)(Accounts Payable x 365)/Total Purchases on Credit
Inventory TurnsCOGS/Inventory

Value Investing



Definition
Value investing is associated with conservative" investing but in practice, that's not always how things pan out. Is it better to own a company trading at a low price to earnings ratio that is dying (would you want to own a bookshelf producing company today at any price?)? Or is it better to pay a high multiple for Facebook? Value investors generally believe that the company's shares will grow either because they will grow earnings and keep their low multiple - or they will be perceived as having better growth prospects and achieve higher multiples."

Vanilla Bonds



Definition
Basic bonds. Nothin' fancy.

Vanilla Terms



Definition
Basic terms. Nothin' fancy.

Variable Annuity



Definition
An annuity where the investment can be placed into equity mutual funds, fixed income mutual funds and/or money market mutual funds. Variable" refers to the likelihood that the investment returns will vary over time. They could do really, really well, or really, really not. The amount that's in the account when the annuity feature is activated determines the amount of the annuity payments."

Vested



Definition
Vested refers to the act of having earned granted stock options in return for having remained at your job for a longish period of time, like 4 years. At least that's the "standard" vest provision in most Silicon Valley start-ups.

VIX



Definition
Volatility Index, ticker: VIX. It's about how choppy the market has been the last 200 days.

Volatility



Definition
Beta. Ups vs. downs. If the market moves 2% and your stock moves 4% on average, it's beta is 2, roughly.

VRDO



Definition
Variable Rate Demand Obligation

Wash Rule



Definition
After you go to the bathroom you really should do this. With soap. It also refers to the notion that you cannot sell a stock and buy it back within 30 days and then claim it as a loss with the IRS.

Western Accounts



Definition
"Every man for himself!" A phrase from the wild wild west. And that's what a western account looks like - you are responsible just for your own shizzel.

When-Issued



Definition
A transaction that is conditional because the security has been authorized to have been issued, but has not yet been issued. This applies to IPOs, secondary offerings and stock splits. Trading can occur in these shares, but the transactions are subject to the shares actually coming into existence. If for some reason they don't, the transaction is canceled.

Whisper Number



Definition
A stock appears to trade at 100x earnings with the Wall Street consensus estimate for next year's earnings being $1 a share. The company has no debt and just a little cash. But nothing trades at 100x earnings. The $1 a share for next year is not what investors believe who are paying $100 a share - rather, they believe that the real earnings by the time the company is done printing its quarterlies will be more like $3 and the next year, more like $7. So on two year forward earnings, investors are paying just 14ish times earnings. That number isn't published anywhere except maybe on analyst's private company write-ups - those are analysts inside of mutual and hedge funds who don't, well, publish. Those numbers are the earnings numbers that investors are "whispering" about.

Work In Process Inventory



Definition
A balance sheet item which tracks production process - i.e. many companies carry a lot of value in half-made widgets - their process must be tracked financially over the course of the quarter.

Working Capital



Definition
The difference between a company's current assets and current liabilities. This is a measure of liquidity; does the company have enough of a cushion to satisfy its short-term cash needs? You might think the higher the "better" but too much working capital might mean that the company isn't utilizing its assets as efficiently as it could.

Wrap Account



Definition
No, not the kind of account that Jay-Z opens just because he's Jay-Z. He might, but not because he's a (w)rapper. A wrap account is one where the broker manages the portfolio for an annual fee, usually based as a percentage of the assets in the account. The fee covers all administrative, commissions and other expenses (but usually does not cover any fees or charges imposed by an exchange or a regulatory body). The benefit of a wrap account is that it prevents investors from being swamped by commissions because they have a trigger-happy broker who trades like a lab rat on crack.

Writer



Definition
The writer of an option is the seller of the option. That is, I will write you the option to buy GOOG from me for $1,000 a share by Jan 23 of next year for $50.

Yield



Definition
The percentage rate of return on a bond given the price paid for the bond. For example, if investors were nervous about a $500,000 par value bond which had a stated yield of 8% of 40,000 per year in coupons, that bond would trade at a discount. Let’s say instead of $500,000 people were only paying $400,000. Yet the bond is still paying $40,000 in interest. The bond has an effective yield of 10%.

Yield Curve



Definition
In this document we’ve covered far too much analysis and not enough stories in my opinion but there’s one more analytical tool you must have on the top of your head before you dive into the recruiting pool: The Yield Curve.

The YC is simply the graphic representation of what investors believe will happen to interest rates in the future. Here’s the story: The U.S. government has a ton of bills to pay. They keep our troops strong, our interstate highways clean, and our White House lights burning bright.  

To pay for all of this, the U.S. government like all governments exploits its opportunities to run the best business in the world in printing its own money. This money goes out into the marketplace in the form of T-Bills, T-Bonds, and T-Notes... all various and sundry forms of bond paper backed up by the U.S. government’s ability to collect taxes from the paltry coffers of its humble subjects.  Each week there is an auction and paper is sold to flippers - investment banking traders who will buy the bonds with yields of 5.217% and sell them for yields of 5.222%. It doesn’t seem like much of a spread but when you pump trillions of dollars through the pipeline, it adds up. 

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. But in the Carter years the curve was inverted... negatively sloped. At one point prime rate hovered around 20%. But investors believed it would come down and the yield curve settled in around 10% 10 years into the future.

Yield To Call



Definition
If a bond is callable, the relevant metric is determining the yield from date of purchase (or issue) to the first possible date that it could be called.

Yield To Maturity



Definition
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.

Zero Coupon Bonds



Definition
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.

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