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1035 Exchange

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 'em either. But here we go.

A 1035 exchange is a swap. More specifically, it's a swap relating to life insurance policies or annuities. You have one annuity or life insurance policy and want to exchange it with another one (of similar value), so you use a 1035 exchange to do it.

Why, you ask? Because a 1035 exchange is tax free. Taxxxx freeeee [insert Homer Simpson drool sound].

12B-1 Fee

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

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

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

1933 Securities Act

Also known as the Securities Act of 1933, this sucker was the original law that served as the basis of all securities laws.

Thanks to this guy, securities that will be offered to the public must be registered.

Exciting stuff.

1934 Securities And Exchange Act

The Securities and Exchange Act of 1934 created the securities and investment world as we know it today.

It's the law that made the New York Stock Exchange a big deal with big powers, and it set up the Securities and Exchange Commission (SEC) to crack down on shady deals. (How successful they are is a matter of much debate at just about every family reunion.) The law also made insider trading illegal, thus paving the way for many exciting Wall Street movies.

1940 Investment Advisors Act

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

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

200 Day, 50 Day Moving Averages

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

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

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

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

2001 USA Patriot Act

Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism.

Talk about an acronym.

This here 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.

The relevant part when it comes to money is Title III of the Act. It's called the "International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001" (seriously, who names these things?). That part of the act requires banks to report suspected money-laundering activities and to create tougher rules to prevent money laundering in the first place. It also makes it tougher to do some types of high-falutin' banking between U.S. banks and financial institutions around the world.

401(k) And Roth 401(k)

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

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

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

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

401k vs. Roth 401k

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

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

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

403(b) Plan

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

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

409a Valuation

409a valuations set the price of the common stock generally after preferred stock has been purchased by the investing angel or venture capitalist. Preferred stock might have been purchased for a dollar a share—but once preferred stock has been sold by the company, it has to be paid back first before common stock has any value. 

So imagine an extreme situation where a company which just started last week raises $80 million in preferred stock. The odds that the full $80 million is ever even paid back is probably low so it wouldn't be crazy to see the common stock valued at almost zero/nothing. Employees get stock options in common stock—not preferred—so somebody has to set the strike price for the options on their common. That's the purpose of the 409a valuation—it sets the price at which common stock options can be bought and thus converted from options into actual stock ownership.

75-5-10 Rule

"75! 5! 10!" isn't what a quarterback screams to signal a roll out pass.

Instead, the term refers to a formula investment managers use to market or advertise their funds: To legally be able to say that their fund is diversified, managers must follow the 75-5-10 Rule. That means their fund needs to have 75% invested in securities from other issuers and can only have 5% (or less) of the fund's assets sunk into one company. The "10" in this rule refers to the fact that the fund can't own more than 10% of any one issuer's outstanding securities. So no buying up 30% of Google stock and sticking that in the fund.


A-shares a class of shares sold by a mutual fund. What makes 'em different from B-shares and C-shares is the way you pay your investment advisor. With A-shares, you're paying a certain amount up front and then paying lower annual fees (usually) when compared with other shares.


Let's say  you have a mutual fund, and your fund manager buys $20,000 in A-shares for you in that fund. About $1,150 of that cash will go to the fund manager or other advisor upfront as their commission (it's also called a "load" in the biz), and the rest is what you will have invested in the shares.

BTW, no matter what kind of mutual fund and shares you buy, you're going to be paying someone some sort of fee or commission. That's just how it works. Those BMWs on Wall Street don't pay for themselves, you know.

Above Full Employment Equilibrium

Ever heard a politician talking about how they're going to create "more jobs"?

Everyone thinks that more jobs = good, but according to economists (those fancy people in fancy suits), it's possible to have too much of a good thing. When almost everyone has a job (even your Uncle Joe, who's been couch surfing since 2004), we produce more stuff; and when we as a country make more stuff than we usually do, we have what's called above full employment equilibrium.

When that happens, the economy is basically doing too well and inflation will go nuts, meaning your money will be worth less.

Above Par

We all know how this one feels on the course, but that's not what we're going for here.

When you buy a bond, it has a face value: that's the set price of the bond when it was issued. That bond will pay out a certain coupon or amount each year, no matter what, as long as the company is around and able to pay its bills. So far, so good. You can make money by just holding onto that bond and getting your money each year.

But sometimes, the actual trading value of the bond goes up because investors are willing to pay more than the face value. Why would they do that? Well, if interest rates have dropped, then bonds being sold today may have smaller coupons, so investors stand to make less per year. Someone who wants to invest today might be willing to pay for your bond (which has a higher interest rate). When this happens, your bond is selling above par.

Sell your bond above par, and you'll make a quick buck.


Let's say the Galactic Empire incorporates and decides to issue bonds because they're in debt after building a new space station. Darth Vader decides he wants to buy a $1,000 bond. He's getting up there in years and wants to be able to enjoy his days in retirement at some point. He gets himself a 5-year bond with a 10% coupon. That means that every year, he'll get $100 for handing over his cash, and at the end of five years, he’ll get his original $1,000 back.

After two years, Darth is dreaming about what he'll do with that money if there's a disturbance in the Force. Interest rates drop. Now the same type of bond from the Empire  comes with a 6% coupon because of the change. Good ol' Darth is feeling pretty smug because his bond is locked in, but what happens to anyone who wants to invest now? Well, they can accept the lower coupon (which means they'll make only $60 a year on the same $1,000 investment) or they can buy an older bond with better rates—the kind of bond Darth has. Darth Vader's bond is selling above par, meaning it's selling higher than its face value. Investors may be willing to spend $1,170 or so for Darth's bond.

Should Darth sell? After two years, he's collected $200 in coupons and invested $1,000. If he sells for $1,170, he'll have made $370 from his investment ($200 from the bond and $170 from the sale) and he'll get his $1000 back. If he were to hang on for the full five years, he'd make $500 ($100 a year for five years). Is it worth it for him to get $370 back now? Maybe... if he needs new boots now.

Account At Maintenance

See margin maintenance.

You can set up a brokerage account if you want to buy and sell stocks and other securities like a rock star. If your account gets listed as "account at maintenance," consider it a yellow flashing light warning you that... there's a problem. Danger, danger, Will Robinson.


This situation usually happens if you borrow from yourself or your brokerage firm to invest. For example, you might get a brokerage account with Fidelity that has a 50% margin. That means that if you pony up $15,000 of your own dough, Fidelity will let you buy up to $30,000 in securities. You might decide to get $29,500 in investments, which leaves you about $500 in wiggle room or equity (you have $15,000 of your own cash in there, but the $14,500 from Fidelity is kind of a loan).

The tiny print in your brokerage account agreement says that you can't go too far into debt on the account. If the Fed Chairman sneezes and the market goes down a percent or two, you will suffer a margin call, which means you'll be forced to sell securities likely just at the wrong time; i.e. when the market is down.

Don't let this happen to you.

Account Executive

Fancy name for "broker." This person (or company) is in charge of taking orders from whoever is buying and selling investments.

If you want to buy and sell stocks, for example, you're going to do that through a broker or account executive—and pay some commission for the whole thing.

Account In Trust

"In account we trust."

An account in trust is an account held for someone else (usually because that someone else is a minor). The idea is that the adult manages the account because the person named on the account can't manage it themselves.


When Uncle Joe manages the account for little Sally, Sally trusts Joe. She's 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

An accounting period is usually a statement of what happened financially in the last quarter or year.

Here's what matters:
  • Wall Street reporting
  • tax status
  • employee contracts
  • union contracts

It all needs to be reconciled and reported on a regular basis.

Accounting Rate Of Return

Accounting Rate of Return (or ARR, just like a pirate, matey) is the amount of profit (also known as return) you can expect to make on an investment.

You can use the ARR to compare investments and see which one will make you the most moolah over time.

One word of caution: the ARR is pretty basic and it does not take inflation into consideration, so it's up to you to keep in mind that if you're making $100 a year from an investment, the $100 you earn this year is going to be worth a lot more than the $100 you earn on that same investment ten years from now. 

Accounts Payable

Think MasterCard: you bought it but you haven't paid for it yet. 

If you run your own business, these puppies tend to show up on your balance sheet, and they're the things you need to pay up soonish (think short-term loan).

Accounts Receivable

You own a business and have offered a line of credit to someone who really wants to buy your Star Wars-themed phone cases. On your balance sheet, that transaction is listed under accounts receivable, or the tab you're keeping open for customers you hope pay up soon.

Accredited Investor

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

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

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

Accrual Accounting

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


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

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

Accrued Interest

Time's always ticking—especially if you own (or pay out) bonds. Let’s say you invest in a bond that has an 8% coupon that's paid twice a year. A quarter of the year in (and half way to the first payday), your cat starts upchucking something blue, and you decide to take Miss Snuggles to the vet. To pay for it, you sell your bond. When selling your bond, you can tack on the 2% you would have earned so far in interest.

And that's the accrued interest.

Accumulation Period

You're pouring your hard-earned bux into an annuity so that one day you can live comfortably.

But here's the thing: funding an annuity takes time. The time you spend funding that annuity and gathering money into it is the accumulation period. What happens after this period? The good stuff—also known as the annuitization phase. That's when your annuity pays you so that you can play golf and show up for the blue plate special dinners at 4:59PM.

Accumulation Units

Let's say you buy life insurance after seeing just one too many heart-rending commercials. As you pay money on that life insurance policy, you are "accumulating" value in it (duh).

But that accumulation is usually broken into distinct chunks. A chunk or unit might be described as
  • a hundred grand
  • the first 6 months of your policy
  • the first two years

Or something else. These units are known as accumulation units, and they decide what value is there, should you one day bite the proverbial dust. These units are also why someone who has been paying into a life insurance policy for a year will get a smaller payout than someone who has been paying in for twenty years.

Active Investing

Active investing means that someone (hopefully someone who knows what they're doing) is in charge of managing the money and investments in a fund.

When you buy shares in a mutual fund, for example, you're paying a fee because someone has hired theoretically smart analysts and portfolio managers who spend all day looking at stocks and bonds to make investments on your behalf. The idea is that these managers and analysts are... active. They are using their own experience, forecasts, research, and other stuff (hopefully not psychics) to decide which investments are best.

The opposite of active investing is passive investing (duh), which is just... buying an index fund. Index funds doesn't have portfolio managers; what they do have are rebalancers. Might sound like Marvel villains, but they're really just finance folks who check every so often (usually quarterly) to make sure that the index still reflects what you think you bought in the first place.

Active Risk

In a portfolio which is actively managed (like a mutual fund or a hedge fund but not an index fund or ETF), "active risk" is the risk in the portfolio taken on by the investments (and the analysts and portfolio managers who put together the fund).

See, risk is a fine line. The riskier stocks might explode and help a fund do really well... or they might tank and pull down the fund with them. Good managers balance risk so that the fund doesn't tank but also has a chance to grow. Investment companies usually put together products with different risk levels: higher risk investments for those who like the money equivalent of skydiving and want a shot at big cash and lower risk investments for those who want fewer late nights with antacids because they're worried about their mutual fund. 

Ad Valorem

This here is a fancy Latin phrase for property tax.

"Valorem" means "value" and "ad valorem" means "according to value"—which you might know if you went to Latin class or survived catechism. Given what it does, you'd think it would have been named minus valorem.

Ad valorem can also be levied on imported stuff like a duty. In either case, it helps keep the coffers of your local or state governments fuller.

Adjustable Rate Preferred Stock

Okay, first see preferred stock for the gist.

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

And that's how it's adjustable.

Adjusted Closing Price

With so many things being so confusing in finance, it’s nice to get a clear answer. On any day, you can look up a stock’s closing price and get one number. Clear as clear can be, right?

Not so fast, bucko. A pickle is not always a pickle—sometimes it's just an old cucumber somebody dropped in salt water. Closing price can be one number, but it can be affected behind the scenes by corporate stuff like rights offerings, dividends, stock splits, and other corporate actions.

The closing price, if it's affected by this stuff, gets adjusted to reflect said actions. A famous example is the one-time enormous dividend made by MSFT (Microsoft) when Bill Gates retired from the CEO role. That little action required some adjusting. Without it, the closing price of MSFT would have looked less spectacular than it really was.

BTW, adjusted closing price is important when looking at historic closing prices or when doing analysis on historic returns. If you're just an average investor, though, you probably won't even run into it.

Adjusted Gross Income - AGI

Adjusted Gross Income (AGI) refers to all the money you make that you have to pay taxes on. It includes your salary, bonuses, money you make from mutual fund distributions, your freelance job, that vacation home you rent to the weird woman with the parakeets, and anything else that the IRS (God's financial quarterback) can dip into when it’s time to pony up income tax.

AGI matters at tax time, but it’s also a big deal if you decide to buy a house. Your banker will take a look at your AGI when deciding how much to lend you, so it can decide whether you can afford a fixer-upper with the ten-foot Elvis bouffant on the roof or the fancy condo with only a modest-sized Elvis shrine. The higher your AGI, the more the bank will generally be willing to lend you.

Adjustment Bond

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

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

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

Advance Refunding Or Prefunding

Let's say you want to buy a shiny Bugatti on credit. It costs a cool $3,000 per month—how can you make sure you can make the payments? Well, you might want to sock away a few Gs in the bank. Even if you have a posh payday, a little extra in the bank can help you out if you spend a little too much at Versace.

Advance prefunding works the same way—but with bonds, not cars. With "safe" bonds, or bonds where an administrator is worried about the cash actually getting to the people for whom it was intended, a prefunding feature can ensure that money is socked away. 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.

What happens if a government issues bonds and then runs a little short when it's time to pay up? One option is to issue a new bond to pay off the outstanding bond (that means a past due bond—not great). That's called advance refunding and it buys the issuer a little extra time in paying off their debt.

P.S. The concept is kind of arcane, yeah.

Advance/ Decline Ratio

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

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

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


The money-whisperer.

Yeah, this is the person who actually manages the money. If you buy a mutual fund, for example, there's a distribution company that brings in customers like you and brings in the dough for investing. That company hires the advisors, who sit around in suits and decide what investments go where. The money you pay in fees for your mutual fund is used to pay for these advisors. 

Advisor Account

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 have an X-Files "Trust No One" phone case (The 90s were cool, we get it).

So you set up an advisor account. The advisor works directly with you, the client, to figure out where you're puttin' your dough.  You stay in the driver's seat and decide which investments you want in there and which ones you don't (Apple? Puh-lease—you want something more obscure than that.)

You pay for that kind of control, though—and it's usually a percentage of the assets in your account (so if you're quite a fat cat, you might have to get a little fatter to pay for it). 

Affiliated Person/ Investor

Let’s say you enter the school spelling bee. And so does your older brother Sam, who’s the top-notch linguist in the country. Should you be treated the same? Not hardly fair, is it?

It works the same with securities. When it comes to trading, buying, or selling stocks and other securities, people working inside a company have a leg up when it comes to their own securities. Why? Because they have special insider information. These people—including C-level officers and board members—are considered affiliated persons and they have to follow a bunch of extra laws. If these types own more than 10% of their own company's securities, they're considered affiliated investors and they face even more restrictions.

It all helps level the playing field between insiders and you, the average Joe or Jane investor.   

Aftermarket Securities Transactions

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

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

Money never sleeps. 

Agency Bond

When you're a big dog like the federal government and want to issue bonds or T-Bills, you can guarantee your bonds with all the cash of the government (like the major moolah in the Federal Reserve).

But what happens when you’re a medium-sized dog... like a government agency? If you’re Fannie Mae or another government agency, and the government won’t guarantee your bonds, you can issue agency bonds. You have to pay a slightly higher interest rate than the Fuzz, but you get cash by issuing bonds. Booya.

Agency Broker

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 any large agency. This guy usually works for large companies placing big block orders on exchanges. Broker agents must try to get their clients the best prices and look out for the clients' best interests—in theory. In reality, there's lots of fancy footwork they can do to get around these rules (look up front running for the gory details).

Broker-dealers are self-dealers: they look out for numero uno and buy on behalf of themselves. They aren't agents and they must only fulfill orders they intend to see through.

Ciao, baby.


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

All Or None

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


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

Alligator Spread

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

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

Allocational Efficiency

Here's the theory: if markets were efficient, capital would be used in a way that had benefits for everyone—customers, companies, and investors.

The idea is that there is a near-perfect balance where companies make the right amounts of the right stuff using the right techniques while keeping costs fair so that customers get what they want at good prices, jobs are plentiful, investors profit, and everyone sits around their dining room tables holding hands and singing Kumbaya.

Look out the window—we’re definitely not there yet (and not just because no one knows the words to Kumbaya). 

Alpha Risk

Alpha risk is a ratio that your portfolio manager uses to compare her picks for your fund or portfolio against a benchmark (that could be other funds or the S&P 500).

If your manager picks a bunch of stocks and investments that push your fund up 10% in a year when the S&P 500 (or whatever the benchmark is) is doing 8%, your manager gets bragging rights (and possibly a nicer office and a promotion).

Alpha risk is often expressed in math equations that would only make a mathlete happy, but the main thing to remember is that when someone talks about High Alpha, that's good (low Alpha is bad).

Alternative Investment

Investments you might be familiar with include stocks, bonds, or good ol' hard cash. Alternative investments include things like hedge funds, real estate, commodities, and fancy derivatives. They're sometimes known as alts and are usually only owned by "accredited investors” (people with lots of money).

Alternative Minimum Tax - AMT

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

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

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

Alternative Trading System

ATS is like an eBay for stocks. It's another way to buy and sell shares without going through NASDAQ. It’s sort of the off-Wall Street, off-grid, off-Broadway version of NASDAQ. Examples include crossing networks and ECNs (Electronic Communication Networks).

American Callable Bond

Them silly Americans... callin' their bonds any time they want. That's what an American callable bond is: the company or government issuing the bond can call it at any time prior to its coming due. Why would an issuer call a bond? Not because they're lonely on a Friday night, but because interest rates have gone down or their rating at Moody's went up. The issuer can call the bonds and issue new ones at a lower interest rate, saving them cash. 

Why would an investor want to buy these bonds if they can be called at any time? They usually carry higher coupons than non-callable bonds. 


Let's say that a pretzel company issues a callable bond bond paying 9.5% interest. They issue a new pretzel and pay off some debts, so their credit gets better and Moody's upgrades them from CCC to BBB status. Interest rates overall drop. The company calls the bonds and reissues new bonds that pay just 7% interest, saving them enough money to invest in new kale-flavored pretzels (the Moody's ratings boost made them very confident).

American Depository Receipt/ADR

Have you ever noticed that some of the things you like aren't as American as apple pie? Well, you can't help having great taste. Thanks to the powers of international trade and a global economy, you can buy stuff from all over the world. It's the same when it's time to invest. You can buy home-grown stocks like Google, but if you want to buy shares in foreign companies you might want to look into American Depository Receipts (ADRs).

ADRs are stocks that have shares of foreign companies. These stocks are sponsored by U.S. brokerage companies, and they can be bought and sold in the U.S. just like your favorite U.S.-based stocks. 


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

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

American Style Stock Option

American style can include jeans, cowboy hats, or Jersey accents. In the finance world, American style options refer to how you exercise your stock options. No, we don't mean popping them on a treadmill. Stock options let you buy or sell options later at a set price—and it's a privilege you pay for. If your stock option is American style, you can exercise it at any time. With a European Style stock option, you can only buy or sell at the specific price on a specific date (the expiry date).


Let's say you have an option to buy shares of the company you work for at $75/share. The current asking price for the shares is $100. If you exercise your options and buy, you stand to make $25/share if you turn around and sell right away. But hold on a sec. Your strike price (that’s the $75) has an expiry date. If your options are American style, you can exercise them (make good on that strike price) any ol' time. But if you have European style stock options, you'll have to wait until the day your option expires to exercise it. Silly Europeans.


The process of assigning costs or revenues across time.


You license 1 year of house-sitting duties on an as-needed basis for $1,200. You are paid all $1,200 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

See amortization.

Let's say you buy an amortized bond that 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. After three years, the bonds will produce less cash for you than they did on the date when they were shiny and new. One way of accounting for that is to think of bonds as a depreciating asset.

Analyst Expectation

Analysts and the rest of the Wall Street community spend a lot of time eagerly waiting for reports and financial information with the same eagerness your local Comic-Con goers await the newest Star Wars release. And both sci-fi junkies and analysts have lots of expectations. The sci-fi fans might expect the latest special effects, while money guys might expect that companies will post certain earnings or other data.

Analyst expectation is also known as "Street Numbers," and it refers to the numbers that money folks think a company will post for their quarterly earnings or other estimates—before said company actually posts the numbers.


Let's say 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

Most stock brokerages employ analysts. See sellside analyst for details.

Despite being wrong well over 50% of the time, these analysts continue to write opinions about stocks and publish financial models. And Wall Street still listens, even though they know their track record. Stock brokerages even pony up money in trading dollars and commissions for these guys—much like your local weather channel continues to pay for the meteorologist who's only right about 30% of the time.

Analyst sponsorship happens when an analyst gives a thumbs-up, positive review of a stock. When that happens, the stock usually goes up. If the sellside analyst works for a big brokerage like Goldman, he or she can have an especially big impact on a stock. Dolla dolla billz, y'all.

Annual Return

Annual return is simply what you get back from your investment each year. It's the whole enchilada of what your investment makes you (or costs you), including capital gains or losses and interest or dividends. It doesn't include stuff like taxes and commissions.

If you're trying to compare different investments or trying to decide whether you want to invest in a specific stock or investment, you're probably going to be looking closely at the annual return to figure out what's what.


You owned Smooshem Ketchup Company last year on January 1. The stock traded at $50 a share. By New Year's Eve, the stock was trading for $55. But it also paid $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

An annual return is what you make from your investment each year. But what happens if you own your stock or investment for a whole bunch of years? You can figure out the Annualized Total Return, which is the geometric average of your investment's returns.

One problem: this method of evaluating returns misses the volatility of the investment. Did it double and then get cut 80% and then go up a lot at the end of the year? Or was it Milwaukee Ski Slope-flat and nicely boring during the year? Unless you like the taste of Pepto-Bismol and bitter tears, you probably prefer the latter, slightly less dramatic option.


When a lump sum is converted into regular payments over a chunk of time. If you have big chunk saved up with a retirement plan or life insurance, the amount will be annuitized so you get a regular income from your cash. 


Let's say you've been saving up with a life insurance plan that's also an investment for your later years. You hit 65 and decide you've had enough of office politics. SnoopyInsurance agrees to annuitize the $500K you've  set aside as an asset in the account and pay you $2,500 a month for the rest of your life, no matter how long you live—but the benefits stop the moment you do.


If you're one of those people who's convinced you're gonna Highlander it and live forever, great. But 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.


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

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

Annuity Due

See annuity, annuitize.

Annuity due is different from annuity dude, the guy who sold you the annuity in the first place. An annuity due is an annuity that pays at the beginning of a time period. If you have an annuity due and you get monthly checks from it, you can expect those checks to start showing up at the start of the month (rather than later). 

Anti-Dilution Covenants

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

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

Anti-Money Laundering Laws

Newsflash: you're not supposed to launder money.

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

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

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

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


First see dilution.

Recap: dilution is bad. If you have a nice glass of lemonade and put a bunch of ice in it, eventually the lemonade will start to get watery... a.k.a. diluted. (Science!) If you own 50% of the shares of a company with 1 million shares outstanding and the company issues 1 million more shares, you'll own only 25% of the company. (Finance!)

Consider dilution from 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 investors (in exchange for $). The problem is that the more shares the founder hands over, the less of her own company she owns.

An anti-dilutive act is anything the founder does to stop this problem. For example, she might buy back some of her own shares.


Some companies are anti-dilutive from the start, especially if they don't need a ton of money to get started. Yahoo! required only a little over $1 million 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.

Approved List

If you're on the approved list at a club, you can probably sweep into the VIP lounge without having to wait in line. If your company is on an approved list at a money manager's office, your shares could end up in an investment portfolio.

Active money managers have an "approved list" written out (or at least in mind) to purposely choose and limit the securities they can put in a fund. For example, a money manager might have a fund that's advertised as an ethical fund. That might mean no "sin stocks" get put on the list: no tobacco, no adult entertainment stocks, you get the point. 


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

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

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

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


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


The key letter in ARM is A, and it stands for adjustable, as in Adjustable Rate Mortgage.  Most mortgages have a fixed interest rate. That means you pay 5% interest (or whatever your rate is) during the first year you have your mortgage, during the third year, and all the way to the final day you have that loan and can throw your big "We Paid it Off" party.

With an adjustable rate mortgage, your rate can change. 

Why would you want to get an ARM rather than a fixed rate mortgage? Well, maybe you like the element of surprise. More likely, you can save a few bucks at the start of the mortgage loan. If interest rates are expected to rise, you can get a better rate (at first) with an ARM than you can with a fixed rate mortgage. By the time your ARM rates go up and you have to pay more, maybe you'll have gotten that promotion at work. Lots of folks choose ARMs because they seem like a better deal on paper, but you'll want to run side-by-side comparisons to figure out whether they'll cost you more in the long run. You'll also want to make sure you can afford your home loan—even if interest rates go up. If you're just barely making payments now and your monthly mortgage costs go up $300, what are going to do? That's the sort of situation that causes people to lose their homes.

ARMs have a couple parts. They usually start with a low interest rate and have  a guaranteed period of time for that interest rate, so you know your interest rate won't go up right away. An ARM also usually comes with an index (like LIBOR) against which it is adjusted, a step up percentage (how much the interest rate will likely grow each period), and maybe a cap (the maximum rate it can be raised in a given period). That all makes sure that the rate won't balloon out of control.

Some ARMs are interest-only for the first few years. The monthly amount you pay is really low, but you're also not paying down the principal or the amount you borrowed. That means the total amount you owe to the bank is not going down any. The upside is that your payments will be affordable at first, and you'll have time to increase your income or get a great job (and hopefully give interest rates a chance to drop). 


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:

YearInterest RateMonthly PaymentAnnual Payment

Bank consortia, which price mortgages, are usually smarter about the pricing of mortgages than Joe the Plumber. Yet there's always a guy who wins the lottery. What happens if the interest rate steps up at intervals of 1% instead of .25%?

YearInterest RateMonthly PaymentAnnual Payment

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

YearInterest RateMonthly PaymentAnnual Payment

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


What you do when you want a prom date.

In finance, the ask or the bid-ask is what the seller wants to sell for. The price includes the commission or other fees the dealer will get. 

Assessed Value

If you own a home, there are two prices attached to it:
  1. The price you pay for it or can sell it for (that's the market value).
  2. What your home is officially worth (that's the assessed value).

Why two house prices? To keep things interesting—and to get you to pay your taxes. Your state charges you property taxes just for the privilege of living in the state. They charge more for the guy living in the McMansion than they do for the guy living in the one-bedroom bungalow (usually), but they still need to figure out who pays what.

Each state is a little different. Some states use a formula and don't even worry too much about what you paid for your house or what your house's value is. In California, you pony up 1.25% of the price you paid for your home, with some adjustments for inflation. In other states, an assessor takes a look at your home every so often and comes up with a dollar figure of what the house is officially worth for tax purposes. Usually, that number is lower than what you actually paid for your hose, and if you whine enough, the assessor may make an adjustment so that for that year at least, your tax bill can come down.

Asset Allocation

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

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

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

Asset Backed

This term is used to describe a type of security that's got an asset backing it up.

It's usually a specific physical security like a wad of cash backing a company that's issuing bonds. In theory, this type of security should be safer—if things go belly up, the company can sell the asset to have the money to pay its shareholders. 


These aren't the sorts of assets people are talking about when they talk about Marilyn Monroe. In financial terms, assets just refer to stuff you own that's worth something. You might have a lot of love, but financial types are more interested in the value of your home, your retirement fund, your stocks, and anything you can sell to make a buck.

Tally it all up, subtract your debts, and that's where your assets are. We hope it's as impressive as Marilyn. 


An orthodontist is 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. Oh, and $12,000 worth of crap in their garage that really should be sold on eBay. Those are all assets. 

Assets Under Management

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

Associated Person

It sounds so devious.

Picture a bright light shining in your face and a dark voice asking, "Are you now or have you ever been associated with an associated person?"

The reality is far less ominous. 

An "associated person" is just a principal of a FINRA-covered firm. They are "associated" with it and have to follow the firm's standards in their behavior and golf game. If the firm has a softball team, they're probably part of it.


Asymmetric Information

Asymmetry happens when two sides of something aren't equal. Think: fiddler crabs.

In the financial world, asymmetrical information exists when one side of a transaction has more information about stocks, bonds, or securities, than another.


Insiders may get some information about their company and then sell or trade stocks before other shareholders get wind of the same info.

It's illegal. Do not do it. We love Orange is the New Black, too, but no one looks good in prison colors.

At Par

If a bond (or other debt or preferred stock) is trading at par or at 100, it's trading at face value, and investors buying the bond expect getting a return that matches the bond's coupon.

Finding a bond trading at par, by the way, is only a little easier than finding someone who doesn't have the hots for Indiana Jones. Most bonds trade either above or below par.
  • When interest rates drop, investors are willing to pay more for older bonds with higher coupons, and bonds will trade above par.
  • When interest rates increase, those lower interest rates look about as appealing as mold on a sandwich, and bonds will trade below par (for less than face value).

Interest rates aren't the only things that can affect a bond's ability to trade at par, BTW. Company news can affect it, too. If an alien spaceship attacks your factories and kidnaps your staff, your bond value may decrease, too.


Let's say a bond yields 7%, meaning that for each $1,000, you get 35 bucks paid to you twice a year. This bond was issued 8 years ago, and now similar-risk bonds have gone way up in price (and yields have gone way down).

So this bond might be quoted at "110," meaning that you pay $1,100 for that same sheet of paper today so that your yield is not 7% but rather 10% less than 7% (because you've paid 10% more for the bond). That new yield is 6.3%. You paid 10 points over par for the same $35 twice a year you're getting.

At-the-Close Order

Stocks and other securities go up and down in price all day long. If you happen to order yours at the close of the market (at the end of business hours), you have an at-the-close order, and you'll generally be paying the closing price for the day (this can be bad news or good news, depending on what the closing price was).

It may be easier to think of it in terms of fast food: If Big Mac prices changed every minute, and you ordered one at the close (midnight at your local McDonalds), the burger flippers' clerk would scream your name at 11:59PM. Whatever the price for BigMacs was at that moment would be the price you'd be charged.


Is sounds like something contestants shout during Wheel of Fortune ("Big Money! Atta Money! At-the-Money!"), but at-the-money means that stock prices match the strike price of the stock options that an investor has bought. So if you have the right to buy a share at $50 and then the share actually is at $50 when you go to buy, the share is at-the-money. 


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 a share (the bid), then it is said to be "at-the-money" or at the strike price. If it climbs above $80, then it's "in-the-money"; below $80, it's "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

Sort of a door crasher for securities. If you give your broker an at-the-opening order, they are expected to get their behind into the market and buy on your behalf as soon as the market opens.

If the lineup at Starbucks is extra-long that morning and they can't buy right at the opening of the market, they cancel the order. 

Auction Market

The New York Stock Exchange is an auction market, which means that the prices on that market happen during a bidding process where matching offers get matched. Buyers and sellers buy and sell at the same time, so in essence, two transactions are happening at once.

The opposite of this sort of the market is the over-the-counter (OTC) market, where dealers are the ones holding the cards and ultimately determining price. 

Auction Market Preferred Stock - AMPS

In AMPS, an auctioneer resets a preferred stock's dividend about every 7 weeks, after a dutch auction. (It has nothing to do with Tulips or cheese; a dutch auction happens when the lowest price needed to sell a whole bunch of securities becomes the price at which all the securities are sold.) AMPS are useful for large investors.

Authorized Stock

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


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

Authorizing Resolution

When a company's board of directors decides to make a specific corporate action.

They decide to launch a new product? It's an authorizing resolution. They decide to appoint a new position? Authorizing resolution. They decide to throw a parade with glitter and floats? It might raise an eyebrow or two, but it's still an authorizing resolution.  

Automated Client Account Transfer (ACAT)

After you make your first billion or so, you’ll probably have lots of different types of assets (stocks, bonds, hedge funds, weird exotic pets), and you’ll work with different banks and brokerage firms as you juggle all that stuff.

Each time you want to transfer an asset from one bank or brokerage company to another, there’s lots of paperwork to fill out (ah, the problems of the rich). To help you with that, the National Securities Clearing Corporation (NSCC) created ACAT, a system that allows for easier transfer of assets between accounts and financial institutions, so you have more time to actually spend all that dough or go lunching in Bora Bora. 

Automatic Reinvestment

Your mutual fund or other investment makes you money on the regular. What do you do with it? Well, you could go out there and spend it like a don. Or, you could set up automatic reinvestment, which means the money your investments make is put right back into your investment or fund to make you even more cash. Many mutual funds include this nifty feature, and the fine print might even tell you that don't have to pay commission when your cash is re-invested. 

Average Cost Basis

It's a tax issue. The IRS is really interested in how many gains or losses you make on your mutual funds because they want to be sure to tax you on your gains. The average cost basis is one way to arrive at an answer. Basically, you tally up everything and divide by the number of shares to get the number. 


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 x 4,250 shares or $92,480.

Away From Market

It's terrible when your throw pillows don't match your decor or when your shoes don't match the rest of your outfit. Money types also worry about things matching up. When you make an order and quote a price for a share but the share is currently at a lower or higher price, it's away from market. 


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.


See A-Shares.

Currently, there are a few flavors of shares out there, including A, B, and C shares (yeah, the person naming these could have used a few pointers). The basic idea behind B-shares is that they are a class of mutual fund. What makes them different? If you buy 'em, you only have to pay fees when you sell the mutual fund. On the one hand, you're paying fees on a bigger amount because you've been socking money away in your fund and your fund has been growing (we hope). But on the plus side, you've had a chance to grow your fund without paying those pesky fees all the time.

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

Back End Load

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


Ooh. This is bad. Scandals. Jail. Silicon Valley soap opera. 

When an important employee is hired by a young company, they might get a generous option plan for company stock and a more modest salary and bonuses. Why? Because young companies don't have a lot of cash now but want to attract good workers, and they're betting on the fact that employees will be tempted by the possibilities of those options.  

There are usually some limits with the options. For example, the employee might have to stay in good standing at the company for 4 years and must sell their options within 10 years or so of them being granted. So far so good, but these options must also come with a strike price, which is the price at which the employee can buy the stock. That's where things can get sticky. How is this strike price created? Usually by looking at the average closing price over the last 120 days of trading or something like that.

Some shady companies (and employees) realized that they could backdate their options, which means slapping on a price from a date a few days, a few weeks, or a few months earlier (when prices were lower). Getting that lower price by fudging a few dates means bigger potential profits for the employees who will eventually sell the stock.

Just one tiny problem: backdating is illegal.

In 2008 and 2009, though, it didn't prevent some big backdating scandals in Silicon Valley. Since then, laws about backdating have gotten stricter.


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.

Backing Away

What you do when talking with someone who has wicked halitosis.

In the financial world, backing away means making an offer and then changing your mind. It violates a bunch of rules and gives the market maker a bad name so others don't want to do business with them any more.


A market maker offers to buy 100,000 shares of MSFT from you at $26.12... and then changes their mind.

Balance Sheet

A balance sheet contains a bunch of numbers and information that can help the accountant figure out the nitty gritty of a company.

For everyone else, a balance sheet just refers to the assets a company has. 


Your daddy gives you $100 to start a chocolate pretzel stand. After 3 weeks, you've 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

A mutual fund made up of both stock and bonds. Simple as that.

Balloon Loan

What happens when your sister gives you her balloon to hold at the fair.

Also, a loan where you make a steady stream of payments and a then a big, final payment. It's easy to remember this one: think of the long period of payments as the string on a balloon and the final payment as the big round balloon. 

Balloon Maturity

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

Basis Point

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


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

Basis Quote

The basis quote is used with futures contracts (those are contracts that promise to deliver a commodity or bond or currency by a specific date at a specific price). A basis quote makes it easy to read futures quotes by referring to the price of another futures contract.


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

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.

Bear Spread

Sounds like something scandalous at Yosemite, but really, it refers to a situation where an options trader buys and sells options in the same class at the same time. The trader thinks that the underlying security prices will drop. By buying options on different dates, losses can be kept to a minimum. 

Bearer Bonds

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

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

Best Bid

If you were to peek over a professional trader's shoulder to look at their computer screen, you'd see a line with numbers above and below the line. These are buy and sell offers. When the trader gets a message from a client, he or she has to look at all those numbers and find the "best bid" or best price for that client.


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 price for his client (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

Possibly Marie Antoinette. Or William Wallace.

Oh, we're not talking about town square executions?

On Wall Street, best execution is when a broker giving the client the best price and service possible. That might mean choosing the lowest prices on offers if the client is buying stocks. Or it might mean doing some fancy footwork (financially) to make a trade move smoothly and quickly.


Let's say a client wants a million shares. You can offer 100,000 at $23.13, but there's an offer to sell a million at the higher price of $23.18. If those million are sold to someone else and suddenly there's 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 is a measure used to describe volatility or risk of a portfolio or share. Usually, Wall Street types use the market as a whole to measure how risky or volatile something is. 


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

Bid-Ask Spread

The bid-ask spread is a quote security dealers give to potential customers when referring to a specific security.

The quote has two prices or numbers: the price at which the dealer will buy a specific security (the "bid") and the price at which the dealer will sell (the "ask"). The ask price will be higher; the difference between the two prices represents the dealer's profit for the transaction.


A dealer gives a potential client a bid-ask spread of "20.00–20.50." The dealer is saying that he will buy at $20 and sell at $20.50.

Black Scholes

It sounds like something to do with shoe fashion ("Black Scholes are just all the rage in Paris this year!") but it's actually a math formula and a system for coming up with the price for the value of stock options. Developed in the 1970s, it involves a lot of complex equations... that you don't need to know.

Block Trade

When a company or a group of investors wants to buy a big bunch of bonds, stocks, or other securities, the deal is called a block trade. It often involves arranging a price beforehand and usually means that the trade happens outside of the open markets (because big trades like that could cause some investors to panic or could affect the markets too much). 


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

High-falutin' and high quality stocks. Think: Disney, American Express, Coke. Basically anything Warren Buffett owns. These stocks are usually from large companies that have a track record of making profits and making money for investors. 

Blue-Sky Laws

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

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

Bond Anticipation Notes

When a new James Bond movie is about to come out, we all quiver with anticipation. When a municipality or company wants to fund a project but can't wait to issue a larger number of bonds, they can issue bond anticipation notes. These are short-term, smaller bonds issued before a larger funding project. When the company or municipality makes a larger bond issue later, they can use the money from that issue to pay for the bond anticipation notes. 

Bond At A Discount

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

Bond At Par

Par value is the stated value of a bond when it's issued. When a bond trades at par, it trades at its face value, and you get what the coupon says. In reality, bonds almost never trade at par because interest rates go up and down all the time, meaning that investors are willing to pay more or less for a bond based on that. 


A company might seek to raise $10 million. It issues bonds at an 8% compound rate which it is obligated to pay, effectively renting the $10 million for the price of $800,000 per year. After a year, interest rates drop to 5%, and now investors are willing to pay more than face value for the bond because the bonds being issued now have only 5% interest, meaning investors get less for their money. The bond is trading above par. Another year rolls by and interest rates climb to 10%. Now that 8% looks paltry, and if you want to sell your bond, you'll sell below market value (below par). If interest rates hit exactly 8%, you can trade at par, but... don't hold your breath.

Bond At Premium

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

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

Bond Components

These are the parts of a bond, or what's under the hood. You'll want to look at all these components when deciding whether a bond is worth your time and money. Most bonds have four basic components:
  • Interest Rate/Coupon Rate: This is the interest rate you'll be paid for investing in the bond.
  • The Borrower: Companies don't issue bonds out of the goodness of their hearts. They issue them because they need to raise money, and they need you to lend them cash. The quality of the borrower is important. If the company goes bankrupt and you're left holding their bond, you might never get paid for your investment.
  • Maturity Date: This is the date at which the bond comes due. Every year you have your bond, you'll earn a bunch of cash for lending the issuer money. When you reach the maturity date, you'll get back the money you invested, too.
  • Principal/Par Value: This is the amount the bond issuer borrows from you and the amount you lend. Bought a bond from an issuer for $1,000? $1,000 is the par value.

Bond Duration

Duration refers to the length of time from when a loan is made to when it is paid off. It can also refer to the length of time until a bond matures. Some bonds are very high duration (Disney has issued 100-year bonds) while most others are much, much shorter in duration.

Loans with a long duration will reflect prices that are much more volatile than bonds that come due in a few years. Over a 100-year period, you'd 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

A mutual fund that invests in—yep, you guessed it—bonds. Bond funds can be diversified (meaning that they invest in many different types of bonds), or they can be more specific, investing in, say, only in municipal bonds or other specific types of bonds.

Bond funds are considered more stable than funds that invest heavily in stocks, since bonds are less volatile. However, bonds also have a smaller potential for growth. Check out our section on investing for more on all that.

Bond Point

The bond point measures the price of a bond relative to its par, or face value. The point is usually a percentage of the par value (about 1% per $100 of par 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

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

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

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

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

Bond Ratio

The percentage of a company's capital that is represented by debt. The higher the bond ratio, the more the company is leveraged and in debt. That's not necessarily a bad thing (are they using the debt to make more money or to pay for hot tubs for executives?), but it's something to be aware of. In most cases, if a company has a bond ratio of more than 30%, it is highly leveraged. In some industries, though, being in debt up to your eyeballs and issuing lots of bonds is the norm. We're looking at you, airlines.


If a company has total capital (debt plus equity) of $100, and $30 of that consists of bonds, then the bond ratio is 30%.  

Bond Yield

The amount of money that a bond will get you for your investment. The yield is the money the bond issuer pays the investor for lending them money. 


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

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

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

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

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

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

Bonds: Major Classes

So many flavors to choose from:
  • Senior obligation bonds aren't cranky or grey. They are the first type of bonds that a company would have to pay if they went bankrupt. These are often considered the most secure types of bonds for that reason.
  • Junior obligation bonds are slightly less secure than senior bonds. If a company declares bankruptcy, the juniors are paid after seniors.
  • Asset backed bonds are backed by the assets a company has. For example, an airline might guarantee its bonds via its airplanes.
  • Debentures are backed only by the credit of a company, so basically the company is just handing you an IOU and promising to pay you back ("trust us"). And if they mess up and can't pay you back? Too bad, cupcake. The only comfort you would have in that situation is that the company's credit would be wrecked if they couldn't pay their debentures or other forms of bonds. That might be cold comfort to you, though (especially if your investments are wiped out and you can't pay your utility bill).
  • Convertible bonds, like their name suggests, can be converted—usually into common stock. You can make a tidy profit converting bonds into stocks if a company suddenly starts to do well and stock prices increase.
  • Zero coupon bonds don't pay you anything until the very end. Once they reach maturity, the pay back what you invested plus all the interest that has built up in one chunk. The problem is that some companies have a hard time paying back all these payments at once. Some set up special funds so that they have enough money once their bonds reach maturity.

Book Entry

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

Book Value

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


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


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

Bought Deal

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

Bowie Bond

Yep. It's about David Bowie. In 1997, David Bowie—the rock star legend—created a new kind of bond to buy older recordings of his music. These bonds are backed by the revenues from Bowie's music. So if you owe Bowie bonds and your Uncle Harry is a big fan who's still buying CDs, more power to ya. The bonds were only for $55 million (that's not much by celeb standards)...but it's David Bowie. He wore those pants in Labyrinth, married Iman, and issued bonds.

Is there anything this man can't do?

Brand Equity

Brand equity is the value your brand has. It's usually linked to a few things, like
  • How many people have heard of your brand. (If no one has heard of your brand, you might not have a brand.)
  • How much people respect and like your brand. (If people hate your brand, you might have negative brand equity. For example, Al Qaeda Brand Aspirin probably wouldn't do so well in America.)
  • Your brand reputation. ("High brand equity" is a name you recognize easily and like or trust. That might be BMW, Disney, or the like.)
  • How readily your brand is recognized. (Shmoop, anyone?)

Break Out

It can refer to that thing that ruins your Saturday night date and makes you wish for darkness and Oxy 10. But it also refers to a stock which has "broken out" of its expected trading pattern. If a stock suddenly jumps up in price (or tanks) after chugging along steadily, it's a breakout. 


A 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 9:30AM is $26. The new pattern created from that $26 is a break out. 


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


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

Broker Call Rate

Brokers offer loans to customers buying on margin (that's when you put in a certain amount of money and the brokerage lets you invest for even more). To pay for all that, brokers get loans from banks. The interest that brokers pay on the loans the banks give them is the broker call rate. 

Broker Loan Rate

Also known as a broker's call, this isn't the sound of brokers howling in the night. Instead, it's the price that brokers pay to banks so that they can borrow money.

Why bottom? So that they can let investors borrow on margin (when a broker or brokerage fronts an investor some cash so that they can invest). 

Brokerage Account

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, anyone can trade stocks like a tie-wearing Wall Street dude. If you have the extra money to be able to invest, then... can we borrow a tie?

Brokerage Fee

Your broker makes sales happen by pairing sellers and buyers of securities. He or she doesn't do it for fun; brokers pay for designer clothes, fancy cars, and liquid lunches. One way they pay for all this is by getting fees, commissions, and other types of payments whenever a transaction is made. In other words, you pay for your broker's fancy shmancy life. 

Bull Market

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

Most investors love bull markets, when the general trend is upwards and investments like mutual funds tend to earn great returns.

Bull Spread

If a security is expected to rise in price, investors can buy different options with the same expiry date but different strike prices. It's called a bull spread, and the basic idea is to make money when the security increases in price while also limiting risk.

Butterfly Spread

No actual butterflies are harmed in the making of a butterfly spread.

A butterfly spread trade is basically a combo deal between a bull spread and a bear spread (the one time a bull and bear can make a butterfly). This spread involves buying four options with three different strike prices but similar expiration. The idea is that the market is volatile and this spread covers all your bases. It is relatively low risk but also comes with few chances to make bigger bucks. It's named after the idea that this strategy, like the butterfly, will "land soft" (you won't lose a ton or gain a ton).

Buy And Hold

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

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

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

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

Buy Limit Order

You want to buy a stock or other security but you're on a budget. You don't want to get fleeced. So you put in a buy limit order. This means that your broker or trader will only buy your stock at or below a certain price. You won't overspend and have to put off that vacation to Maui. 


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

The "sell-side" of Wall Street includes stock brokers, people who sell companies, investment bankers, capital markets makers, and other such folks. These people are all about making money, wearing ties, and driving fancy cars. If you've seen Wolf of Wall Street, you know who we're talking about.

The "buy-side" of Wall Street includes people like mutual fund managers, hedge fund managers, and pension fund managers.These are people who are responsible for the money and have an obligation to their clients. They have to report to shareholders and have to justify how much risk they took to make money. If they lost money, they have some 'splainin' to do.

Buy Stop Order

An order to buy a stock or security at a specific price above the current market price. This sort of order can help you avoid losses if a stock goes up a lot after a short sale. 


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.


If a seller promises but doesn't deliver securities,  you have a buy-in. The buyer will generally need to go elsewhere to buy the securities—and possibly at a different price. The seller is on the hook for any difference in price between what they agreed to and what the buyer actually ended up spending.


See A-Shares and B-Shares.

These mutual funds have no front loads (commissions charged when you get them) but do have small back-end loads of about 1%. If you hold the fund for at least a year, that number may disappear altogether. C-shares might be a good idea for those who want to get out of their mutual fund early (but after hanging in there for at least a year).

Calendar Spread

With a calendar spread, you buy one option at the same time you sell another option that has the same strike price but an earlier expiry. This spread lets you play around with due dates so that you can take advantage of different prices when options come due.  

Call Loan

Call loans are super short-term loans that banks give to brokers or brokerage firms. Brokers use the money to offer margins.

Let’s say you set up an account with a broker to buy $100,000 in shares and they offer a 50% margin. You pay $100,000, and the brokerage uses call loans to let you invest another $100,000. The call loan is backed up by the securities in the account, so the loan is pretty low-risk (which means low interest rates). Brokers have strict rules about how much of a margin they give clients, so even if the value of your investments falls, they still have enough dough to pay off the loans and make some bucks.

Call Option

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


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

Greed. (It’s good again.)

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

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

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

Call Premium

When you buy a call option, you are paying for the right to sell a share at a certain price, which protects you in case the price suddenly starts to tank. The money you pay for this option is the call premium. 

Call Protection

Call protection is the fine print in the paperwork. When you buy a bond, this language protects you, the buyer, from companies trying to get out of paying you higher interest. Even if the interest drops, the company cannot repay the premium early and issue bonds at a lower interest rate, fleecing you out of profits. Usually, the company has to wait at least five years before calling its bonds and issuing cheaper bonds. 


Let's say interests are high and 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

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


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

Call Risk

A call risk is the risk that your brokerage or the issuer of your bond will redeem or call the bond before its maturity. If this happens, you could lose out.

If you were supposed to get an 8% coupon for 10 years, but after 2 years the bond is called, you possibly lose eight years of profits from the bond. If interest rates go down, you also have the option of selling your bond at a higher rate (since investors will want to buy a bond with a higher interest rate and therefore more money being made). If a bond is called, you lose out on the chance to sell that bond at a profit.


For bonds, callable means that a bond can be called early and for less.

You might buy a bond that promises to pay 9% for 30 years, but the fine print makes the bond callable in 3 years at 102 cents on the dollar. This means the company could pay you off sooner and for less than you'd thought. This protects the company issuing the bonds in case interest rates drop a lot.

Callable Preferred

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

Capital Appreciation

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

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

Capital Asset Pricing Model (CAPM)

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

Capital Gains

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

Capital Gains Distribution

The fund manager looking out for your mutual fund may sell or buy some of the stocks and bonds in your mutual fund. If he or she sells and makes a profit, the profit might be distributed to the fund holder (you). If this happens, you will have to pay taxes on the capital gains distribution. 

Capital Markets People

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

Capital Stock

The total common and preferred stock that a company can issue (according to its charter, or the paperwork the company had to file when it became public).

Capital Surplus

See Paid-In Surplus. 

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


Capping is when selling pressure is placed on a stock to either lower the price or keep the price low. Selling pressure can be created when a lot of traders try to sell a share or stock, which keeps the price down. 

Cash Dividends

If you own stocks, the dividend is what is paid out to the stockholders when the company does well financially. Usually the dividends are paid in cash (a.k.a. cash dividends), but another option is to pay a dividend in more stock. 

Cash Equivalent

On a balance sheet, cash equivalents are cash and anything that can be sold and converted into cash quickly (within 30 days or so). That can include things like money market funds or T-Bills. Stuff like intellectual property and patents, although valuable, don't count because they aren't easily sold and made into cash.

Cash Flow

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


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

Cash Settlement

Let’s say you buy a lemonade from the kid down the street. You trade your two bucks for a lukewarm glass of what tastes like battery acid. Pretty simple trade, right? Not so if you want to trade futures or options. In that case, there’s lots of paperwork to be signed and papers to file. Information about risks and commissions must be shared. This is called “settling” a trade. When you settle a trade, it clears.

And there are two ways for trades to clear: the regular way and cash settlement. The regular way, not surprisingly, is the most common way. With a cash settlement, what happens is that, at the end of the contract, you will just be debited the difference between the final settlement and entry price. 


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


CBOT stands for the Chicago Board (Bored) of Trade (or Tirade, on angry days). It's an exchange where you can buy or sell futures and options. It is also the oldest options and futures exchange on the planet that's still trucking along. The CBOT was created back in 1848, and back then it mostly dealt with agricultural stuff like corn and wheat. It has since expanded into energy, gold, and other stuff. 

Certificate Of Deposit

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


Chief Financial Officer; also known (rarely) as chief fun officer.

If there were CFO scratch-and-sniff stickers, they'd probably smell like money, because that's what CFOs take care of. Companies hire CFOs to take care of the past, present, and future of money at the company. These pros collect and share information about historical and current financial data, make decisions about what to do with a company's money now (including where to invest it), and  make projections about what's likely to happen to a company's finances in the future.

The Wall Street Journal tells us they're not just bean counters.

Chinese Wall

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

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


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

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


Futures and options exchanges have separate agencies or companies called clearinghouses. The clearinghouses take care of regulations, settling trades, and reporting information. 

Closed Indenture

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

Closed-End Fund

See mutual fund. While a mutual fund is sometimes known as an open-end fund, a closed-end fund is more like a stock. A closed-end fund releases a specific number of shares during an IPO. Those shares can then be traded on an exchange; how much you make from this type of fund will depend on how the market does (just like with stocks). 


CMO stands for Chief Marketing Officer. This is the person at a company responsible for advertising, marketing, market research, and everything else that goes into making sure people buy, buy, buy. 

COGS (Cost Of Goods Sold)

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

Coincident Indicator

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

Helpful, we know.

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


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.


You forget your wallet when you go to McDonald's. You leave your cell phone there while you drive home to get your wallet. That cell phone is collateral; McDonald's is holding on to it to be sure you don't run off without paying. (We're guessing that phone is worth more than your Big Mac.)

Collateral Trust Bonds

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


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

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

Collateralized Mortgage Obligation

A bunch of mortgages that are packaged together. When banks and investors package mortgages together, they can treat them like investments because these groups of mortgages pay interest (the interest comes from people who pay their mortgages).

So what happens when people don't pay? Well, then you have a bunch of investments not making money. The subprime meltdown of 2008–2009 was caused in part by these puppies, so you want to tread very carefully if you decide to invest in 'em. 

Collection Ratio

You'd think after the IRS snagged Al Capone and however many other master criminals in the name of "tax evasion," people would realize that dodging the tax man is futile. Unfortunately this isn't always the case.

The IRS has lots of tools to catch the bad guys. One of them is the collection ratio, which measures the amount of taxes a city or government is supposed to take in versus the money they actually collect. If there's a difference between those two numbers, you can bet some guys in suits are going to be doing some audits and asking some questions. 


If you mingle at a party, you’re schmoozing with a bunch of different people. In finance, commingling means schmoozing with a bunch of different accounts, a.k.a. combining different accounts together.

For example, a broker might combine securities owned by the brokerage with ones owned by clients or might combine a whole bunch of individual customer accounts into one fund that works like a mutual fund.


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

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

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

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


Commodities are things like sugar, coffee beans, copper, and oil. Seem random? Well, here's what they have in common:
  • They can be sold, bought, or traded.
  • They are produced in high volume.
  • They are important in trade and economies.
  • They are basically the same no matter who makes them (you might prefer one brand of coffee but one bag of coffee beans is basically the same as another—you wouldn't necessarily be able to tell the difference).

If you're buying and trading commodities, you'll find that global events make a big impact on prices and markets. For example, disturbances in the Middle East will affect prices of oil. A frost in Florida will make frozen concentrated orange prices skyrocket.

Commodities are also very sensitive to inflation. When people think that prices are about to go up, companies, investors, and other buyers will hoard a commodity, so supply is suddenly constrained and the price soars before dropping again. For example, if coffee prices are expected to go up, you can bet that big coffee companies and roasters will buy up beans. All those buys will then push the price up. And then... people will stop buying (because they have enough or because the prices actually do go up), and with fewer buyers, the prices will drop again.

It's a volatile and nasty commodities world out there. Hold on to your wallets.

Common Stock

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

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

Common Vs. Preferred Shares

The names give them away.

When something is common, it has the stench of bricklayers, plumbers, and people who actually work for a living, i.e., the commoners. They live at the bottom of the food chain, but 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. If you own common stock, you are not guaranteed a dividend (that's the money companies pay to stockholders) but you do get voting rights on major company decisions. That can be a heady rush of power. And if the company does do really well, you will, too.

Preferred stocks occupy a higher position on the corporate food chain. Preferred shareholders stand in line before the commoners in a liquidation, so if a company goes belly-up or can only afford to pay dividends to some shareholders, preferred shareholders are closer to the front of the line. Most preferred shares have a fixed dividend which are pretty much guaranteed. 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 sheep's clothing.

Competitive Bid

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

Competitive Underwriting

See negotiated underwriting. Basically, a way for underwriters to duke it out when an issuer wants to sell stocks and needs an underwriter. The underwriters submit bids to the issuer and the issuer selects the best of the bunch. 

Conduit Theory

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 company passes 90% or more of its net income, gains, and so on to its shareholders, then it won't be taxed on the income. Instead, the income (and losses, if any) will be passed to the investors and those shareholders will be taxed. It's the opposite of what happens at many corporations, where taxes are paid twice—once on the earnings and again after earnings have been passed on to shareholders. 

Constant Dollar Plan

Imagine you buy a mutual fund and inject money into it every so often: your money would grow a lot faster than if you just bought the mutual fund and walked away, right?

A constant dollar plan is just that: a way of investing in mutual funds where you add a constant sum of cash each month (or each quarter) to buy more shares of the fund.

Consumer Price Index

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

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

Thanks, guys—we needed more bad news.

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

Contingent Deferred Sales Charge

When you buy any flavor of mutual funds, you're paying fees that go to your broker. How you pay these fees (which are called "loads") depends on the type of mutual fund you have. A-shares have a front-end load, meaning you pay your fees (around 8%) to the selling broker when you buy—it's very thoughtfully added to the price right then.

B-shares are marketed with the lure that there's potentially no load, but if you sell early, the sales charge applies then (on the "back end," as the finance types like to say). B-shares basically require you to hold onto the shares for a minimum period or you get dinged with a fee. This extra fee is called the contingent deferred sales charge. How much is it exactly? It depends on when you sell. The earlier you sell, the more you pay.

The SEC has really clamped down on contingent deferred sales charges in recent years because most mutual fund investors hold shares for a period less than the CDSC (minimum) 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

If you have health insurance (and... it's illegal not to, so you do), there's a point at which that policy expires. The conversion privilege lets you "convert" your policy into a similar policy that continues on for a few more years. Conversion privilege is a big deal for people with dicey health issues because it means the policy can't be cancelled for health reasons (and premiums generally stay the same).

Conversion Ratio

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

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


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

Conversion Rights

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

Convertible Bonds

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

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

Convertible Stock

A type of preferred stock that can be converted into shares of common stock. What's the point of converting? If common stock takes off in value, making the switch could mean that you end up with a more valuable investment. 


Let's say you have $25,000 in a preferred stock. It converts into 1,000 shares of common. So if the common is selling above about 25 bucks, you'd want to convert. Hal E. Lujah.


What you do when you see a widdle, itty-bitty, baby beagle puppy. Cooooooooo.

Oh, also, Chief Operating Officer. In a business, the COO is the executive who's second in command (behind the CEO). Usually, the COO and CEO work together and the COO's job is to make sure that the company is doing what it's supposed to be doing. If the CEO says "jump," the COO needs to figure out how to make things jump—and how high.


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

Cooling-Off Period

Hot buyers need chillin' time. If you decide to buy that Ferrari, for example, you might want to cool off a little, big spender, before you fork over the $200,000.

If you're a company and you file with the SEC to sell bonds or stocks, there is a legal 20 day cooling off period. During this time, your company can't advertise and you have to behave yourself. When the 20 days have passed, the SEC will issue a "release" so that the securities can be sold to the public.

Corporate Bonds

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


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

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

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

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

Cost Basis

What did it cost ya? The cost basis is the full price you paid for an investment that later made you moolah.

Who cares as long as you made money, right? Not so. It matters because of the taxman who cometh.


You bought 1,000 shares of IBM at $100 ($100,000 in total) and sold it 2 years later at $140 net of commissions ($140,000 total). 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 1,000 shares. Even without the fancy calculus, that works out to a cost basis of $100,000.

Coterminous Debt

Coterminous debt is a municipal debt that was incurred in connection with some asset that benefits more than one municipality's citizens. In a coterminous debt, the obligation for the debt belongs to more than one municipality. 


A public park has a border between two cities and is used by citizens of both cities. If the cities issued debt to pay for upkeep in the park, the debt would be coterminous because it would be owed by the citizens of both cities.


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

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


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

Coupon Bond

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


See Exodus.

In finance, a covenant is just a promise—usually a security is backed by a series of covenants or guarantees from the issuer.

Covered Call

See covered put. "Call" here refers to the famous call option land. Covered calls relate to 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 (also known as shorting a call.. .because nothing is better than having lots of terms for the same thing).

The point? You'd have to sell the stock for whatever you agreed to—even if the stock was now worth a lot more. You can imagine that if you had sold a call on some hot internet stock and it then skyrocketed... yeah. Not good.


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

Selling options when you have enough of that stock or security to protect (or cover) your butt if the price on the stock changes a lot.

If you sell call options and actually have the stock, you aren't going to be happy if the stock rises because you'll lose the stock, which is more valuable now. But at least you won't have to "cover" the stock in the market at a higher price.

Covered Party

At Angelina and Brad's wedding, it rained. There was a big tent.... 

The term also refers to liability. It means that if one person is considered an insiderand is banned from insider trading, there may be other people in their life who are also covered by the same laws. If your twin is the CEO of a company, you can't just use her insider information for your own insider trading. 


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 also applied to him... and to them collectively. So they both lose everything, and they can cool their heels in prison for 5–10 with time off for good behavior.

Covered Put Writer

Writing is another common term for "selling." So writing a put = selling a put.

For every buyer of a put option, there has to be another party that sells that put.


We'll start with a covered call because it is easier to understand... and explain. In a covered call trade, the trader buys shares, believing they will go up (duh) and then also sells a call against them (which gives others the right to buy the shares at a specific price). 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 buys IBM at $130, thinking it's going down. But she's 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 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 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. So, the risk is less. But 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


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

Credit Agreement

The legal handshake that happens between the borrower and the lender. It's usually a long contract in legalese that outlines all the details of a loan, including the terms, interest rates, and all other super fun details. 

Crossed Market

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 caused by misunderstandings and mistakes (like typos), but they can create some excitement until the error is resolved.


Consolidated Tape System.

This is the electronic system that provides real-time information about stock trades. Seen all those numbers scrolling by from stock exchanges? Thank the CTS. 

Cumulative Preferred Stock

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

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

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

Cumulative Voting

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


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

Current Asset

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

Current Liability

Debt owed within one year. Nothing to do with risky raisins. 

Current Ratio

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

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

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


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

Current Yield

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


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

CUSIP Number

It's like the bar code on a security.

Many stocks and bonds have multiple flavors, some that are very, very similar. Trying to keep things straight can be confusing, and tacking on CUSIP numbers helps to clear things up a bit. Having a unique CUSIP allows for the securities to be individually identified so when you think you were buying a cow, you actually get a cow... and not a bunch of magic beans.

Custodial Account

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.

Customer Statement

"I love my broker!"...said no one ever.

Technically, a customer statement is a piece of paper (electronic or dead tree) that simply outlines what the customer did during the month: the trades they made, what their account is now worth, what they currently own, etc. You get 'em from your bank accounts, credit card accounts, and investment accounts. The SEC requires quarterly statements for investment accounts, but most brokerages send customer statements monthly—sort of a marketing thing.


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

Dated Date

What a term.

In finance, it's the date on which interest begins to accrue (grow) on a fixed-income security (like a fixed-rate government bond, for example). Investors who buy 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 you have your eye on a $1,000 fixed-rate government bond for January–June and you buy the bond in March, you're going to pay for the bond and you're going to pay the interest that would have been due between January and March. 

Day Order

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

Dead Cat Bounce

Sounds like a dance move from the Old West, but it actually refers to a terrible situation when the market plummets, rebounds very slightly, and then plummets again. The idea comes from the notion of dropping a cat off of a high building. It hits the cement—dead—and bounces a bit before a wet thud.

PETA: No cats were harmed in the production of this 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."

Dead Money

Dead men tale no tales—but dead money might. Dead money is just an expression for funds that aren't earning interest or investments that aren't likely to gain in value. In other words, it's an investment that's doing nothing at all. 


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

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

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

Debt Per Capita

Dept per capita is a ratio that describes the amount of debt per person in a specific country.

Usually, the higher the number, the more debt a country has and the shakier its economy. For example, Greece has a high one; Dubai has a low one.

Debt Service

Debt service refers to the interest you pay on a debt in a year.

Why do you need to know this stuff? Well, for the IRS. The IRS may give you a tax break on the interest you pay on a business loan, so you may need to tally up the interest you've paid in a tax year. Banks might be interested in your debt service if you apply for a loan and the bank needs to figure out whether you have too much debt already. 

Debt Service Ratio

This ratio compares cash flow (money coming in) to the total interest payments owed on debts. 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 is a ratio that compares what a company owes in debts to the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

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

Debt-to-Equity Ratio

A very closely-watched metric by analysts.

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

Deferred Annuity

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

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

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

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

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.


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.


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

(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

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.


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.


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

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

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

Diagonal Spread

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.


If you pour a bunch of cream into black coffee, you dilute the coffee—it's tastier, yes, but it's not just coffee anymore.

Same deal with stocks. The more shares a company has outstanding, the more the company is owned by other people and the more diluted it is—which means that each person with stock owns a tinier chunk of the pie.


If a company has 50 million shares outstanding and grants 10 million options with a low strike price, 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 because they're trying to raise cash for growing the company. 

Direct Participation Programs

(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

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

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

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

Investments always carry risk. How much risk they carry is where the discount rate comes in; when fancy numbers are run on discounted cash flow, it lets money types figure out present value.

Basically, you get a higher discount rate for riskier investments.


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.

Loose lips sink ships and all that.

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

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


When you really criticize intermediation.


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

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.


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, which means 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

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

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

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

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

(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

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

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 Diligence

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

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

Dutch Auction

Uh, an auction held in Amsterdam? Well, maybe.

But in the land of money, it's a public offering where the offering price is decided by asking for bids. The bids are mulled over to find the price at which securities will be sold.  


The Fabulous Fabulous Company is a start-up. You're not sure what they do, but you know it's something fabulous. The company is making a public offering via dutch auction. You submit a bid of $100 for 1,000 shares. Your sister submits her bid ($90 for 1,000 shares) and your dad submits his ($85 for 1,000 shares). The bids are all arranged in order from highest to lowest. The last successful bid is the one that wins. So if that bid is your dad, you (and your dad and your sister) will be able to buy 1,000 shares for $85. 


It stands for "Delivery v. Payment."

To understand it, you have to understand the awkwardness of selling stock. The buyer doesn't want to pay cash until they have the stock. The seller doesn't want to let go of the stock until they have the cold, hard cash. The obvious answer is to make sure that the handing over of the stock and the cash happen at the same time.

That's DVP... but how does that happen? In this situation, a clearing agent makes things a little less tense by being the middleman. He or she ensures that the buyer gets the stock and the seller gets their cash.

Crisis averted. 

Earned Income


Earned income refers to what you earn from employment (including tips and commissions).

The Tax Man is really interested in it, since this is the money that you'll be paying income tax on. 

Eastern Account

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


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


Earnings Before Interest, Taxes, Depreciation, and Amortization.

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

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

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

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


The Electronic Communication Network (ECN) is a platform for securities trading. It matches brokerages and investors of securities "off market"—that is, not as part of the registered group trading on the New York Stock Exchange.

Each transaction comes with a fee. 

Efficient Market Theory

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

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

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

So there's that.

Emerging Market

China was once seen as an emerging market. Now that it owns a huge chunk of our debt, we can all agree that it has emerged.

An emerging market is one that carries political and economic risk—but great potential because its economy is growing fast. Some people like investing in emerging markets because there is the potential for huge growth if the country's economy takes off.

Employee Stock Options

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

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

Enterprise Value

When you ask the question "What would it take to replace this thing right now?" you get the enterprise value. The number is used when deciding the total value of a business, usually. Insurance companies also consider it when deciding how much coverage a business needs.


Let's say you set up a food truck selling anchovy sandwiches. The truck and everything in it set you back $100,000. You put down $50,000, and a bank gave you a business loan of $50,000. The equity value of the business is $50,000 because you've got debt, but the enterprise value is $100,000—that's what it would cost to replace everything and keep truckin' with the 'chovies. 


Thing. That's what it means. Really.

So what does it have to do with finances? Well, it gets used in contracts a lot—basically anytime legalese makes an appearance. For example, "business entity" is used when describing what kind of business a person is setting up (corporation? non-profit?). It can also be used when describing a separate part of a business (a division or department).

So yeah, it's a weird entity.


You can figure out a company's earnings per share (EPS) by taking the total earnings of the company, subtracting the dividends, and dividing that number by the number of shares outstanding.

Uh, why would you want to do that?

It can help tell you how profitable the company is, for one thing. It can also give you something to do on a rainy afternoon if you really like math.


Alison wants to invest in one of two companies. Her uncle's dry cleaning business makes $1 million in profits and her cousin's marketing company makes $2 million in profits. On the surface, it looks like the marketing company is the better deal, but Alison is a Shmoop reader so she knows better.

Her uncle's business pays out $50,000 in dividends to all shareholders and has 200,000 shares outstanding. That's an EPS of $4.75 ($1 million minus $50,000 divided by 200,000 shares). Her cousin's company has dividends of $200,000 and 100,000 shares outstanding—an EPS of $18.

Should she invest in the marketing company? Maybe. The EPS alone is not enough information. There's lots more she needs to know. Just how much debt does the company have? How happy are customers with the company? Is the company growing? Is there anything financially weird going on? But the EPS is one number she can use to figure out whether she might have a sound investment.

Equipment Trust Certificates

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



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



Equity can refer to two things:

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

Equity Capitalization

Equity cap refers to the total value of an equity market. You add up the market capitalization of all the companies in a market and—ta-da!—you have the equity capitalization.

And what can you do with this big number? Well, if you like numbers, you can stare at it and enjoy it that way. Most likely, you're going to compare it to the past equity capitalization rates for the market to see how the market's doing. Or maybe you'll compare it to other markets (like the real estate market) because you're considering where to make your investment.

Basically, 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

Equity funds are mutual funds or index funds that are made up mostly of stocks.

Equity funds come in a range of flavors, depending on the investment themes they display. So there are "income equity funds," "growth equity funds," "fun equity funds," and so on.

An income equity fund would be made up mostly of stocks from companies that have a good history of paying out dividends (so they give you an income—get it?).

A growth equity fund would be made up of stocks from companies that are growing (duh?) and are probably not paying out dividends because they are reinvesting their profits to grow faster.

You get the idea.

Equity Income Fund

See equity funds. It's is a type of index or mutual fund that is made up mostly of stocks. But not just any stocks: You're investing in companies that are usually fairly established and are pretty good about creating income for investing by paying our dividends regularly. 


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 which have lots of "excess" cash to give back to investors.

Equity Market

It's just a market where equities are traded like marbles (or kidneys on eBay). If you want to buy or sell stocks or ownership in companies, you're going to be headed to the equity market. 


NASDAQ is an equity market. So is the New York Stock Exchange. Nothin' fancy.

Equity Options

See options. "Equity options" refers to options where the security in question is a stock (rather than a bond).


You buy a $5 option to buy shares of your Uncle's favorite hot dog company in one month for the price of $100 per share. Congrats—you've bought an equity option. 


Employee Retirement Income Security Act.

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

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


Something (usually money) held by an independent third party for the buyer and seller in a transaction until the transaction goes through.

Think of it a little like a standoff in the Old West: The Big Bad comes in with Suzie Mae, who was kidnapped a week ago. The hero comes in with the cash to pay the ransom. Nobody wants to make a first move, so the sheriff takes both Suzie Mae and the cash for a minute and hands both Big Bad and the hero what they got in the exchange. No guns drawn, and a tumbleweed rolls by.

Escrow is like that... but a lot less tense. 

Securities and cash are often held in escrow until they get the green light from the escrow agent (the guy who's holding this stuff) saying that both sides have fulfilled their obligations; the agent then releases the assets to the respective parties.

ETF - Exchange Traded Fund

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

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

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

Index Funds vs. ETFs

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

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

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

*not a real index; sorry, dudes

European Style

Slow dinners. Fancy shoes. Disgust over the acoustics of the room.

In the finance world, European style refers to a type of stock option. American style options let you exercise your stock options (i.e., buy or sell your stocks at the strike price) any time up to the expiration date. European style options can only be exercised on the expiration date—not before, not after. No matter where the company is based and whether or not your broker has a snazzy European British accent, your stock options can be European or American style.

Read the fine print. 


Sort of like JDate, only with exes as the entire dating population.

Oh, ex-date also refers to the deadline for when an investor has to buy a stock to get the dividend. You have to own the stock by a certain date, which the company declares in advance, to get the dividend. But when you buy a stock, you don't buy it instantly. There's a settlement process before you take ownership of the stock—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—which is known as the "ex-dividend" date.


Without rights.

Warranties and rights are often added to bonds to lure in investors. But these rights are detachable. You can separate the rights from the bond and sell them on their own.

A bond trading "ex-rights" means that if you buy it, you don't get the warranties. They may have expired, the seller might be keeping them, or they may have already been sold to someone else. Anyway, they're gone.

It's a little like buying bonds "no batteries included." 

Exercise Price

It's not about how much you pay to get in to your gym. It's the strike price of the stock option you own. So if you buy an option to buy a stock at a specific price, that specific price is the exercise price (a.k.a. the strike price). 


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. The $2 you pay to buy the stock as you exercise the option is the exercise price. 

Exercise Settlement Date

ESD refers to the date when an option is converted into a stock or share. It's also the date when a trade officially goes through.

It's important to keep this date in mind because the date when you buy a stock and the date it is officially in your hot little hands can be different. In some cases, you officially own your stock a day after a transaction, and in other cases, it can take up to three business days.

If you're getting dividends for your stock, the slight difference in dates can make a big difference.  


You buy an option to buy 100 shares of a new social media startup called mylifesucks.com at $5 a share. The stock goes up to $10 a share and you decide to buy on October 3. On October 6, you get word that the stocks are officially yours. Awesome.

One little detail: the cut-off date for dividend payouts was October 4. That means you don't get the dividend cash because you didn't officially own the stock until October 6. That does suck. 

Expense Ratio

The expense ratio of a fund is a fraction that helps you understand how much you're being charged for your investments.

The numerator (top number) is the fee charged to you by the bank or whoever buys investments for you, and the denominator (bottom number) is the total assets or total amount of your investment.

If the numerator is big compared to the denominator, you're being charged a lot for your investments. If that's the case, we hope they're growing like weeds.

Expiration Dates

If you buy stock options, the expiration date is the last day you have to exercise your options (i.e., either buy or sell the stocks at the strike price).

If you wait past the expiration date, your options expire and become worthless: you can’t sell it or trade it or use it to buy or sell stocks, and whatever money you’ve paid for the stock option has now gone up in smoke.

That’s why it’s as important to pay attention to option expiration dates as it is to pay attention to the expiration dates of stuff in your fridge. Usually, the expiration date for stocks in the U.S. is the third Friday of the month. 

Extended Trading

When the world was older and slower, trading during "normal hours" went from 9:30AM until 4:00PM New York time. Any trading done after this time was "extended trading."

Today, the world's markets drink lots of Red Bull. "Extended hours" means, in theory, 24/7, especially with electronic trades. Most after-hours trading still dries up around 8:00PM, though, and most pre-market trading begins around 5:30 A.M.

Money never sleeps.

Face Value

What's your face worth?

Guess it depends on your face.

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


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

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


Family Offices

The super wealthy set up their own family office to manage their money. It can handle stuff like investments, money management, estate management, taxes, and loads of other stuff. It basically lets these folks deduct a wider range of expenses and have other tax and control benefits.

Fast Market Rule

This rule applies mostly to the UK and the London Stock Exchange. When the London Stock Exchange plunges into chaos and there are tons of trades going on while prices are all over the price, things get hectic. People run around, tea gets spilled. When that happens, the fast market rule can apply: it lets brokers relax some of the trading rules.

The big one? They don't have to stick to the ranges of quotes when making trades; they can trade outside of firm quotes. 

Fast Tape

When prices are moving fast in heavy trading, the ticker (that's the tape) might not be able to keep up. When that happens, a range of prices usually shows up on the ticker with the word "fast" in front of it. That's the fast tape—and it usually happens in futures markets.

Feasibility Study

A report that tries to answer how possible or practical a plan is.

Can our city convert all the neighborhoods into one giant fun house? Can we create a giant machine that will shoot burgers into the air? Can we build the highway through this forest?

Feasibility studies are important to cities and companies trying to create a business plan.

Federal Funds Rate

To understand federal funds rates, you need to understand how banks work. (Fun!)

Your bank takes money from people depositing cash at the bank and lends money to borrowers (like the guy applying for a loan to buy a Maserati). So there's money coming in and money going out. The bank needs to keep a reserve, or a certain amount of money on hand, so that when a bunch of people come in for their cash, the bank can't say "sorry, we gave it all to the nice man wanting to buy a sports car." That kind of thing leads to panic and disaster.

What happens when a bank has less money than it legally needs to have as a reserve? It borrows money in a short-term, overnight loan from either the Federal Reserve Bank or from other banks that keep their own reserves at the Federal Reserve. Now, we all know that borrowing money is not free. If a bank borrows overnight from other banks, it is charged an interest rate at the current federal funds rate. The Federal Reserve influences the federal funds rate.

Why should you care how much interest banks charge each other? The federal funds rate has a big impact on the interest you are charged if you need to borrow money. When the Federal Reserve nudges the federal funds rate lower to stimulate the economy, you'll pay less for loans. When the federal funds rate goes up, borrowing gets more expensive for you. 

Federal Reserve Board

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

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

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

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

Federal Reserve System

The Federal Reserve is the central bank of the U.S. You can’t just waltz in and open an account at The Fed, though—this bank is only for the federal government and for other banks.

The Fed has a big impact on the economy because it decides what interest rates will be and controls how much money is out there in the economy. The Federal Reserve also sets up all sorts of rules for other banks. It's like the granddaddy of all banks, and other banks have to follow its lead.


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


Federal Home Loan Mortgage Corporation, a.k.a., Freddie Mac.

Freddie Mac is a group created by Congress whose job it is to buy mortgages, bundle them together, and sell them as investments.


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

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


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


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

Financial Adviser

Someone who provides financial advice and information. This person could work for a financial institution, bank, or other type of business.


Attorneys, HR people, credit counselors, staff at banks and credit unions, insurance representatives, brokers, and accountants can all acts as financial advisers.

Financial Planner

A financial planner is someone who advises individuals about their overall financial situation. They help with stuff like estate planning, tax plans, investments, and more.

Since money stuff can be confusing (duh), these guys and gals basically help you make money decisions that hopefully don't suck.

Planners can work in a few different ways: they might charge you an hourly or monthly fee to just give you general advice or manage your holdings; or they might recommend (and manage) specific stocks, bonds, or mutual funds (oh my!) and get paid a percentage of the assets they manage for you.


The Financial Industry Regulatory Authority (FINRA) is a private agency that regulates exchange markets and brokerage firms that are members of... it.

They test and license people and firms in the industry and work to protect investors from shady financial dealings.

If you're in the investment business, you probably want to know these guys.

Firm Commitment

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

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

Firm Quote

The firm quote is the price a firm or dealer commits to—up to a certain number of shares. Unlike nominal quotes, there isn't much wiggle room or room for negotiation with a firm quote. 

Note that firm prices are only for 1 round lot of 100 shares. Larger transactions usually involve some haggling.


A dealer is asked for a price upon which she will transact to trade 100 shares of XYZ, makers of zipper examiners for the masses. The dealer will give a price at which it will buy ($5 per share), and a slightly higher price ($6 per share) 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. 

Fixed Annuity

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

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

Fixed Assets

"Fixed assets" refers to assets that are "hard items"—like property and equipment. That is, these are assets that the company paid for in cash (99.99% of the time) and are going to be used for a good long while. They carry an asset value on the company's balance sheet, and they're considered "non-current" assets, since they aren't going to be sold for cash easily or any time soon (probably). 

Fixed Dividend

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


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

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

Floor Trader

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.


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?


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

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

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

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

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

Trade in which the government doesn't stick its nose. Adam Smith was a big believer in it.

Basically, it means that the markets decide on trade and prices, not the government. There are no taxes or other incentives out there to affect things.


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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

(Revenue - Cost of Goods Sold) ÷ Revenue

Gross Profit Ratio

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

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

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

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?


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


High Octane Stock

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

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

Vroom vroom. 

High Yield

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

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

Not such a great deal, then, eh?


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


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

Holding Period

The tax man is interested in how long you have your stocks and other securities before you trade because you get taxed differently depending on whether you keep 'em for a short term or hold onto 'em for a longer time.

The time you keep your stock before selling is known as the holding period. If you keep them for at least a year (and a day, weirdly) you get taxed a lot less. If you have them for less than a year, the money you make is treated like income and you pay a lot more. So you might want to show your stocks a little love and keep 'em around to cuddle for a while.

Hurdle Rate

When trying to make decisions about investments, people come up with all kinds of rules. For example, they might want to make a certain amount in returns or they might want to keep risk low.

One rule that companies use when deciding whether to pony up cash for an opportunity is the hurdle rate. It just means the minimum percent return on investment that the opportunity must surpass in order to get funded. If an investment or opportunity is expected to create returns above the hurdle rate, the company comes up with money for the project. If not, it's scrapped. 


A company thinks about building a condo building. One lady person in a suit says: "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." The CEO says: "Let's do it, baby."


Let's say you want to start investing but don't have the cash for it.

Your broker lets you borrow money to invest—as long as you have collateral. Hypothecate means that the lender has an interest in the stocks or securities you've purchased with the borrowed money but doesn't actually take your collateral.

Hypothecation Agreement

Pretty much a margin agreement.

Someone (we're not naming names) wants to start investing but doesn't have enough cash for all the investments they want to scoop up. So, they use the stocks or securities they buy as collateral to borrow money to invest.

If the investments make money and the investor can pay back the cash, all is well and good. If the investor can't make good on the loan for some reason, the lender can grab up those stocks or securities. 

Immediate Annuity

Immediate annuity is a fast-acting annuity that's also a twisted version of a life insurance policy.

In a typical term life insurance plan, you pay, say, $75 a month "forever," and when you die, your wife and the dude she later marries get a check. Hopefully, you've lived and paid long enough that it's a pretty big check—maybe a million or more. That'll buy a lot of margaritas in Honolulu. Your wife and new guy can annuitize the money and get a certain amount every month to live on.

An immediate annuity is kind of the opposite.

You write a big check for a lot of money to the insurer up front, and the insurer then pays you in set payments every month or year while you're alive. You (not husband #2) can then use that money as income. 

Immediate Or Cancel Order

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

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

In Street Name

When you purchase stocks or securities, there are two options:
  1. You can have them registered in your name. 
  2. You can have them registered in the name of your broker's institution (for example, Goldman Sachs)

If you choose Door #2, your stocks are held in account for you, but are formally registered to Merrill-Lynch or wherever your broker works.

Why would you want your securities in someone else's name? Well, it's how a lot of brokers do business. It lets them lend your stock to people who what to sell it short.

It also cuts down on the paperwork that would interfere with your broker's golf game...

Check the fine print on your brokerage agreements to see whether your securities are in street name.

In The Money

See at-the-money. It's when you have a stock option that you can make a profit from if you exercise that option right now


You own a call option for KO with a $65 strike price. KO is trading at $75. You are $10 "in the money."

Income Fund

See Equity Income Fund.

Income funds are funds that are made up of dividend-paying stocks and bonds. The goal here is not to grow in value but to create a steady income.

These funds are popular with old people, retired people, and people who are really, really scared of everything. 

Income Statement

The infamous P&L or profit and loss statement.

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

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

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


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


Let's start small.

Each stock is issued by one company. When you buy a stock, you own a little bit of that company. With a stock market, you have a bunch of stocks being traded together. But let's say you want to know how a specific type of stock is doing—maybe the biggest stocks in a specific region. To do that, you'd check out an index. Indexes, like the Dow, NASDAQ, and S&P 500 take a look at a sample of stocks and securities in a specific portion of the market. 

And index can be very broad—like the Russell 3000—or it can be made up of, say, Sri Lankan agricultural producers.

Index Fund

See ETF vs. Index Fund.

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

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

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

Index Funds: Why Buy?

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

Options on an index fund.

You pay for these options so that you can buy or sell an index fund for a specific price by a specific date. You can use index options, just like stock options, as another way to invest money and make money on index funds. 

Individual Account

An account owned by one, individual person.

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

Joint accounts and business accounts are not individual accounts. 


Something that old people love to talk about.

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

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

Initial Margin

The initial margin is is the amount that your broker will lend you so that you can buy stocks and securities. The minimum margin percentage is 50% (required by regulation), but brokers can choose higher margins.

Brokers offer margins to lure in investors (sort of "buy one and pay later for the rest" kind of deal). If you default or your stock goes down in value, though, the broker might be left holding the bag, which is one reason why some brokers impose higher margins. 


 If your broker has a 60% margin policy, that means that you have to put up 60% of the purchase price; the broker will lend the rest. If you decide to invest $100,000, that means you have to pony up $60,000 and the broker will lend you $40,000 so that you can invest the $100,000. 

Initial Public Offering

When a company starts selling stocks to the public, the first sale is known as the IPO (Initial Public Offering), and it usually results in a lot of excitement from investors, especially if the company is a biggie (hello, Facebook).

Companies usually hire a middleman known as an underwriter (or a whole team of 'em) to help them place their stocks and decide when to sell and for how much.

Take a look at the 11 Greatest IPOs of All Time.

Inside Information

Inside information is knowledge you have that lets you invest with an unfair advantage over everyone else.

You might get this information because you work for a specific company or know someone who works for a company (thanks, Mom!). Or you might overhear something that gives you an investment advantage. In any case, using that insider information is illegal and if you're caught, you face jail time.


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 whiz. While you're standing there streaming broadband, you see the CEO of Verizon (you recognize him 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—at least without landing yourself in the slammer. 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.  

Insider Trading And Securities Fraud Enforcement Act Of 1988

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

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

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

Interest Coverage

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

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

Earnings Before Interest Taxes / Annual Interest Expense

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

Interest Rate Options

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

Internal Revenue Code

The Internal Revenue Code is the whole mass of laws that affect excise taxes, income taxes, and transfer taxes in the U.S.

If you're wondering why you have to pay so much on your taxes or why you get stressed out every April, you can go ahead and blame the Internal Revenue Code.  

Internal Revenue Service

IRS might be the three scariest letters in the alphabet.

The IRS is the Tax Man: they're the guys you file taxes with and the guys who audit you or ask questions if they think you're fudging your tax returns. The IRS is also the part of the Treasury Department in charge of the federal tax system.

Intrinsic Value (of An Option)

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

Introducing Broker

Sort of a schmoozing broker.

Most brokers are handling client accounts. They answer phone calls from clients who want to buy or sell, or who know why their investments are not making them money.

An introducing broker doesn't do all the dirty work. Instead, they know lots of rich investors. For a commission or a flat fee, they send them to brokers who need more clients. 

Inventory Turnover

This number show how often a business replaces and sells its inventory over a specific period of time (a month, a year).

The number can be found with this handy-dandy formula:

sales / inventory

A high number means that lots of stuff is selling. That's good (especially if you're selling something that rots), but it also means you need to pay attention so that you don't run out of stuff to sell. A low number means you're not selling much. Maybe it's time to get your business on a reality TV show.

Inverse Head-and-Shoulder-Chart

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

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

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

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

Investment Bankers

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

Investment Company Act Of 1940

This law sets the rules for companies that make and sell mutual funds to the public. If you own a mutual fund, the people who sold you that fund have to obey this legislation, which is enforced by the SEC.

Investment Grade

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

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

Investment Objective

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

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

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

Investment Policy Statement

When a pro tries to sell you investments, they want to know a bunch of stuff. How much can you invest? What are your goals? How comfortable are you with risk? It's not all small talk.

All the questions are to create an investment strategy or a game plan for your investments. The investment policy statement is just the written road map that shows what you've talked about. It makes sure that you aren't lost in bond land when you really wanted to be investing in growing stocks

Investment Style

You've got style that would make Kanye West weep—but what's your investment style?

It depends on your personality, your investment ideas, and what your goals are.
  • Your style might be aggressive (you go after stocks you think will rise and rise fast, baby) or passive (you're not going to try to outperform the market, duh; you're into long-term growth). 
  • Your style might be focused on buying shares in big companies and holding on for a long time or buying smaller, growing companies and hoping they take off.
  • You might be all about value (buying stocks when you think they're undervalued) or growth (buying stocks now and hoping they grow).


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

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

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

Irrational Exuberance

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&amp, 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

The shares outstanding or the stocks that all shareholders have in their hot little hands.

This number changes all the time, and lots of people use it when trying to figure out how much financing a company has. If you want to buy stock, this number will tell you how much of the company you're going to own.


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


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

Joint Account

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


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

Joint Tenants With Right Of Survivorship

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

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

Junk Bond

See high yield bond. A junk bond comes from a company that has a bad rating from Moody's or another rating agency. The idea is that you might lose your money because the company that issued the bond has lousy credit. On the plus side, junk bonds are usually cheap. You get what you pay for.

Keogh Plan

If you have a traditional 9-to-5 job, your boss might offer a retirement plan so that, once you've stopped working, you still have cash to pay for stuff like rent and food.

But what happens if you decide to go freelance and be your own boss? One option is a Keogh Plan, which is a tax-deferred retirement for self-employed folks.


It's a dark wharf at midnight. Suddenly, a car squeals up by the water's edge. A man in a suit gets out and hands over a briefcase full of cash. The man? He's an executive with a big company.

The next day, he benefits from a deal that's harmful to another company. The guy representing the other company? He looks an awful lot like the guy who left at midnight with a case full of moolah.

Bad guy #2 basically accepted money under the table to make a deal go a certain way. It's completely illegal in corporate America... but it still happens. 

Know Your Client

Brokers and investment advisers are legally obligated to know their client.

That doesn't mean they know how a client takes their coffee or what they really think of Magic Mike. It means that they understand the client's goals, financial situation, and comfort levels when it comes to risk. Knowing this stuff lets the pros make good investment decisions on behalf of the client and lets them offer the right advice. 

Large Cap

Large cap = "large market capitalization companies." Nope, they don't wear oversize Stetsons. They are usually big companies with lots of shares and lots of dollars per share.

If you want to figure out a company's market capitalization, multiply the number of shares a company has outstanding by the stock price per share.

Most mutual funds these days define large cap stocks as those with market caps over $15 billion.

Law Of Supply

This fundamental economic principle states that as prices rise, supply will increase (in part because people who make the stuff will be excited to sell whatever it is for more money). And as prices fall, supply will decrease (some suppliers will go out of business or choose to make something that is worth more). 


Ryan Gosling declares his love of pretzels and suddenly everyone wants to buy pretzels to be just as cool. The price of pretzels goes up until each one costs $6. A bunch of people who are sitting around wondering what to do with their lives suddenly say "I know! I'll start making pretzels! I can make a bunch of cash because fools are buying them for $6 each."

Maybe before the Ryan Gosling announcement, there were 100 million pretzels made in the U.S. each year. With the great Pretzel Craze, there's now 200 million pretzels being made because the price went up.

But then, Ryan Gosling announces he hates pretzels now. Prices drop to a more reasonable $3 per pretzel. Everyone with a pretzel Pinterest board and blog stops talking pretzels and some of those people making soft dough start making other stuff, instead. It's no fun making pretzels when you're making half as much money for them.

In the next year, the U.S. is back to making 100 million pretzels a year.

Lead Manager

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

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


LEAPs are "long-dated options."

We're talking about any call or put options that last for many months (or even years) rather than having an exercise date that comes up in a month or two.

Hint: if you see an option with a date that is at least nine months away, you're dealing with a LEAP.

Just like any option, you can trade this option, and if the value of the underlying stock goes up or down, you can make money from the option. LEAPs are often used by people who own stocks and who want to make money without selling the stocks themselves. LEAPs can also be a way to start investing if you want to trade in options without buying stocks. 


Weird Uncle Fester always had a thing for light bulbs. Then he died and left you his fortune, which amounts to 10 million shares of GE. 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

A list of "allowed" investments.

Fiduciaries or folks who manage investments for others may have legal lists so that they can make investment decisions on behalf of their beneficiaries. If the legal list says it's okay to buy Disney stock and Disney stock suddenly seem like a smart move, the manager of the trust or investment can go ahead and buy without having to get the green light specifically. 

Letter Of Intent (LOI)

Also called an LOI, a letter of intent is a paper signed by an investor who's buying shares in a front-loaded mutual fund. The LOI gives the investor a chance to get a lower sales charge (see sales load) immediately, even if the investor hasn't bought enough shares to qualify for the lower sales charge.

The LOI is basically the investor saying, "I'm going to buy more shares in the future, so I'd like to pay the smaller sales charge now, as though I had already bought the extra shares." If the investor doesn't end up buying more, the mutual fund company is potentially losing money. So what they usually do is hold some shares of the fund in escrow.

If the investor does buy more shares, those shares in escrow go to the investor. If not, the mutual fund company sells the shares and gets the money they wanted to get from the investor in the first place. 


London Interbank Borrowing.

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


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

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

Limit Orders

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

So what can you do?

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


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

Limited Liability

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

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


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

Limited Partnership

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

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

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

Line Of Credit

A type of open-ended credit that lets you withdraw and borrow money as often as you'd like—up to a certain limit. In some cases, people use their homes as collateral for lines of credit. Lines of credit usually have low interest rates and are very flexible. You could keep withdrawing money out of them as long as you still have money left in the line of credit.


You finally paid off your house and now you have a $200,000 house, mortgage free. You decide to open a $20,000 line of credit so that you have money for a rainy day or for fixing up the house.

With your line of credit, you can take out $20, $200, or anything at all up to $20,000. If you pay it back, you can take out more money—again, up to $20,000. There is an interest amount that you pay, but only if you take out money.

Let's say that you take out $10,000 to fix your windows. The bank may tally up that you owe $200 in interest on that amount. They automatically take the $200 out of your account each month until you pay back the $10,000. Once you've got your house spruced up, you can focus on repaying the $10,000, or you can keep withdrawing money until you hit $20,000.

Liquid Market

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

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


Liquidity 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

Stocks and securities that are listed on an exchange, like the New York Stock Exchange or the London Stock Exchange.

These securities can be bought and sold easily, and it means the company behind the stocks had to meet a bunch of rules and regulations to make the offering. 

Load Fund

A mutual fund which charges a (usually up front) commission (also called a load). If you want to invest in the mutual fund, you have to pay up. Since you're paying up front, though, you might be able to enjoy lower fees over time than someone who didn't have to pay out of the gate.

Lockup Period

The length of time your BFF had to cool his heels in Vegas before you could come up with the bail money.

The lockup period also refers to a period of time when investors can't sell their shares. After an offering is made to the public, for example, venture investors might not be able to turn around and sell their stocks for 6 months, according to the fine print. These six months are the lockup period. 

Lockup Provision

In most IPOs, there is a lockup provision for insiders. Insiders—like executives and early investors—cannot sell their stocks for a specific period of time (usually 6 months or so). This provision makes sure that insiders can't use their knowledge to make trades of stock.

For example, if the executives of a company know that the company is headed down fast, they can't just offload their shares immediately to the public (who might not know the company's in trouble).


In the stock market, long refers to the belief that a stock will go up in value.

Long can also mean that you own something (like a security) outright. Not the options, but the actual ownership.

Long Gamma

A stock option trade that lets you make a profit when the price is volatile. Any time the price of the underlying stock moves, a long gamma position can mean profits. Usually, this sort of trading is left up to the experts. 

Long-Term Capital Gain


Long-term capital gain is a type of tax on an investment that you've held onto for a year and a day (at least).

Long-term gains are usually taxed less than short-term gains; the goal is to encourage investors to be more patient and to hold their investments longer; the broader gain being, in theory, a more stable stock market.

See also short-term capital gain.

Maloney Act

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

Management Company

A management company is the group of pros who work for a mutual fund distribution company. The management company handles and manages the money the distribution company has raised—for a fee, of course. 

Management Fee

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

These guys don't work for free, so you want to read the fine print to find out what the fee is like for you. Is it worth it? Probably depends on how well your investments are doing.


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


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

Margin Accounts

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


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

Margin Call

Not a call you want to get in the middle of the night.

A margin call happens when you've borrowed money from the broker to buy more investments and your stocks and securities are used as collateral. If your securities rise in value, everyone's happy. If they drop, you might suddenly not have enough in your account to cover the money your broker has lent you. In this case, the broker will issue a margin call; i.e., they'll contact you and ask you to put in more money into your account—or else. 


You put $100,000 in a margin account and it gets invested. Your broker lends you $50,000, borrowed against the $100,000 in the account. You now have $150,000 in investments, but $50,000 of that is with borrowed cash.

Then, the market crashes. Your investments are now worth $40,000. You still owe the broker $50,000, and he gets nervous because you owe more than you have.

Margin call time.

Your broker asks you to put in more than $10,000 or he will sell off some of your investments to get back his money. 

Margin Debt

Margin debt usually refers to the notion of borrowing from yourself—or at least from your investments.

If you have a bunch of stocks, you can set them up at Schwab, E*TRADE, Scottrade, or any other brokerage. You pledge your $50,000 or whatever of stocks, and if the brokerage lets you margin up to 50%, you can borrow up to $25,000 from yourself. You can use that money to pay for something (like a car) or to pay for more investments.

You'll pay margin interest on the money you borrow, but it's cheaper than most types of financing if you want to buy a car or boat. If you use the cash to buy more investments, you're earning profit on a bigger bunch of money, so the idea is that your investments grow faster and you can get rich that much quicker.

As with any debt, there's a risk. The big risk here? That you're using your securities to borrow money. What happens if the prices of your securities drop? The brokerage will get really nervous, and you'll go through a margin call. That's when someone from the brokerage contacts you and tells you very nicely that you need to put more money in your account because you owe more than you have in stocks.

If you can't pony up the cash, you might have to sell some of your investments (which might mean paying taxes on the profits). 

Margin Interest

When you open a margin account in a brokerage, you can borrow money against the stocks and securities in your account. Have $50,000 to invest? The brokerage may give you another $25,000 to invest so you can be making profits on $75,000.

Nice deal, but it doesn't come free. Like all borrowed money, there is a cost or interest rate involved. The cost of borrowing money through your brokerage is known as margin interest. 

Market Capitalization

How much is a company worth? It's a big question. The IRS wants to know the answer so they know what to charge a company, and investors want to know so they know whether to sink their money into a specific business.

The market also places value on a company, which helps investors compare companies and securities. The market value of a company is known as market capitalization, and you can figure out this number by multiplying the number of shares outstanding by the stock price. 

Market If Touched

A market if touched (MIT) order is something you give to your broker if you want to buy (or sell) stocks or securities at a certain price. If the price reaches (or touches) a specific number, the broker can go ahead and buy (or sell) at that market price. 

Market Maker

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

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


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

Market Manipulation

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

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

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

Market Order

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

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


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

Market Risk

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

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

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

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

Matching Orders

In this scheme, two different brokerage firms illegally try to manipulate a market. They trade stocks or other securities back and forth between each other without gaining or losing money or gaining any advantage.

All those trades catch the greedy eye of investors, who think that the stock seeing all the action is "hot"—and they want in. The price of the stock goes up thanks to all the trades, and the brokerages are sitting pretty on stock or securities that they can now sell for more.

It's all quite illegal, of course, so there's major fallout if they're caught. 

Material Information

Material information is worth something. So if you want to trade stocks and have some information that only insiders know, you have to decide whether you have material information. If you do, you can't make the trade—it would be illegal. If the information you have is not material information, you can go ahead and make the deal.


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; it's gossip. 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.


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

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


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

Mergers And Acquisitions

Investment banking pros offer services that help companies buy and sell used companies. This buying and selling is called mergers and acquisitions.

Translation: companies are merging with each other and acquiring one another.

Minimum Maintenance

In margin transactions, you borrow money against your investments in order to buy other investments. The brokerage lends you the money, and the money you've already sunk into the account is the collateral. Stocks and securities go up and down in price, and this means you need to keep a certain amount of equity in the account.

For example, if you put $50,000 into your account and borrow another $25,000 to sink into investments, and the total value of your stocks drops to $20,000, you're going to have to put in more money. The minimum amount of equity the brokerage asks you to keep in the account is the minimum maintenance. The amount is based on the value of stocks and securities in your account. 


If the minimum maintenance percentage is 25% (most brokerages have a higher requirement), the value of an 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

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

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

Money Laundering

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

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

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

Money Market

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

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


One of the big three agencies that rates securities.

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

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

Moral Obligation Bond

One issuer of a bond decides to pay bondholders if the original issuer of the bond defaults. They don't legally have to do it; they do so because it's "right thing to do."


San Diego issues a bond, and the state of California decides to pay the bondholders if San Diego defaults.  

Most Active

Each day, there's a list made of the most actively traded securities that day. If you're an investor, you might want to listen up. If a stock suddenly starts trading like crazy, it could mean that the price is headed up. There's something good afoot at the company, maybe, that will make the stock more valuable. Time to go a little Sherlock Holmes and investigate. 

Municipal Bond

A bond issued by a municipality.

That's it.

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

Municipal Syndicate

The people who come together to sell muni bonds to the public. When a local or state government decides to issue bonds, they hire a bunch of underwriters or an underwriting firm (syndicate) to handle all the dirty work.

Mutual Funds

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

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

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

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

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

Naked Options

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

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



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

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

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


National Association of Securities Dealers (NASD).

The NASD used to be the organization in charge of the stock markets and in charge of administering exams that investment pros had to pass. NASD was replaced by the Financial Industry Regulatory Authority (FINRA).


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

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

NAV - Net Asset Value

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

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

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


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

Thanks, math.

Negotiated Deal

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

Negotiated Underwriting

See competitive underwriting.

A single underwriter can handle a public offering when things are small scale. Before the offering can be made, the offering price and the purchasing price have to be hashed out. If this negotiation about prices happens directly between the underwriter and the issuing company, it's known as negotiated underwriting. 

Net Income

See earnings.

Net income is the earnings of a company after taxes. It's sometimes called "the bottom line."

Your net income is what you earn in income after taxes. It's a number that might make you weep into your coffee. 

Net Present Value

NPV (net present value) is usually calculated using a formula and lots of charts and spreadsheets. (Helpful, we know.)

Basically, it compares the present cash value a company plans to invest and the expected returns on the investment.

Here's the catch: It considers the expected returns in today's cash value. If your company invests $1 million today and makes $2 million from the investment ten years from now, that $2 million will not be worth the same as $2 million today (thank inflation). NPV tries to account for this by figuring out what the returns would be in today's money, which makes it easier to tell whether a possible project or investment will be profitable or not. 

Net Worth

Having a lot gets you on the Forbes Top 100, and gets you lots of dates.

For a company, it boils down to assets minus liabilities. Nice and straightforward.

New Account Form

The form that the SEC and FINRA require for all new accounts. If you're registering a new brokerage account or adviser account, you're going to have to fill out this form and pay the application fees. 

Nine Bond Rule

If an order is put to the NYSE for nine bonds or less, this rules requires that the order stay on the floor of the exchange for one hour. The idea is to look for a market for the bonds and get the best price for the investor.

If the order is not filled within the hour, the customer can ask the broker to try to fill the order away from the exchange or over the counter.

There's just not a ton of bond trading at the NYSE, and this rule can help net a better price. 

No-Load Fund

On a mutual fund, index fund, or other fund, loads are the commissions you pay to the people who manage and sell you your fund. So, no-load fund suggests free stuff, right? No commissions?

Not so fast.

It's really just a marketing phrase that's supposed to make you think you're getting a free lunch. In reality, you still end up paying money for your fund—it's just sneakily hidden as a yearly management fee. 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 charge 0% commission up front, but then investors pay 2% per year in management fees.

Over time, it can end up costing more than the funds that charge you up front. 

Nominal Yield

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

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


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

Non-Accredited Investor

See Accredited Investor.

Non-accredited investors might not have the institutional ties or the big bucks to qualify as accredited. They might still have the know-how to make money and might even be doing better than the accredited kind—they just lack the "official" cred.

Non-Cumulative Preferred Stock

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

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

Non-Diversified Funds

Funds where there's no diversity. Shocking, we know.

Basically, non-diversified funds are investments (stocks, bonds, you name it) that are all in one area—like, say, tech or healthcare or commodities. If tech or healthcare or commodities then tank, you're in major trouble if you're not diversified.

Non-Qualified Plan

See qualified plan.

A non-qualified plan is a retirement plan in which your taxes are not deferred (i.e., you don't get tax breaks while contributing to the fund). Instead, when you're old and grey and taking money out of the account, that's when you get the breaks.

Which is good, since that's when you'll probably be complaining about the cost of everything anyway... arewerite?

Non-Voting Stock

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

Not Held

Brokers who make "not held" trades can choose when to submit a trade. If the broker thinks he or she can hold out and get a better price for their client, they can go ahead and wait. The only right the broker has in this case is how long they can sit on the trade; they still have to do what the client says when it comes to how much to trade or whether to buy or sell.


The New York Mercantile Exchange (NYMEX) trades commodities like cotton, oil, sugar, gold, and lawyers.

The NYMEX is the largest physical commodities futures exchange on earth and is sometimes called the Merc. (Sounds fancier than it is.)

NYSE - New York Stock Exchange

The NYSE is the oldest stock exchange in the United States and one of the biggest exchanges in the world. When news anchors show something happening in the economy, they almost always flash an image of the floor of the NYSE.

NASDAQ and electronic trading networks have meant that the NYSE is less important than it used to be... but don't tell them that; they get very touchy about it.

Companies can list their shares on the NYSE if they meet SEC standards and go through a whole process of getting listed. 

Odd Lot

Here at Shmoop, we pride ourselves on being an odd lot.

In trades, an odd lot is an uneven number of shares traded in a transaction; specifically, a multiple of shares less than 100. 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

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

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


See bid-ask.

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

Omnibus Account

An account that has a bunch of investors.

Since a group of accounts are combined into one, the idea is that the investments are easier to manage. The brokers handle the records of all the investors involved, so the investors get some anonymity... in theory).

It's kinda like a mutual fund except no formal shares are issued.

Open-End Fund

See closed-end fund first.

Back? Okay.

An open-end fund is your typical vanilla mutual fund. It owns hundreds of securities and maybe millions of shares in 'em. 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 (the total value of the securities prices, times the number of shares of each that the fund owns, 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

At the start of the trading day, brokers and other finance types come into the office, drink their coffee, and check opening prices on securities: the prices that a security has at the start of trade on any given day.

During the day, this price can go up and down at dizzying speed until we get to the closing price: the price the security ends up with at the end of the trading day.

Hey, sometimes names make sense.


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

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


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

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


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

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

Option Premium

The money that investors pay for a premium.


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 a knockout on the stock market and will be at $85 or more in 3 months. The $6 she is willing to pay is her option premium.

Option Schedule

An option schedule lists all the different strike prices and expiration dates available for a stock or security.

In a company offering stock options to employees, this list contains the size of shares, too. It's important in accounting because it shows how much in liabilities the company will have in the future.  

Options Clearing Corporation

An organization that issues and guarantees futures contracts and options.

It's owned by the American Stock Exchange and the Chicago Board Options Exchange, among other exchanges. The SEC and the Commodities and Futures Trading Commission (CFTC) regulate this organization. 

Ordinary Annuity

In an ordinary annuity, payments are made at the end of a period (for example, at the end of a month or at the end of the year).

Ordinary Income

Ordinary income refers to the tax rate you get charged for your earnings and for investment gains on investments you've held for less than a year.

The tax rate for ordinary income is way higher (like almost twice as much) than it is for capital gains (profits you've gotten on investments you've held for a short period of time).

Moral of the story: Hold on to your investments for more than a year, or the government will consider it ordinary income and take more of it from you.

Ordinary Shares

Also known as common stock. (Ordinary, as opposed to preferred.)

Original Issue Discount

Original Issue Discount (OID) is the difference between the face, or par, value of a bond and the amount actually paid for the bond.


Let's say you buy a $1,000 bond but you pay $800 for it because it's a zero coupon bond, which doesn't pay interest. You get a nice discount when you buy the bond, and you get the full face value when it matures. The difference between the discount rate and the money you get at maturity is the original issue discount. (In this case, $200.)

OTC - Over The Counter

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

Pssst... wanna buy some stocks?

Out Of The Money

When a stock option has a strike price above the value of the stock.

Yeah... not good.


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

You probably don't want to buy—just a guess. 


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

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

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


See overbought. 

What happens when there are too many sellers in the market and some people think there needs to be more buying. 


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


Extra money, more or less.

Paid in surplus is a balance sheet term: it represents the amount that investors have paid in shares above the par value of the shares. It only refers to shares bought directly from the company—not traded on the market. Usually, companies price the par value pretty low so a lot of money earned from a public offering is from paid in surplus. 


A company's common shares have a par value of $1. The company prices these shares at $10 on the IPO. The paid-in surplus is the difference between the par value and the price, or $9. If the company sells one million shares, they put $9 million in the paid in surplus section on the balance sheet. 

Painting The Tape

Painting the tape is an illegal way to manipulate the ticker and a market.

Here's how it goes down:

Two people or firms trade stocks or securities back and forth. There's no real benefit to the trades—except that everyone looking at the ticker will see lots of activity on this one stock. The idea is that the stock will seem hot and real investors will also start to buy the stock. If you get caught running this scheme, you can expect some time in the Big House (and we don't mean a McMansion). 

Par Value

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

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


We always thought this would make a great name for Aunt Elma's toy poodle, but she doesn't see it that way.

In the financial and legal world (and, uh, in French), pari-passu means "on equal footing": two investments, sides of a deal, or parties are treated equally; there is no preferential treatment.

In a bankruptcy, sometimes it's said that the creditors are treated pari-passu: each of them have the same rights to get repaid, no one has a better crack at getting his or her money back.


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

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

Participating Preferred Stock

PPS is a popular term in venture capital circles.

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

Pass Through

This type of security is backed by assets, like property.

Each month, money is gathered from one party and handed to an intermediary. The intermediary collects some of the cash as a fee and passes the money on to investors who own the pass-through.

Example? A mortgage-backed certificate, which is backed by the homes that people have bought with mortgages. Each month, people pay their mortgages; the money is collected by the bank and then goes through government agencies involved in the mortgage industry. Finally, it makes it to the investors who've bought the certificates. 

Passive Income

Income you make without having to deal with your boss or having to schlep into work every day. It's usually money made from investments or from businesses that are mostly self-managing.


Ellen hates her job as a barista and decides she’d rather be relaxing rather than spending all her time dealing with caffeine zombies every morning. She decides to set up some passive income for herself. She sets up an online business where people can download her e-books and seminars about how to make the perfect cup of coffee, and she uses her savings to buy up a house she rents out to tenants. The money she makes from her coffee business and real estate business is passive income.

Of course, Ellen would still have to work really hard (at least at first) on creating her coffee business or investing cash (in the house) to earn passive income. There are online courses that promise you can create a passive income with no cash and no work, but the reality is that it usually does take time, money, and hard work (sometimes all three) at first to start creating a passive income. And that income might not be enough for you to give up that crummy job right away, either.


Passive Loss

In limited partnerships, limited partners can't take part in managing their own investments.

These investments generate huge accounting losses at the beginning, which pass through the partnership entity to the limited partners. (Those are the passive losses.) It 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, but the IRS has put a stop to that. Passive losses can only be used to offset passive income, the income that you get from those limited partnership investments.

Penny Stock

Stocks that trade for very little—but not necessarily for a penny.

According to the NYSE, anything that trades under $5 a share is a penny stock. So basically, anything that costs less than a Starbucks.

Usually, these stocks come from companies that are in their last death throes (i.e., they've been caught in a huge lie and now the SEC wants to shut them down) or small companies that are volatile and speculative (hello, new startup created by a genius who lives in a bunker in the desert).

You might see ads in magazines promising you that you can make big bucks with penny stocks. These ads usually imply that penny stocks are a hidden, untapped resource for investors. But in reality, it's easy to lose your shirt in penny stocks. The idea of "there's nowhere to go but up" does not apply: You can buy a stock for $3 a share and watch it plummet even further—or watch the company fold, leaving you with a very expensive piece of paper and no money.

Buyer beware.

Pink Sheets

What some very macho rock stars sleep on.

Also, a publication by the National Quotation Bureau that lists prices of over-the-counter (OTC) stocks—usually shares of delisted or very small, thinly-traded companies. These shares don't need to file papers with the SEC or meet their rules the way that stocks on exchanges do; they tend to be highly illiquid and have (maybe) a single dealer.

Thanks to that publication (which used to be printed on pink paper), trading OTC stocks is sometimes referred to as trading on the pink sheets.

If a company's stock symbol includes the letters "PK," it trades on the pink sheets. No word on whether matching shams and throw pillows are included. 


See Regulation D.

Most offerings of securities are made to the general public, but companies can also sell 'em to a small number of investors instead (usually under a Regulation D registration)—then they call 'em placements. 


An investment portfolio refers to all of the investments that you have, including stocks, mutual funds, bonds, real estate you've bought for investing, and the money you've sunk into your grandpa's cough drop venture.

Pre-Emptive Rights

Rights that allow you to do something first.

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

Prearranged Trades

In a legal trade, a customer buys or sells a security at the market price.

In a prearranged trade, two brokers meet over chai lattes for breakfast and decide to buy and sell a security at a specific price. When the market opens, they don't have to worry about market prices.

Yeah, it's illegal. Why? Because it gives them an advantage over other folks, who have to deal with market prices and changes in prices.

Preferred Stock

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

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

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

Preliminary Prospectus

This is a document your company has to file with the SEC before an IPO.

The document includes all kinds of stuff investors need to know about the company: management, financials, the CEO's favorite steakhouse. It's like the "red herring" lite: It's not official, but things are so hot that we have to put something out or our marketing people will kill us.

Premium Bond

To us, Daniel Craig. That was one prime 007.

Oh... you mean financial stuff. Right.

A prime bond is a bond that trades for a higher price than its par value. It can happen if the bond had a higher coupon or interest rate when compared with other bonds being sold. Investors are willing to pay more because the bond can make them more. 

Price Limit Orders

This is an order to your broker to buy or sell—but only within specific price range. For example, you might order your broker to sell for at least a certain amount (and no lower) or buy for no more than a specific price. This gives you some control over how much you pay for your investments. Most brokers charge more for limit orders, so be sure to check the fine print.


From your Greek villa, you call your broker and say "I'll buy 1,000 shares of KO at $85 and not a penny more." That's a limit order.

Primary Offering

Pretty much an IPO.

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

Primary Shares

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

Prime Rate

The lowest interest rate that banks offer to low-risk folks.

You know that number banks advertise on mortgage and financing ads? The rate that includes the fine print "rates may vary"? That's the prime rate.

If you pay your bills on time, have a good credit history, and are very likely to pay the bank back, you might get the prime rate. If your credit score is not so great or you make fun of the lender's tie, you'll get charged a lot more to borrow money.

Them's the breaks. 

Principal Protected Fund

Nothing in life is guaranteed except death and taxes, right?

Well, a principal-protected fund can be added to that list—sort of.

This fund guarantees that you will at least get back your initial investment. So if you invest $10,000 and the investment goes to crap, you'll still get back $10G. You won't lose money.

Sounds great, but be sure to read the fine print. To qualify, you have to hold onto the fund for some time. There might be other loopholes, too. Since these funds make big promises, they tend to net smaller returns. You might not lose much but you won't gain much, either, and, uh, isn't that kind of the reason for investing in the first place?


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

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

Private Equity

Another way that companies can raise money and investors can make money.

Private equity firms team up with investors (like charities or college endowment funds); investors pony up money, and the firms buy companies to flip. They improve the company and then sell it at a profit that they pass onto investors. The company ends up being more profitable and investors make money.


If you want to become an investor, keep in mind that this type of investing requires deep pockets. Depending on the private equity firm or fund, you might have to pony up $250,000 or more to get started as an investor. 

Pro Rata Rights

When a company is raising money, there can be some tension because of dilution.

Let's say you invest a lot in your Aunt Wilma's yarn business when she's just getting started, and you get shares that give you 33% of the company's ownership. But the business is a hit and Wilma is expanding. She launches additional efforts to raise funds. She sells more shares, and now you only own 15% of the company's ownership. You're miffed. What about all the money you ponied up when no-one else believed in the project? What about all those times you listened to her rants about lint?

Pro rata rights address some of these problems (not the lint problems—you're on your own there). Pro rata rights give you the right to invest in future offerings so that you can hold onto the same percentage of the ownership you had before. You don't have to invest at later stages, but if you decide to you get first crack at it—before the general public. 

Program Trades

Program trades are computerized trades that usually involve a lot of shares and a lot of money.

Investors make these trades directly with the system of computers used by the exchanges—no going through brokers like a chump. Usually, you can only complete program trades at specific times of day because the size of the trade can affect market prices. 

Progressive Tax

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

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


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

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


Any policy or plan that protects the businesses of a country and the local economy.

For example, high taxes on imports are protectionist policies. The idea is that they make foreign goods more expensive to get into the country and make them more expensive on the shelves, so local companies aren't put out of business by overseas competitors. 


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

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

Proxy Contest

A proxy contest happens when a bunch of shareholders team up together to sway a vote.

It's basically the corporate equivalent of the villagers showing up with torches and pitchforks and happens with takeovers and when shareholders are upset about a policy change. (The CEO really should have known that hiring his 8-year-old kid as an exec would have repercussions, eh?)

Proxy Statement

The SEC requires that a proxy statement be sent to the shareholders of a company before annual meetings. This document gives the deets about the issues that will be voted on at the annual company meeting (Should we open a new factory? Are we switching to decaf in the lounge?). Think of it as a sneak peek of the meeting so that you can decide how you'll vote. 

Prudent Investment

An investment that's appropriate or reasonable when you consider the investor's risk comfort levels, financial situation, life, and tolerance for dairy.

For example, getting mom to invest in mutual funds or bonds may be prudent if she wants to save for retirement. Having granny invest in penny stocks is not a prudent investment (even if they make her think of the penny candy she enjoyed as a girl) because granny's likely to lose her shirt and possibly her walker. 

Prudent Investor Rule

An outgrowth of the "prudent man rule."

This standard asks a fiduciary to invest like a prudent investor. They can't just sink all your funds into junk bonds; they have to invest as though they were investing in themselves.

Note that this does not guarantee anything about how your investments will do. A fiduciary might invest reasonably and still lose money on the market; the rule only requires that reasonable decisions are made. 

Prudent Man Rule

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

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

Public Offering

The sale of stocks or other securities to the public.

There are a few different types. There's the initial public offering, where a company hasn't sold stocks before and is going public for the first time (oooh, the excitement). Secondary public offerings happen when a company wants to raise more money but has already sold stocks once. They're now selling more. 

Public Offering Price

POP can mean two things.

If a company is selling stocks or securities to the public, the POP is the price at which they are selling the stocks. This price is usually made pretty attractive to get investors to open their wallets.

In the mutual fund world, the POP is the NAV (Net Asset Value) plus the commissions or loads. It's the cost of buying shares of a mutual fund—and that cost goes up and down daily. 

Purchasing Power

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: say, $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 or, uh, elsetime.


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

Qualified Dividends

Dividends that come with no more than a 15% tax rate. If you meet a bunch of restrictions, dividends are taxed at the long-term capital gains tax rate instead of as regular income (the latter of which has a higher rate).

Qualified Plan

A "qualified" retirement plan meets all kinds of rules and laws so that you can enjoy some tax breaks with the plan. A 401k, for example, is a qualified plan. 


Quotas are limits on how many of a certain item can be imported at a time. (No more than 100 million pounds of staples at a time, please.)

RAN - Revenue Anticipation Note

A very short-term muni bond.


The municipality has plans to launch a muni bond offering. But they need cash now, so the RAN covers them until that larger offering is made. The money from the larger offering then pays for the shorter-term bond.

Random Walk

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

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

Don't tell Warren.

Realized Gain

The gain you make when you actually sell a stock or asset at a profit. You may own stocks for years and daydream about what you'd do when you sold it, but until it's sold those gains are unrealized.

Important note: You can't be taxed on unrealized gains, but you will fo' sho' be taxed on the realized ones.

And yes, you'll realize it.


You bought GE at 10 bucks a share. You've held it a few years, and now it's at $30. Nice big fat hefty gain.

When you sell, you will "realize a gain" of $20 a share. 

Realized Loss

See realized gain.

Realized loss is a loss you experience when you sell a stock or asset for less than what you paid for it. As long as you hang in there and only see the loss on paper, it's unrealized. Once you sell, boy do you realize it.


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 you likely also realized that you have no clue when it comes to investing.

Red Herring

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


See: the plot of every movie ever made.

In money terms, redemption just means paying off debt.

Registered Form

When a security is issued, it can take one of two forms: registered or bearer.

With a registered form, there's a paper trail that notes who bought the security and when. Each time that the security changes hands in trade, information about the new owners is added. Most securities today are registered. 

Bearer forms mean that whoever has the paperwork for the security owns the security—they can walk into a bank and cash it in, no ID usually required and no questions asked. These forms are less popular today because terrorists and other shady types can use the anonymity of bearer forms to raise money for their projects. 

Registered Investment Adviser

An investment adviser registered with the SEC and the state where he or she works. This person usually handles the investments of institutional investors and really rich people. See The Investment Company Act of 1940.

Registered Representative

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

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

And no, those things aren't mutually exclusive.

Registration Statement

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

Regressive Tax

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

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

Regular Way

This term refers to the way in which trades are settled (when they take the usual amount of time to do so); depending on the security, that could mean the next business day or a few days.

Regulation A

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

Regulation D

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

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

Regulation FD

FD = full disclosure.

Full disclosure registration means that in trades, securities offerings, and other business deals, everyone has to offer up all the important information that can affect the deal.


If your company sells stocks to the public, the SEC requires that you make information about your finances publicly available. No hiding that you're $30 million in debt, bucko. Not disclosing important information like that can land you in a nice orange jumpsuit.

Regulation T

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. According to this rule, brokers can offer up to 50% margin.


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

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

Relative Strength Index

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

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

Reset Date

The date when the rate adjustment of a dividend happens.

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

That last trading day is the reset date.

Residual Claim To Assets

The claim to leftover assets.

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

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

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

Restricted Stock

A type of unregistered stock that a company can sell or give to execs or investors. This stock cannot be sold or transferred until the SEC registration is handled. 

Retail Investors

Investment pros love to complain about retail investors. These are the average shlubs, not the money pros. They're the teachers, plumbers, dentists, and grandpas who want to make money with investments but who might not be all that sophisticated about money.

Hint: If someone says "So an interest rate makes me money, right?" they're probably a retail investor. 

Retirement Accounts

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

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

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

Return On Assets (ROA)

The return on investments is the money you make from your investments and it's usually pretty easy to figure out. You invest $10 and you make $5... your returns are $5.

But companies don't just make investments. They sink a lot of money into assets—like land, factories, brand names. How can a company figure out how well it's making money with its assets?

Answer: by figuring out the ROA (Return on Assets). And, yes, there's a formula for that:

ROA = net income / assets

If your company has $1 million in net income and $5 million in assets, that's a ROA of 0.2 or 20%. Is that good? Bad? It depends in the industry and what assets you have.

You want the ROA number to be as high as possible—it means you're squeezing more juice from your assets and really putting them to work. 

Return On Investment (ROI)

The money you gain or lose on your investments over a specific period of time. For example, if you own a stock, you look at your returns on investment over a period of two years, and you may find that you have gains of $1,000. Is that good? Bad? Depends on what you are expecting from your returns and what other investors have seen on their returns.


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 ROI 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 just $1, your return was negative 67%.


The bucks you get from sellin' your wares or conducting business activities.

Revenue is important for a few reasons: First, you gotta have some to pay your bills. Second, how much you make decides how much you pay in taxes. Finally, revenues are often the starting point when you're trying to decide whether you're making good business decisions ("How can we increase revenue?")

NB: also called "top-line" in kitsch Wall Street circles.

Revenue Bond

A municipal bond that pledges the revenues generated from the project with the amount borrowed. Toll roads, municipal parking garages, city councilmen's Lexuses... those are all examples of projects that are funded through revenue bonds.

Reverse Split

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

Reverse Stock Split

Sort of like a stock regeneration. Instead of 1 share becoming 2 (like in a stock split), 2 shares become 1. Your investment is worth the same overall, but the window-dressing makes it all look more impressive.   


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

Risk-averse people don't want to take unnecessary risk. They wear knee pads when walking up hills and bike helmets in classrooms—just in case.

When these folks want to invest, it's best to set them up with bonds and T-bills. The poor dears can't handle the ups and downs of high-risk stocks.

Road Show

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

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

Think Cirque du Soleil but with charts and suits. 

Roll Up

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, anyway.

Round Lot

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

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

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

Rule 144

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

See lockup provision.

Rule Of 72

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


You buy $1,000 worth of a stock (50 shares at $20 a share), which compounds at 8% per year. The Rule of 72 tells you how many years it'll take to double the principal compounded value of that stock—to get the magic number, you take that 8 and divide it into 72. In this case, at an 8% compound rate, it'll take you 9 years to double your money.

S&P 500

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

For more, head on over to our Learning Guides.

Sales Charge, Sales Load

Mutual funds ain't free, no matter what the ads say.

When you invest in a mutual fund, you pay a commission (a load) or an annual fee. The money goes to the people who sell and manage the fund. The money that's collected from you to pay those folks is known as the sales charge or sales load.

You could be paying one of a few ways. You could have a straight-up sales charge or a high annual fee (it's usually one or the other). A good rule of thumb is to think about how long you'll have the fund: If you plan on holding, choose low annual fees and you'll save in the long run. If you'll sell soonish, look for no loads or low loads. 


When a flood is imminent, people put bags of sand against the shores of rivers and lakes. The idea is that the sand absorbs the water and slows the flooding, hopefully saving a few basements along the way.

When a company sandbags, they try to keep estimates of financials pretty conservative. They publish underwhelming numbers so that when the real numbers come in, the company looks that much better. 

Underpromise, overdeliver.

Sarbanes Oxley

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

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

Savings Bond

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 '69 Barracuda), you receive the face value (they're usually sold with a $500 face value), plus all that accrued interest.


Do re mi fa so la ti do!


The term also refers to the way companies 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 hundred million; if the retail price stays around 50 bucks, that's a lotta mega profit.

Second Market

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

Secondary Offering

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

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

Sector Fund

Seems sort of obvious, yeah? It's a mutual fund that invests in a particular sector, like tech or healthcare.

It's is the opposite of a diversified fund, which usually invests in lots of sectors or areas so that when one slides, you still have all those other investments holding the fund up. 

Secured Bond

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

Secured Creditor

Secured is better than unsecured because you have something to grab and sell (collateral) 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

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

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

Securities Exchange Act 1934

A law that helped make securities trading safer for investors.

Thanks to this law, the SEC came to oversee the industry, the New York Stock Exchange became linked to the government, and insider trading became a major no-no.


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

Sell Limit

You call your broker to sell a stock or other security, but you only want the sale to go through if the broker can get you at least a certain price. You put in a sell limit, so the broker can only sell at or above the price you want. 

Sell Side

Brokers. Brokerages. People who sell stocks.

The opposite is the buy side: folks who buy and manage money for a living. 

Sell Side Analyst

Someone who works for a firm and assembles reports and research about a specific industry (like energy or tech). This person creates graphs, charts, and lots of information that investors can use. But their real role is to get clients to trade with them or their firm. When that happens, the clients pay a nice commission. The real work of the analyst is more of  a marketing thing, so take those charts with a grain of salt. 

Sell Stop

This is an order to your broker to sell a stock at less than the current market price. Why would you want to do that? Usually because you think the stock is headed downward and you want to sell before it drops too low. It protects you from losing even more.


You have a stock that's worth $40 a share, but you think it's about to do much worse. You put in a sell stop order for $38. If the price reaches $38, your broker sells for $38 and you lose $2 per share. But a week later the stock drops to $30. You feel pretty good—you kept your losses from being too big. 

Separate Account

An investing account that's in the name of specific individuals or entities.

The difference between a separate account and a mutual fund is that the investor of a separate account owns the stocks or securities in the account rather than shares in a basket of securities. You need a lot of dough—like $100G or more—to invest in a separate account since the money isn't being pooled together.


The process of taking care of trades and seeing them to the end.

When a trade is settled, it means that the buyer has his stock and the seller has her money.


Sales, general and administrative expenses.

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


A person who own stocks in a mutual fund or company. This person basically owns a bit of the company and has some rights.

Sometimes known as stockholders. 

Shares Outstanding

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


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

Short Interest Theory

This investing theory states that stocks with lots of investors betting that the stock will go down will actually go the other direction.

When a stock sees lots of short sales—where people sell something they borrow but don't own—any slight increase in price will cause these sellers to buy because they stand to lose money if the stock price goes up. All those buys will push the stock price up.

That's the theory, anyway.

Short Sale

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

The net result is the same.


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

Short-Term Capital Gain

When you make money on an investment you’ve had for shorter than a specific amount of time (usually a year and a day), they're known as short-term capital gains. You can expect to pay taxes on this gain, and you’ll pay higher capital taxes than someone with a long-term capital gain, so it can make sense for you to hang onto your investments. 

Short-Term Capital Loss

Loss on an investment you’ve had for a short period of time (usually less than a year and a day, although you might want to read the fine print or the information that came with your investment). 

Shorting Stock

When an investor makes a bet that the price of shares will decline.

When you short stock, you sell a stock you don't own by borrowing it from your broker. Once you make the sale, the money is credited to your account. Then you close the short; that is, you buy the stock to give the money back to your broker.

If the stock has declined in price, you pay less than what you earned, and the difference is your profit. If the stock you've already sold has gone up in price, you have to buy the more expensive price and you lose some cash.

Sinking Fund

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

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


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


The Securities Investor Protection Corporation (SIPC).

This non-profit offers insurance for accounts, and broker-dealers who register with the SEC have to be part of SIPC. If your broker goes bankrupt, SIPC makes sure your investments come back to you. If some assets are missing, SIPC will replace them—up to certain limits.


Trends in options, stock prices, and other financials show up on graphs as lines that, uh, don't go straight. When a line on a chart goes on an angle horizontally or vertically, it has a skew. When trying to figure out where options, stock prices, and other stuff will go, skew can give analysts a clue as to where trends are headed.

Small Cap

Stocks that have a small market capitalization, generally because the company doesn't have many shares outstanding.

Of course, this is Wall Street, where big is small. Small cap refers to companies with less than $1 billion in capitalization. So yeah... not so small, after all.

Sole Proprietorship

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

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

Special Memorandum Account

Have extra margins in your margin account? You can put them in an SMA.

In fact, you should.

Keeping those extras in a different account makes sure that your gains stay protected and you have extra margin you can use when you want to buy more investments. 


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

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

Order in the market!


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

Spread To Treasuries

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

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


It sounds like a class at Starfleet Academy, but it's really a combo of inflation and stagnation—and it's really bad news for the economy.

Stagflation happens when the economy isn't growing. It's stagnant, which means low interest rates, few jobs, few opportunities. Things are sluggish. At the same time, there's inflation; the cost of stuff is going up, which means people can afford less stuff, which means less demand and fewer jobs... sensing the vicious cycle yet?

Statutory Voting

For every share you have, you get one vote. 

That's statutory voting.

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

Stock Dividend

Some stocks pay out dividends, and you can use that cash however you want.

Stock dividends are dividends paid out in the form of—wait for it—stocks. One problem: Since the company has created more stock, you get to deal with dilution, meaning that every individual share is a smaller slice of the company pie. 

Stock Option Plan

A stock option plan is just the, uh, plan that the company uses to issue stock options.

The plan outlines the number of options that will be issued, what the options are like, the time frame for the options, any rules that relate to the options, the strike price, and the level of insanity of the start-up founder. (We wish.)

Stock Split

See stock dividend. They are identical in result.

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

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


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

Stop Limit Order

See stop loss, buy stop, sell stop... actually, just pull out all the stops.

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

A trade order you give your broker to stop the bleeding.

If you think a security is heading down in price, you can put in this sort of order. When the price starts dropping below a certain limit, the broker sells before you lose any more money. See buy stop and sell stop.


You've bought a stock at 43 bucks per share. You were hopeful that the new drug from this company would cure cancer. Instead, it only grew hair on people's knuckles. Wisely, just in case that hair-knuckle thing happened, you had put in a stop loss order with your purchase at $42 to sell everything. When the price reaches $42, the broker starts selling at the next available price, which is $25. You've lost a lot of money, but the next day the stock is at three dollars a share. You got out before your stock bled out all over the floor. Lucky—those things get messy. 

Stop Order

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


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

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

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


A way that you can take advantage of stocks going up and down like crazy. With a strangle, you buy a put option and a call option where the call strike price is higher than the put strike price. 

Street Name

Shares are yours, but the broker holds them in her name (the street name). Why? If you decide to sell or trade, it's easier to make the trades without you having to sign a bunch of papers. 

Strike Price

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


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

Subordinated Debenture

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

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

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

Good luck.

Subscription Agreement

When you apply to become a limited partner in a DPP, you have to show that you're worthy. You do that by filling out a form called the subscription agreement. This form asks about your net worth, income, past investments. It will also outline out the risks you take on with the DPP. It's all written in legalese so it's hard to read but it tells you that you can lose your money and that DPPs are risky. So now you know.

Super-Voting Stock

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

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


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

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


This is the electronic trading system used by the New York Stock Exchange for limit orders. It's considered more efficient because it sends orders directly to a floor specialist instead of to a broker.

Supply-Side Economics

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

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

Surrender Charge

Most annuities require you to keep the investment for a minimum period—usually 7 years. If you surrender or give up the annuity before then, the annuity company will make you pat (usually 1–5%). 

Surrender Fee

This is the amount of the surrender charge, which you pay if you back out of an annuity early. The surrender fee is usually expressed as a percentage of the original investment. 

Surrender Period

See Surrender Charge and Surrender Fee.

If you have an annuity, you are expected to hold onto it for a specific period of time—usually seven years. That's the surrender period.

Withdrawing before the end of the surrender period will mean you have to pay extra fees and costs. (Is it just us, or is that the ending to every finance definition on the planet?)


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

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


The T here refers to time, and the 3 refers to 3 days.

So T+3 = the 3-day time period that you have to wait after you buy or sell a stock. Yep, it takes three days from when your order is executed until you actually have the stock or the money in your hot little hands.


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


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

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


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

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

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


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


A fancier word for taxes. It's usually a type of tax or duty on imports or exports, and it's meant to help protect local companies from products being shipped into the country. 

Tax Anticipation Notes

How can you not anticipate paying taxes?

Tax anticipation notes rely on the fact that the city will collect $X in taxes so many months from now. They issue bonds today using that expected tax money as collateral so that they can pay for stuff today.

Tax Deferred

A type of tax break that lets you pay taxes later—as opposed to now.

For example, on some retirement accounts, capital gains and income aren't taxed until you start taking out money from the account as a silver-haired retiree. You don't avoid paying taxes (no one has that superpower); you just put it off. 

Tax Equivalent Yield

Sometimes comparing bonds is like comparing apples and oranges—especially when you're dealing with bonds that have different tax breaks. When that's the case, you can compare them by calculating the tax equivalent yield. Here's the equation:

(Muni bond yield) / (1 – tax rate).


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. 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

Want to pay fewer taxes?

Tax exempt bonds are one way to do that. With these bonds, you don't pay local, state, or federal taxes on your investment so your investment dollar goes further. Municipal bonds are an example of tax-exempt bonds. Whatever money you make from your muni bonds is money the IRS can't touch. 

Tax Loss Carry-Forward

It sorta is what it says it is: If you have a tax loss—you lose operating profits one year in your business—you can "carry it forward" into the next year. So if you suddenly do well one year, you can use the carried over tax loss to pay less taxes.

In fact, you have 7 years in which to use those tax losses.


Do the math: a company called Scooby Dude pays 30% tax. 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 her 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. 

Technical Analysis

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

Something pretty useful, actually.

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


A type of account that has more than one owner.

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

(Yeah, put the baseball bat down.)


Tendering is what the government does when they invite bids for a project. It's also what happens when shareholders hand over their securities or shares for a takeover. Shareholders who want to see the change that the takeover promises will pony up their shares. If enough shares are submitted or tendered, the takeover can happen.

Term Sheet

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

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


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

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

Thank you. 


Mr. Faust


Greek symbol for time, usually in reference to stock option trades. Theta refers to the way that stock options decline in value over time.

Carpe Diem and all that stuff. Time's a ticking. 

Theta Decay

See theta. It sounds like what happens when you don't floss, but it actually refers to the way that the time value of a stock option decays or declines with time.

The closer to the expiration date, the smaller the time value of the option.


You sold puts on GOOG at $450 for $35 which expire in 4 months; the stock today is at $600. That is, you sold the right for someone to make you buy shares of GOOG at $450 any time between now and 4 months from now for 35 bucks. Things go along and, well, GOOG just stays pretty flat, doing a whole lot of nothing. 

It's now 3 days before those put options expire (we've gone 3.9 months with a whole lot of nothing happening in GOOG). The stock is still around $600 a share. What are the odds it plummets $150+ in 3 days? Really low. So the value of those puts is almost fully expired—its THETA has decayed to just 3 days' worth of trading time and it is highly likely you just collect your 35 bucks, walk away, and buy yourself a really nice burger at a Manhattan eatery.

Ticker Tape

Back in 1927, stock information (e.g., prices) were passed on through telegraph.


Still with us?

The info was printed on thin paper known as ticker tape. Back in the day, this paper was synonymous with the stock market, and people used to throw the stuff around during parades. By the 1960s, the traditional ticker tape was no longer needed; there were better and faster ways to transmit stock price info.

Today, it's all done electronically. No more dead trees, thankyouverymuch.

So, now, ticker tape refers to the stream of stock prices and information that come through, usually on a mobile device or screen of some sort.

Time Value

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

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

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

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


Treasury Inflation Protected Securities. They're exactly what they sound like: treasury securities that are very low risk because they protect the investor from losses caused by inflation.

These securities are linked to the Consumer Price Index and their par value increases with inflation. The interest rate remains the same no matter what inflation does.

Trading Volume



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


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

Transfer Agent

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

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

Treasury Stock

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

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

Why keep treasury stock? Two reasons.

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

Trust Indenture

It's right there in the fine print of the bond contract.

The trust indenture describes where the money for your investment comes from and what will happen in case the company goes bankrupt or can't pay its bondholders. This is stuff you want to know before the company looks like it's taking a swan dive.

Trust Indenture Act 1939

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

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

Two Dollar Broker

An independent broker on the floor of the exchange who takes care of business for other brokers.

Usually, this person handles orders for brokers who are too busy to handle their own. Back in the day, two dollar brokers were paid $2 a trade. Today, they earn a commission.


UGMA is what you say when your mother tells you to go wash your face.

It's also the Uniform Gift to Minors Act, a law from the 70s that outlines the gifts minors can receive and the taxes they have to pay. Thanks to this law, you can give your kid securities and assets without having to set up a trust. If you stay below certain limits, Junior, Jr. might not even have to pay taxes on the gift—but you do have to make sure you follow a bunch of rules. 


The underwriter can be a person, but more likely it's a bank or firm that helps a company sell new stocks or securities to investors. They handle the many details of an offering, and they act as middlemen, buying stocks from the issuer and reselling 'em to the public (at a profit).


Goldman Sachs is an underwriter. They financially back companies during the IPO process (and other financing events), such that they in fact own the company for a brief moment in time... like 5 minutes... and then turn around and sell that company at a mark-up in price.

Unfunded Pension Liabilities

If a municipality offers a pension to its employees, that's a financial obligation that stays on the books. But that pension seems far away, so the municipality doesn't put any cash away for those pensions. They're not sure when money will be needed, and there's no extra money available anyway because the politicians spend it all.

As long as no money is being put aside for the pension, it's an unfunded obligation. 


Welcome to Detroit. A city worker—let's say a janitor—would make (today's dollar, inflation adjusted) $37,000 a year with 5 weeks off for vacation and get $8,000 a year invested into his pension fund. He also got $3,000 worth of health care benefits and other perks. So it cost the city $48,000 plus various city taxes to employ the janitor. He was paying into the pension with the understanding that he'd have money to live off when he was too old to work. 

And all of this was fine until, one day, a clever union negotiator tweaked one phrase: "defined contribution" became "defined benefit" and all of the sudden, the city was on the hook for making up losses that the janitor might have suffered in the stock market with his investments. 

This worked fine—and was generally unnoticed when the market went up 10% a year for a long time—but along came the crash of 2008/9 and, well, that was the end of Detroit courtesy in large part to its pension liability. The janitor and others like him who had paid into their pensions suddenly weren't getting the money they were promised. The janitor paid into the pension but the city used up the cash on other things and went bankrupt.


The result was that the pensioners sued and will likely end up getting only a small part of their pensions. That's what happens when great negotiating and financial mismanagement collide.

Uniform Securities Act

An act that defines what your company has to do when registering securities.

Each state also has its own laws based on this act.

If you're looking for some light bedtime reading, dig in.

Unit Investment Trust

Also called a UIT, a unit investment trust is like a mutual fund, but without the management and with an expiration date.

Like a mutual fund, there are stocks and bonds, and the whole thing can be traded on the secondary market.

The goal of the UIT is usually to create income.

Unlimited Liability

It means you can have your pants sued off—literally.

In this structure (like a sole proprietorship or a freelance business), if your company is sued, the lawyers can go after your company and your own money and assets—even the stuff that has nothing to do with your business. That's why lots of people prefer limited liability companies.

If your company destroys a city, the business can be sued. But you can still take your personal money (which remains yours) and move to a city you haven't destroyed yet.


It's a tale of two pizza parlors: the Joneses and the Smiths. The Joneses owned their pizza parlor personally as a sole proprietorship style of business ownership. The Smiths set up a limited liability corporation for $299 on LegalZoom.com.

Both operated basically the same. Until The Cheese Day happened. It was bad cheese. They had the same supplier. It turned all of their clients' stomachs to mush. And both operators got sued. And lost. A million dollar judgment.

The Smiths lost the restaurant, but they had taken money out of it for years, so they were just fine financially. They'd open a new one down the street. And change cheese suppliers.

The Joneses were not so lucky: the parlor brought $300,000 at auction and the family still owed $700,000. The lawyers stepped in and sold their house, net of mortgage and realtor commissions for $500,000. The cars went for $25,000. Then went the fish tank, the shoes, the jewelry brought over from Europe during the war. All of that was another $20,000.

It still wasn't enough. We shan't continue with what happened to the Joneses, but you don't want to keep up with them. It's called a "limited liability corporation" for really good reason and costs a couple hundred bucks to set up. 

Unrealized Gain

See realized gain.

When you have an unrealized gain, you own something (a stock, maybe), and if you sold it today you'd make a profit or gain from it. But you don't sell—so that gain is unrealized.

You don't get to fully enjoy it. Then again, the IRS doesn't get to tax it, either. 


You bought 1,000 shares of Planar Televisions for $2 a share; the stock now trades for $12 a share. You've made 10 bucks a share. But you haven't sold the shares yet. As it sits in your brokerage account now, this nice gain of 10 grand is "unrealized."

Uptick Rule

This old-school rule from the 1930s meant that if you were making any short sale transaction, you had to enter at a price higher than the price of the previous trade.

The idea behind the rule was that when the price of an asset was already nosediving, short sellers wouldn't push the price even lower. In 2007, this rule was taken off the books. In 2009, there was some talk to bringing it rule back in some form.

Oh, fickle economists.


Not to be confused with STDs (although some people like 'em about the same amount), the USTD is the U.S. Treasury Department.

This government department handles government revenues and issues treasury securities.


The UTMA (Uniform Trust to Minors Act) lets parents set up trusts and entities to keep money and assets on ice for their kids. When Junior was 21 and could make his own bad decisions, UTMA made it easy for the assets and cash to pass over to him.

Valuation Analysis

What's it worth? And why?

These are the questions people ask about companies when they want to invest, and valuation analysis attempts to answer 'em.

How we get to the valuation analysis is another story. Some people use charts or formulas or ratios. Some compare a company's earnings to an index or an average company. Some use Discounted Cash Flow Analysis. Some seem to pick a number out of a hat.

Bottom line: It's not an exact science.

Valuation Formats

A small sample of how bankers, investors and others compare and value companies: 
  1. Multiple of Sales—The company does $100 mil a year in sales. Buy it for... twice that number? How are others handling this?
  2. Multiple of Margin (Gross or Operating)—Same as above, only with margins instead of sales as the foundation.
  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 when they were made).
  4. Multiple of Earnings—the most common denominator. This means dividends paid to common stockholders plus the value of the company when the Argentinians buy it in 2009. 
  5. Establishing the Health of the Company—There are lots of ratios and equations you can use here to please your cold mathlete heart. We've put together the "dirty" Dozen ratios to illustrate some valuation techniques. That's a lot of number crunching.

The "Dirty Dozen" Ratios


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

Value investing is often considered "conservative," but in practice, that's not always how things pan out.

Value investors look for companies they think the market has undervalued. They buy them, eagerly awaiting the day when the market smartens up and all the other investors (who they think react emotionally to the market) start buying again (meaning the price goes up).

One small detail: it's almost impossible to tell what a company is really worth, which means there's no real way to tell if a company is actually undervalued.


From ancient history: Yahoo! came public with its IPO in 1995. At the time, it carried a market valuation of $350 million, give or take. It was considered an astronomically high multiple on $5 million of earnings... 70x.

Yet two years later, Yahoo! earned almost $120 million—on a forward 2 year earnings multiple. Yahoo! came public at just 3 times earnings. Like the lowest multiple ever for an IPO kinda sorta.

Was it "value investing" to buy it at 70x? Courageous? Stupid?

Vanilla Bonds

Basic bonds. Nothin' fancy. No special features.

Personally, we prefer mint chocolate chip, but what can you do?

Vanilla Terms

Vanilla terms are the basic terms you get with stocks and bonds. Nothin' fancy; just what you'd expect reading the fine print on your investments.

Because you totally do that.

Variable Annuity

A retirement account you create with an insurance company.

For years, you put money in the account, and the company invests in money market funds or different types of mutual funds.

Then you get old and wrinkly.

Time to tap into all that cash so you can get serious about your bingo game. At that point, the insurance company promises a minimum payment ("we'll pay you at least $500 a month"), but the payments each month can vary (always above that minimum) depending on how the investments did and how much money you socked away. 


If you're vested, you're wearing a sleeveless jacked. That, or that you've stayed in your job long enough that you get to tap into your stock options.

Hopefully, those meetings with the most neurotic staff on earth and the late nights listening to your co-workers talk about their cats were worth it. 


At Shmoop, we pay in three forms: cash, peanuts, and options. Our fearless content leader, Deb, was given 100 options to start at Shmoop (and an enormous bag of peanuts). Her options carried a 5-year vest provision, so that at the end of the first year, she was "vested" into 20 options—meaning that on her 1-year Shmoopiversary, she had the right to buy those options, no matter what.

Then she had 4 more years or 48 more months on that grant of 80 remaining options and she vested a bit each month, until 5 years down the road, she was "fully vested" and could by every one of those 100 options.

In that time, she's only developed a few minor facial tics from dealing with our antics, so we think it's a win for her. 


Volatility Index (VIX).

It generally refers to about how choppy the market has been the last 200 days. The VIX is like a gauge of the anxiety levels of the market: Is the market chewing its nails and rocking back and forth or more sunning itself in the corner and taking a nap?

The VIX also helps price derivatives. 


Here's the VIX. Makes you kind of anxious to look at it, doesn't it?


Ups and downs (in the finance world, it's referring to the market).

Sometimes, volatility is called beta and is measured in numbers. If the market moves 2% and your stock moves 4% on average, it's beta is 2, roughly.


Here's a volatile stock chart. And here's one that's (relatively) a dead man's pulse.

Why the diff? Well, Netflix has more ups and downs because investors are less sure about the company. The company doesn't pay a dividend and it has monster competitors. GM, on the other hand, is a slowly dying-ish company. It has relatively steady (albeit scant) earnings, and it pays a dividend, which keeps its stock price stable.

For a better encapsulation of volatility, we suggest Real Housewives.


Variable Rate Demand Obligation. Translation: a redeemable debt that has a changing interest rate. 


You have a variable rate bond. It adjusts annually and it pays 100 basis points above LIBOR. This particular bond, however, has a demand obligation which makes it automatically convertible into a flat 7% yield bond, payable in U.S. dollars, if the dollar to Euro ratio ever drops below 1:1. The bond carries this VRDO feature as a kind of hedge against strange fluctuations in currencies, interest rates, and other bizarroland occurrences.

Wash Rule

A rule that says you should shower regularly—with soap, please. This rule also says you cannot sell a stock and then buy it back within 30 days, claiming it as a loss with the IRS to pay lower taxes


You bought Netflix at $400 a share in October. It's now December 27th and you want to sell it here at $320 and take the $80 a share loss to make up for your gains that you realized by selling GOOG and YHOO at a tidy profit. It's smart tax planning so you sell. 

New Year's Eve happens and you get anxious that Netflix is going to skyrocket in the next week. So you buy the same amount you sold January 15th. Bad news for you. You don't get to deduct the $80 a share loss you realized December 27th because you effectively "washed" that sale.

Western Accounts

"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.


A conditional transaction where the security has has not yet been issued but is authorized to be issued. When-issued transactions can happen as part of IPOs, secondary offerings, and stock splits: The trade happens but doesn't really go through until the stock is actually issued. If it never gets issued, the transaction or trade gets cancelled.


Shmoop Enterprises Global or SHMEG decides to spin off its European business as a separate company based in Paris. (We like the food and the tiny dogs.) So we declare that all shareholders of SHMEG will get 0.35 shares of SHMEUR, a new company to be spun off of the parent. The spin will officially happen on May 4th (our favorite day of the year), but they can begin trading in March as "when-issued," so that people who really want SHMEUR can rush to the head of the line.

Whisper Number

The numbers Wall Street Guys whisper as part of their seduction technique. Sort of a mathematical version of "whispering sweet nothings."

Ah, darling, 7546, 76758, 87878...

Also, the earnings per share (EPS) that are not published or official but which the pros on Wall Street have access to.

If you're their favorite investor or someone they whisper sweet nothings to, they'll share. But this information is not available to the Average Joe.

In theory, you can use these numbers to make better investment decisions. In reality, the accuracy of these number varies and lots of people in the know point out that with all the rules requiring companies to disclose financial information, there's not much out there that's secret.

Work In Process Inventory

An item on the balance sheet that tracks the production process. It refers to stuff in inventory that's not fully made yet and isn't part of finished goods.


Your business has five half-finished tractors in inventory right now because it takes months to complete one. They are evaluated on their value in their current state and added to the balance sheet. Overhead, materials, and labor went into 'em, so they have to be accounted for. Once they're finished, the tractors get listed in regular inventory.

See the Shmoop blurb on working capital for more.

Working Capital

The difference between a company's current assets and its current liabilities. This number shows how liquid the company is: dDes the business have enough money on hand to pay for stuff right now or are they paying suppliers with rolled coins?

Working capital is a delicate balance. Too low and the company will struggle to pay the bills. Too high and the company might not be using its assets to its best advantage.


Okay, you're at the prototypical lemonade stand, whose lemonade has to cure for exactly 100 days before it's just bitter enough to be called Miss Havisham's Lemonade. 

You know that you sell on average 500 glasses a day, so you have to stockpile the lemonade for 3+ months before the day comes when you'll serve it. And bitter lemonade ain't free. In fact, it costs you about a dime a glass, with all the sugar you use to combat the bitterness. Even at just a dime, that's 50 bucks a day (a dime times 500 glasses) times 100 days. It totals to $5,000 of stored lemonade. 

Then there's the fridge you have to rent to keep it cold. And insurance. And cups. And a whole bunch of other stuff. How'd you get the 5 going on 10 grand in cash to pay for all of this? Well, you may have borrowed it. 

Wrap Account

Jay-Z's brokerage account. Or something.

In a wrap account, you pay an annual fee (based on a percentage of what's in the account), and the broker manages the account for you. The fee you pay covers commissions and extra expenses (but not the costs exchanges or the SEC charge). You don't pay extra commissions each time a trade is made in the account, which prevents brokers from making trades just to earn more commissions. 


If Jay-Z gives his broker $100 million under a wrap account that charges 1%, he'll be charged a million bucks a year in return for handling all of Jay-Z's trading, wiring, account, and a whole bunch of other services.

For many large brokerages, wrap accounts allow for their clients to be able to buy various flavors of funds (mutual, hedge, index) at "wholesale" prices; that is, if the fund is a captive fund maintained by the brokerage, the wrap account allows the client to buy with no commission or upfront charges.


Shakespeare was one. But in this case, "writer" is the person who sells an option. They're called a writer because years ago sellers of options probably had to write up some of the sales contract. By hand. By the light of a candle. 


We have shares of Google (GOOG) that are trading at $500. We write you a call option that gives you the right to buy a share of GOOG from us for $550 a share. If you decide to exercise that option when Google is trading at $600, we'll sell the stock to you for $550, and you'll make a nice profit. If Google drops to $400, you might not want to buy, and we get to keep the money you paid us for the option. 


Yield is just the dough you get back after investing an initial sum. It can come in the flavor of bond yield—like a coupon—paying whatever percent face value, based on par value. That is, for a bond trading at par, with face yield of 5%, that bond pays the investor 25 bucks twice a year for that 5% face on a grand invested. 

Got it? It is just the percentage rate of return on a bond.

But what if the price of the bond got cut in half? Maybe something bad happened to the company—patent law suit or CEO caught in bed with an alien from Mars—so investors suddenly feared for the creditworthiness of the company. And they sold heavily their bond positions. Now the bonds are selling at 50 cents on the dollar or $500 a unit instead of the standard $1,000. The bonds still have to pay the 50 bucks a year interest but now they yield 10%... 50 bucks of the grand at which they were created.

But yield is also derived in the land of equities. Coca Cola stock trades at 50 bucks a share and pays a $1 dividend. It yields 1/50 = 2%. You get 25 cents 4 times a year for each share you own. And another big note: Equities pay dividends 4 times a year while bonds pay twice.

Yield Curve

The Yield Curve (YC) is just the graphic representation of what investors think will happen to interest rates in the future. The most common YC that gets put in books and in the news is the yield curve of U.S. Treasury securities. This YC can impact the YC of other markets (like mortgage YCs).

Here's what a yield curve looks like: 

Yield Curve

Notice a few things about it. The vertical axis is the interest rate paid and the horizontal axis is time. Notice that over the short term, money is cheap... around 1% for 1-year paper. But also notice that as we move out 10 years, the yield curve is flirting with 4%. What this curve is saying is that investors believe that 10 years from now, odds are best that bonds will be trading around 4%. The curve is now said to be positively sloped because rates today are lower than they are expected to be in the future. 

Yield To Call

If a bond is callable, the issuer can call in the bond early—meaning you might not get the full amount of money you would have gotten if the bond went to its maturity date.

How much can you make with a callable bond? The answer will depend on when the bond is called. You can figure out a minimum yield by calculating the yield from the day you get the bond to the first possible date that it could be called. 

Whether the bond will be called will depend on what interest rates do. If they drop, it's likely that the bond will be called early because the issuer won't want to pay the higher interest on the debt. If the rates stay the same or go up, just calculate yield to maturity. It's cheap borrowed money for the company at that point so they probably won't call the bond early.

Yield To Maturity

This is the yield that a bondholder will receive by holding the bond until it matures. This assumes that the interest payments are all reinvested, so yield to maturity will change over time as the reinvestment rate fluctuates.


You buy a bond for $1,000 (i.e. at Par) which has a face yield of 6%. That's it. Simple. It's yield to maturity is 6%. 

But it's not. Not really, anyway. 

Why? Because when YTMs are calculated they assume that the 6% is REINVESTED and returns that 6% face value. But, in fact, that's usually not what happens. You get your 30 bucks twice a year on the grand you put down with your broker and... you spend it. On whatever. But you spend it—oh, and you spend it after you are taxed on it. So it's...less. 

What happens if you pay a premium for your bond? Like, you've paid $1,100 for a bond yielding 6%—your YTM will be LESS than 6% because you've paid a premium—but the calculated rate would be as if you reinvested the money at 6% so that YTM number usually overstates the real value you'll derive from that bond. 

Might not seem like much...until you're retired and living on a budget and need every penny to buy toys for your bratty grandkids at Christmas. In this case, note that the yield is in the low 5%s which means that the prevailing rates are lower than they were when the bond was likely issued...so it would be very hard to replace the full 6% interest rate returns when that semi-annual cash coupon came in. 

Zero Coupon Bonds

Bonds that do not have any stated coupon rate are called zero-coupon bonds. Instead of paying regular interest, these bonds are issued at a large discount to their face value, and pay the face value at maturity. The difference between the issue price and face value represents the interest earned on the bond.


Why would you want a bond like this? Well, they usually pay more. Why? There's usually more perceived risk in a Zero, in that you get NONE of your money back until the very end.

In a normal "vanilla" bond, you at least get the semi-annual interest payments along the way so if the company goes bust and really can't pay you back for your sweat, toil, and savings you invested, then at least you got the interest. And that interest can mean a lot to retirees and others who need the cash to live on (so many of them don't buy Zeros in the first place).

But Zeros are great if you already have lots of cash as they are "illiquid." Until they are very liquid—meaning that when they come due, say, on a given issue, 10 years later, you get a mountain of cash. To wit, if you bought a bond maturing for $1,000 in 10 years, that had a face value of 6% yield, you'd put down today $558...and get almost double your money back in a decade. 

All from our hero, Zero.