Why don't they give these things a name? Like what pathos is there in a number? It makes your life miserable remembering all of them - and frankly doesn't make our life any easier writing pithy epithets about them either.
But here we go: A 1035 exchange is a swap. More specifically, it's a swap relating to life insurance annuities or policies. Ever read Pygmalion? That's the basic idea, insurance style - I swap my life insurance policy/ annuity / whatever - for yours. Tax free. Taxxxx freeeee (Insert Homer Simpson drool sound.)
A 12b-1 fee is a fee tacked on by mutual funds quarterly to pay for the administration, paperwork, mailings that it incurs as a normal part of running its business. The 12b-1 fees were initially provided for as part of the 1940 Act
that created the regulations behind the mutual fund
business. The belief then was that these marketing fees would make the fund industry grow and under scales of economy, it would let them charge lower fees to customers. With the huge popularity of index funds and ETFs, the mutual fund industry is in gradual decline now - the 12b-1 fees have become an important element in helping the industry "die more slowly" as other vehicles have simply become more popular investing vehicles. See index funds vs. mutual funds.
1940 Investment Advisors Act
Wondering why you're taking this exam? This is why! After people claiming to be "investment advisors" scammed a lot of innocent folks, this act established the rules you have to follow to become a registered investment advisor. For the test, note that if an advisor bills outside of the trading relationship with the client, they do not need to be registered.
200 Day, 50 Day Moving AveragesDefinition
Moving averages are a series of snap shots of stocks' closing prices over a given trailing 200 day period when the market actually ran (or walked). Traders using technical analysis
follow the 200 day and the 50 day closely, looking for resistance lines
both as floors and ceilings on securities. Since "everyone" follows the same charts, and often those are the buyers and sellers making markets in the stocks, in the short run, the moving averages matter. Stocks don't always follow them - and when they don't it's called a break out
and is not related to Oxy 5 or 10 or Jessica Simpson.
2001 USA Patriot Act
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism. Youch, what an acronym. This was a series of laws enacted after 9/11 to prevent terrorists from laundering money and using the stock market to fund their illegal activities.
401(k), Roth 401(k) Or Just 401k PlanDefinition
Mr. Roth was a very smart man. He realized that Social Security alone was not going to cut it so that workers en masse could retire with dignity. He wanted to shift the onus of that financial burden onto the employees themselves with some help/love from the corporations for whom they were working.
In 1978, the Roth 401k plan was created. Specifically, the 401k plan is "qualified" meaning that you don’t automatically get it just for showing up. A bunch of hurdles you and your company have to jump through to properly structure the beast. The 401k is also a "defined contribution plan"
, meaning that the money the employee puts in and money that the employer puts in are defined – not open ended. This concept stands opposite "defined benefit plan"
wherein the company is on the hook for investment return minimums rather than sharing that risk with the employee.
The basic idea here is that a 401k is a great deal for the employee because for every buck she saves, her employer may give her
another buck – tax deferred – until she retires (and then taxed like a screaming IRS banshee). Like a twofer on your investing dollar before you even start investing the dough.
for structural details but the 403(b) is just a 401(k) for intentionally non-profit organizations like The American Heart Association, Stanford University, and The Hallelujah Church of Skokie.
A valuation basis placed on the company's common stock (which sits sadly inferior to its preferred stock) which is oft used to set strike prices for employee stock options.
Diversification. "75! 5! 10!" is not what a quarterback screams to signal a roll out pass. Rather, the term refers to a formula investment managers may use to market or advertise their funds: To qualify for legally being able to claim that their fund is diversified, the fund must have 75% of its holdings in no more than 5% positions in any one security. And it can't own more than 10% of any one company's outstanding securities. But note that for 25% of the portfolio, the fund can "violate" the diversification rules tagged under the 75% umbrella - a common test question relates to the maximum that a fund can own of one security and still call itself "diversified" and the answer is usually 30%.
A-shares are just the standard shares sold with commission by a mutual fund. Commission is paid up front and the maintenance fees are low - those are called 12-b1 fees. Over time, the marketing people inside of mutual funds came up with all kinds of crazy ways people could pay - as if that made a big difference to their eventual investment results... that is, you can pay when you redeem, along the way or get "no-load" funds where instead of paying 1% for the management fee, you pay 2% per year instead - but your initial commission is low. Woot?
Above Full Employment Equilibrium
Short fancy men and women in fancy suits called "economists" believe in fancy. Lines of supply and demand meet. And the notion of "equilibrium" is like a religiously shared ideal. In theory, there is a natural balance of the employed and the unemployed and at that rate we have economic Satori. That is, there should always be some percentage of unemployed people out there. If we have fewer than that unemployed number (or, said another way), there are "too many people gainfully employed and working", then we likely have inflation as the economy is "too hot".
When bonds are built, they typically have a foundation. Just like a house. That foundation is called par. It's the number most of the other elements of the bond are built on.
A typical bond might have par value of 100 and a stated coupon or yield of 5%. It means it's going to pay investors, on a thousand dollar investment, $25 twice a year. Let's say that the Fed lowers rates and/or the risk associated with this bond goes down. Investors will bid up the price of the bond so that it might yield only 4% or 2.5%.
What would the bond have to be priced at to yield 2.5%? Well, it pays 50 bucks a year regardless of what the bond itself is trading at...that number is fixed and set in stone. So at $1,000, it yields 5%; if it were $1,500, it would still pay 50 bucks a year and yield 50 / 1,500 = 3.3%. So to yield 2.5%, the bond would have to be trading at TWICE its par value or $2,000 - its yield would be 50 / 2,000 = 2.5%.
Account At MaintenanceDefinition
See margin maintenance
. This is the yellow flashing light equivalent in your brokerage account. Danger, danger, Will Robinson. If you have a brokerage account with a 50% margin maximum and you have $30,000 in equity in there - but you have borrowed $14,500 from yourself - you only have about 500 bucks of room in there to spare. If the Fed Chairman sneezes and the market goes down a percent or two, you will suffer a margin call and be forced to sell securities likely just at the wrong time - i.e. when the market is down. Kids, don't let this happen to you.
Fancy name for "broker."
Account In TrustDefinition
In Account We Trust. When Uncle Joe manages the account for little Sally. Sally trusts Joe. She is also a minor and knows that Joe will manage the account for her with all due good intent until she turns 18 and can then go shopping for Beemers. UTMA
is an example of an "Account in Trust."
An accounting period is usually a statement of what happened financially in the last quarter or year. Wall Street reporting matters. Tax status matters. Employee contracts matter. Union contracts matter. It all needs to be reconciled and reported on a regular basis.
Accounting Rate Of ReturnDefinition
What's a given business or subdivision or investment worth over its lifetime? See hurdle rate
, discounted cash flow
, and net present value
. Those terms explain the concept better than we can here. The problem with ARR is that it ignores the time value of money
- remember that a buck today is worth more than a buck tomorrow. ARR methods of valuing things are also problematic in that they focus on profits - which are definable many ways - rather than cash flows, which are usually much less subject to accounting shenanigans.
You bought it but you haven't paid for it yet. Think "MasterCard."
The other side of the accounts payable trade. Your seller sold it to you and expects you to pay him at some point. Preferably sooner than later.
Accredited investors are simply investors who qualify to do a certain investment. Usually accredited" means that they have... credit. Or assets. Or wampum. Or "chee" (knowledge, balls) which means that they are big boys and girls who are able to invest a large amount of money in a risky venture.
Officially, they are investors who have an income of at least $200,000 for the past two years ($300,000 for joint accredited investors), OR have a net worth of at least $1,000,000 (individually or jointly), OR are executives, partners or directors of the entity issuing securities. Institutional investors such as mutual funds, hedge funds and pension funds also fit the bill.
Accrual accounting refers to the practice of accruing costs (or revenues) as they become more likely/certain to occur. let's say an employee gets a $12,000 bonus at the end of the year—in the past 5 years they have earned all of their bonus so it is highly likely that this year will be no different. You would accrue that bonus cost as the months of the year go by at the rate of $1,000 a month. overly simple but you get the idea.
Wesley owes money to Lenny. Lenny has lent Wesley a Baseball Bond* which requires payment on January 1 and July 1 each year. The bond yields 8% annually and is compounded semi-annually. So Wesley owes 4% twice a year. But Wesley is now wearing stripes (not a referee reference) and a court has ordered him to pay off the bond entirely as of April 1, no Foolin'. That's half way to the halfway point of the semiannual payment of the 8% Baseball Bond. So Wesley has accrued interest of 2% during those 90 days and will pay it off in cash, not cigarettes. For literally every day that ticks by, Wesley will owe Lenny interest on that bond, those bonds, in this bondage.
*There is no such thing as a Baseball Bond. There is, however, a Barry Bond, plural.
You are funding an annuity
. Know what that means. But funding an annuity takes time. It builds. For most, that annuity is funded over time and funding for it accumulates over a... yes... period. This process happens in the form of accumulation units
, which are bought in stages over time. God this is dull.
Note additionally that over long periods of time, markets go up and generally speaking, the more aggressively you save during the accumulation period or phase, the more money you'll have when you want to play golf and show up for the blue plate special dinners at 4:59 pm.
An accumulation unit is a rite of passage in the world of fancy shmancy life insurance. As you pay money in to a life insurance policy, you are 'accumulating' value in it (duh). But that accumulation is usually broken into distinct sub sections either by time, money, or both or other elements - that is, a unit might be described as a hundred grand; or first 6 months. The "unit"-ness of that accumulation makes for a discrete start and stop point in defining what value is there, should you one day mange le dust.
1933 Securities Act
Also known as the Securities Act of 1933, this established the requirement that in general, securities that will be offered to the public must be registered.
1934 Securities And Exchange Act
This is known as the Securities and Exchange Act of 1934, and it extended the securities policing regime to government regulation of the exchanges. It also established the SEC as well as limits on the usage and amount of margin.
Active management of money. You buy shares in a mutual fund
, which has hired theoretically smart analysts and portfolio managers who spend all day looking at stocks and bonds and make investments in them or sell them on your behalf. For a small fee. The other side of the street is passive investing which is just buying an index fund, which doesn't really have a portfolio manager per se - more like a rebalancer who just makes certain each period (usually quarterly) that the index still reflects what you think you bought in the first place.
In a portfolio, which is actively managed (like a mutual fund
, a hedge fund
, etc - but NOT an index fund
), "active risk" refers to the risk in the portfolio taken by the actively managed investments. It ignores market risk in its assessments. Well-managed active risk, i.e. good risk adjusted returns are a key component in producing "high alpha" which is like the Good Housekeeping Seal of "smart" investing."
Fancy Latin phrase for property tax. "Valorem" means "Value" if you went to Latin class or survived catechism. Given what it does, you'd think it would have been named minus valorem, though.
Adjustable Rate Preferred StockDefinition
Okay, first see preferred stock
for the gist. Preferred stock acts like a bond in that it pays interest. Most preferred stock is convertible though into equity. So, there's this "adjustable" word. How is it adjustable? Adjustable to... what? Industry practice defaults rates to T-Bills. That's common in the land of ARPS.
Adjusted Closing Price
Why would anyone have to adjust anything for a closing price of a stock? You go to Google Finance, type in the ticker and you get a number. That's the closing price, right? Why adjust?
Well, a pickle is not always a pickle - sometimes it's just an old cucumber somebody dropped in salt water. There are corporate actions like dividends, stock splits, and a bunch of other weird hybrid things that companies do to make your life miserably complex.
The closing price then gets adjusted to reflect said actions - and we need to favor adjusted historical returns" because without the adjustment, history gets cloudy - a famous example is the one time enormous dividend made by MSFT when Bill Gates retired from the CEO role - if you ignored that huge dividend and just looked at the closing price of MSFT, its returns would have looked less spectacular than they really were.
Guys, hike up your jeans and adjust.
Adjusted Gross Income - AGI
AGI matters for a whole host of reasons - but the most popular time the cavalry of AGI is called in is for home mortgage debt limits. Most banks have maximum multiples of AGI under which they will loan money so it's an important number.
Basically AGI is your normal salary and bonus bucks plus passive income like net rents you get from that small apartment building you now own (thank you dead uncle Harry) and dividends on stuff like GE stock AND capital gains from mutual fund distributions. The way AGI gets defined by the IRS - God's financial quarterback - is that it is whatever you pay taxes on.
An adjustment bond is sort of like an open marriage - the couple can choose to be faithful or not with no comeuppance either way. Similarly, an adjustment bond can choose to pay interest or not at will. If the responsible party for the bond punt a payment, they don't' go into default - they just keep rollin' over.
Advance Refunding Or PrefundingDefinition
The concept is arcane. But you gotta understand the basic concept of Prefunding. Bad things sometimes happen, even to good people. So in the case of "safe" bonds or bonds where an Administrator is worried about the cash actually getting to the people to whom it was intended, a Prefunding feature can be required. That is, when a bond is issued, a chunk of money is tucked away safely in a nice Escrow account with a bank or trust company so that the odds of the money actually being there for a distribution or a call provision
are high. It's extra netting under the financial high wire.
Advance/ Decline Ratio
It's an index. Just an index. It doesn't mean that much other than that it is an index widely quoted in the financial press. Specifically, it is the number of stocks which are up vs. the number which are down (hence the catchy "advance" and "decline" nomenclature). You can imagine though how this index has wide ranges for error - i.e. every stock could be down one penny and the ratio would be 0 which would be like "as bad as it's ever been" - when in fact the day was basically Olive Oyl flat.
The money-whisperer. The folks who actually manage the money. Perhaps oddly, in a mutual fund for example, the distribution company (which was responsible for bringing in the dough to manage) hires and fires the investment advisors or managers. The hot shot portfolio managers actually work FOR the people pouring coffee for the stock and fund brokers.
You're an at-least-semi
fat cat. You think you have some Buffett in you (Warren, not Jimmy). You want to be intimately involved in managing your money. You trust no one, like David Duchovny.
So you set up an Advisor Account. The advisor works directly with you, the client, to figure out where you're puttin' your dough. The cost? Well, if you get really nice Lakers tickets, you know you've over paid - but generally these are set up like wrap" accounts where you have a fixed percentage fee based on the assets you have under management with your Advisor. See breakpoints.
Affiliated Person/ InvestorDefinition
See covered party
too. An affiliated person is someone who has special knowledge, relationships or hooks into a given public company so that they are treated different from Joe Sixpack the Plumber when transacting in securities of that company. If you are the CEO of GE, you obviously should be treated differently from Joe if you are buying or selling stock. The "affiliate" tag extends to board members, other C-level officers... and extends to "affiliated investor" restrictions for those who own more than 10% of the stock of the company (sometimes) and a bunch of other "privileged knowledge" people.
Aftermarket Securities Transactions
When stocks trade past the normal 4pm NY time closing for jingoistic Americans who think the world revolves only around New York. (The term also applies to other countries where their main exchange closes but hten securities trade elsewhere after the close.)
Fannie Mae needs money. It has gotten the A-OK from her own managers to issue bonds - but the FEDERAL government doesn't want to be involved, or at least not guarantee the bonds the way they do T-Bills. What's an agency to do? They pay a little higher interest. Fannie, Freddie and other quasi-governmental agencies come under the "agency bond" tent this way.
Honey, baby, cookie, lovey - that's the hello of a different kind of agent, the guy in the bright yellow suit with awesome Hollywood hair.
But a broker agent or agency broker is just an agent for a fund, or typically any large agency, which places big block orders on exchanges - the key issue is that the agent must try to get his client the best prices. Lots of ways to corrupt the system - see front running
for the gory details. Broker-dealers
are self-dealers - they buy on behalf of themselves. They aren't agents and they are obligated only to fulfill orders they commit to executing.
Collects 10% from movie stars; But with regards to an IPO, the agent is the one who gets commission for placing or selling the securities.
All Or NoneDefinition
It's a kind of security offering. Either the whole thing gets done - or nothin' gets done. It applies to IPOs
and stock block trades
. All or none block trades are issued this way by the buyer in cases where they are either famous or known for trying to buy out a company entirely. Imagine if Warren Buffett bought 2.3% of Netflix (yes, it would mean the world is ending but that's a separate story). NFLX stock would almost certainly shoot up a ton. So if Warren wanted to own 10% of the company, he'd go out to brokers for an all or none order with that 10% "all" figure. Once he has already bought his stock in the amount he wants to own, if NFLX then shoots up, fine. No sweat. Thanks for the easy money. But if he owns 2.3% then he's in a kind of "no man's land" and either has to pay up a big price for the remaining 7.7% he wanted to own. Or turn around and sell the 2.3%.
There are two definitions here - one relates to the centerfold out glossy pages of PlayGator magazine. At Shmoop, we are fans of the new Go Green theme.
The other definition relates to a situation where broker commissions "eat up" any profits that would have been available to making a trade, usually in reference to a derivatives trade involving put options
and call options
. The commissions in this case were so high that the trade doesn't make sense to execute.
If markets are efficient, capital will get allocated efficiently. That's the theory anyway.
Wall Street loves to assign Greek letters to things to make them sound almost mythological. "Alpha" is no different. Alpha is all about how well your portfolio manager is picking stocks relative to his index slice of the market, risk adjusted. That is, if your manager was up 30% in a year when the market was up 10%, that's great - but how did he get there? Was it speculating in options on high flyer internet stocks? Or did he just get the fundamentals right on Dow Chemical? High Alpha good; Low Alpha bad. Cold Alpo: A brand of dog food.
Not stocks, bonds or cash. Alternative investments include things like hedge funds, real estate, commodities and fancy derivatives. Alts are usually only owned by "accredited investors", aka, the wealthy.
Alternative Minimum Tax - AMT
AMT was invented by the IRS and Congress in reaction to rich people who came up with clever ways to avoid paying their fair share. See Warren Buffett's recent diatribes on this subject for more gory details on the effects of aging on one's brain. AMT evolved into an onerous burdensome tax structure that is now being reconsidered in Congress.
Specifically, AMT adds back items into the "adjusted gross income" line that everyone fills out on their forms for the IRS. Some things that used to be deductible aren't deductible any more like charitable contributions over a certain percentage of your income, etc.
For The Seven, all you really need to know about AMT is that it's neither "minimum" nor "alternative."
Alternative Trading System
ATS is just eBay for stocks. It’s another way to buy and sell shares other than being on NASDAQ. It’s sort of the off-Wall Street version of those guys who have homes dug in the ground 12 feet deep, with a year’s supply of canned foods and a few rifles in ‘em. Northern Idaho. Off-grid.
ECNs, crossing networks and other fancy market exchanges are all ATSs.
American Callable Bond
Them silly Americans.... Callin' their bonds any time they want. That's what an American callable bond is - the issuer can call it at any time prior to its coming due. Usually the call provision carries a premium - that is, the caller (the issuer) of the bond pays 103 cents on the dollar to call the bonds... using advanced Shmoop calculus B/C, that's a 3% premium.
Why would an issuer call? Not because they were lonely but rather because they had issued their bond paying 9.5% interest and then their credit status got better, they were upgraded by Moody's from CCC to BBB and the prevailing interest rates went down. If the company could buy back and reissue new debt paying just 7% interest, why wouldn't they?
American Depository Receipt/ ADR
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 ExchangeDefinition
The AMEX is a private intentionally non-profit company, which sees about 15% of all trades in the US. Its competitive brethren are NYSE
. And hundreds of ECNs
emerging from the bulrushes. An exchange is like a coffee shop for stock trading – there is a barista and a set of urinals.
American Style Stock OptionDefinition
There are a few flavors of stock options - most of the sugaring has to do with when the option can be exercised. An American style option can be exercised any time from when it is bought to when it expires. A European Style Stock Option
can only be exercised on the day it is to expire.
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.
. A bond comes due in 10 years. It has a coupon of 7%. Over the course of its life it will pay 10 x 7% x whatever the amount of issue of the bonds. Three years into the ten years, the bonds will produce less yield than they did on the date they were issued. One way of accounting for that differential is to think of bonds as a depreciating
This dicey little phrase is also called Street Numbers", "Reuters" (which runs a poll of analyst estimates and reports the numbers), and "Whuh?" The phrase refers to a company's quarterly earnings or other estimates that the Wall Street community has come to believe said company would print when they actually release their results.
To wit, Cisco has told the Wall Street analysts (employees who work for brokerage houses to provide "expert" advice to investors) that it expects to earn 40-45 cents a share on $10.5-11 billion in revenues. One analyst publishes that they expect 43 cents on $10.652 billion; another analyst publishes that they expect 40 cents on $11.1 billion, etc. See Whisper Number
, and Sell side
for more gory details.
Most stock brokerages employ analysts. See sellside analyst for details. Despite being wrong well over 50% of the time, these analysts continue to write buy, sell, hold opinions of stocks and publish financial models and...talk. And Wall Street still listens. And pays for that research in the form of commissions/trading dollars.
So when a sellside analyst sponsors a stock (or writes positively about it), that stock usually goes up. And the bigger the brokerage, the more the stock usually moves on a big recommendation.
There is a hierarchy among sellside analysts as well. Someone from Goldman will usually have dramatically more impact on a stock's price than someone from a smaller regional firm. The top dog analyst in a given stock is called The Axe or The Hammer, don't axe us why.
Annual return is simply what you get back each year from your investment each year. You owned Smooshem Ketchup Company last year on Jan 1. The stock traded at $50 a share. By New Year's Eve the stock was trading for $55. But it also paid a $2 in dividends through the year. Its annual return, in simple terms (i.e. not worrying about the time value of dividends paid at different times of the year) was $7 total from a base of $50 or 7 / 50 = 14%.
Annualized Total Return
Geometric average of the total returns annually of an investment - that is, asset appreciation plus dividends or other distributions in cash and/or stock. This method of evaluating returns misses the volatility of the investment - did it double then get cut 80% then go up a lot at the end of the year? Or was it Milwaukee Ski Slope flat and nicely boring during the year? Most investors who don't like the taste of Pepto-Bismol prefer the latter.
Annuitize is when a lump sum converts into a series of set income payments delivered on a regular basis over a given period of time. This most commonly happens with retirement plans or life insurance. So you write SnoopyInsurance a check for $500k, and in return they agree to annuitize that amount and pay you $2500 a month for the rest of your life, no matter how long you live, but the benefits stop the moment you do. Eek. If you're one of those people convinced you're gonna Highlander it and live forever, great. However, if you think you might be on the losing end of a Clamor and bite the dust sooner than expected, clearly you aren't going to get the best return on your investment.
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.
. This is different from Annuity Dude who is the guy who sold you the annuity in the first place. An annuity due pays at the beginning of the period, so if you get a monthly check and it's from an annuity due, start looking in your mailbox around the first of the month, rather than at the end.
Dilution and delusion are generally bad things to the original owners of securities or a brain. An anti-dilution clause keeps pro rata ownership flat, even for subsequent investment rounds. Those who own this valuable clause usually get stock options or warrants or share grants to maintain their ownership percentages.
Anti-Money Laundering Laws
You're not supposed to launder money. "Laundering" usually refers to hiding money from the government, whatever government in theory is... governing. There are lots of ways to launder. In the good ol' days, the system was very straightforward: A bootlegger made a ton of money selling illegal alcohol but wanted to find another way to show that he had "legitimately" made the dough so the authorities wouldn't catch on. Well, a theater could show a cheap film but still be "sold out." So a bootlegger buys a movie theater and, voila, the movie theater business shows itself to be hugely profitable with repeated "sold out" showings, and the bootlegging profits are now hidden.
First see dilution
. Don't look at Delusion. Then understand why dilution is a bad thing for existing shareholders and why an investor might want an "anti-dilution" provision in a contract.
Consider a perspective on dilution from that of the eyes of an entrepreneur: The eventual goal in any company is to create wealth for shareholders. In the beginning, the founder owns all of the "wealth" or at least the shares in the company. Over time, that founder gives away pieces of the company in the form of shares to various flavors of investor who give him money in return for shares of his company. The challenge in high capital cost companies for the founder is the enemy of all capital backed companies: dilution.
A new tractor company requires several hundred million dollars to start. By the time he is done with 11 round of financing, the founder likely owns less than 2% of the company after having started with 100%. Conversely, a company built from software (computer code) often requires a very small amount of money. That is, Yahoo! required only a little over $1MM of total capital until it reached break even. It chose to take on more capital because it believed that the dilution was worth the incremental capital raised so that it could take advantage of market opportunities. eBay was about the same. The great fortunes of the internet era were made in part because the founders suffered so little dilution that at the end they had tens of billions of dollars of wealth via their large percentage ownership stakes in the companies they founded.
So what would be an ANTI-dilutive act? How about the company buying back its own shares?
Active money managers keep an approved list" around to purposely limit the securities they can pick in a given fund. Let's say the theme of one fund is "Senator Approved" - that means no "sin stocks" - no tobacco, no adult entertainment stocks, no ... caffeine? No... polluters? No... Republican CEOs? That list could get pretty narrow pretty fast.
In large mutual fund complexes, sometimes an analyst will come across inside information
and they must halt trading or the potential of trading in a given name. e.g., they hear in the hallway that Microsoft is about to buy Disney directly from Bill Gates, whose high pitched voice distinctly cuts through long hallways. They must take DIS and MSFT off the approved list (their traders usually have electronic gates managed by in-house lawyers so that they are physically prevented from trading in a restricted security) until that information comes public.
A sure thing. Easy money. No sweat. That's what arbitrage is... or at least is supposed to be. It's a great word to use at cocktail parties so you should know what it means. Arbitrage is the business of finding gold for sale in Spain for $1,302.50 per ounce when you know buyers in the U.S. who will pay $1,303 per ounce. Arbitrage is "riskless profit". In the deal above, you're pocketing 50 cents an ounce which doesn't seem like much but if you bought and sold 2 tons, that's 16 x 4,000 x $.50 = $32,000...not bad for a few phone calls.
With the advent of high-tech global electronic trading, the opportunities for "arbing" have fallen drastically. Note also that there are usually commissions and/or overhead costs involved in making these deals so there must be a pretty wide spread in prices for it to be worth the arbers while to deal. See alligator spread
Consider it this way: in the gold example above, what if a teeny tiny commission of just 0.1% (that's one tenth of one percent) had to be paid on the transaction on each side? You only made 50 cents an ounce to begin with. A 0.1% transaction cost would be $1.30+ on either side. The commish completely destroys the "arb opportunity" in the trade. Arb is not arb until the check clears and cash actually shows up in your account.
(yes, long definition but worth every penny!)
The key letter in ARM is "a" and it stands for adjustable as in adjustable rate mortgage. Adjustable means that the mortgage payment is a moving target. The interest rate can be adjustable. The payment terms can be adjustable and the time to bankruptcy can also be adjustable. In times when interest rates are expected to increase, adjustable rates are typically lower than the prevailing fixed interest rates and the opposite is true as well.
A typical ARM has a low interest rate, a guaranteed period of time for that interest rate, an index (like LIBOR) against which it is adjusted, a step up percentage (how much the interest rate will likely grow each period) and hopefully a cap (the maximum rate it can be raised in a given period).
Sometimes an ARM can be in the form of interest only for the first few years. There are very low payments but no principle is paid down. The buyer is making a bet that interest rates in that timeframe will be less than they are today and that the buyer’s income will go up.
An ARM at a 3.75% guaranteed interest rate for the first 5 years, a .25% step up and a 12% cap has a schedule that looks like this:
Year Interest Rate Monthly Payment Annual Payment
1-5 3.75% $1,111 $13,338
6 4.00% $1,141 $13,693
15 6.50% $1,399 $16,526
30 10.00% $1,572 $18,864
The reason people buy an ARM in the first place is because they are cheap or appear cheap to the borrower. Sometimes they are actually cheap to the borrower.
Often they are not. Bank consortiums, which price mortgages, are usually smarter about the pricing of mortgages than Joe the Plumber. Yet there is always a guy who wins the lottery. What happens if the interest rate steps up at intervals of 1% instead of .25%?
Year Interest Rate Monthly Payment Annual Payment
1-5 3.75% $1,111 $13,338
6 4.75% $1,232 $14,790
15 12.00% $2,146 $25,753
30 12.00% $2,146 $25,756
Let’s compare this to a fixed rate 5.25% mortgage.
Year Interest Rate Monthly Payment Annual Payment
1 5.25% $1,325 $15,903
6 5.25% $1,325 $15,903
15 5.25% $1,325 $15,903
30 5.25% $1,325 $15,903
Notice, you are making a trade-off between low interest in the early years (ARM) and certainty (Fixed) in the later years.
(as in bid-ask, and not Jeeves) It's what the seller wants to sell for. Think: The "s" in the middle. The ask price includes the commission or market from the dealer. Synonym without sin: "Offered".
As in "of your home". In some states, property tax is based on a formula and there is no assessing going on. In the People's Republic of California, property taxes are 1.25% of the purchase price. They then rise roughly with overall inflation over time. No assessor need be involved. But in many other states, each year your home is re-assessed often by VocabWord#305 and your taxes go up. The assessed value may have a disconnect from market value - i.e. market value (what you get from the Joneses if they want to to buy it) is often higher than the assessed value and usually if you whine enough, the assessor will make an adjustment so that for that year at least, your tax bill can come down.
This concept is about where you put the stuff (assets) you have. The notion of "allocation" is a brokerage-y concept that attempts to optimize the risk-reward issues that investors encounter in volatile markets and climates. How much time do you have until you need to consume your investments? If you have a very long time, you can afford much more risk in your portfolio than if you are an old geezer and... don't. If you're somewhere in the middle, what about bonds - how exposed are you to them and to the negative effects on bonds of high inflation? What about real estate, the stock market, private investments? The structure most brokerages use in discussing the allocation of assets among these various categories is tactical (e.g. what's the market gonna do the next few years?) and strategic (e.g. how long do we have to bail us out if we are wrong? How much risk we can take? How much volatility can we endure without pulling out what's left of our hair?).
A security backed by a specific physical asset like an airplane issuing bonds against its hull. Cozy.
It's just wut u got. For the average orthodontist married to a school teacher in Peoria, IL, their assets consist of $253,432 in a Schwab One brokerage account, a home valued at $643,000 with a $300,000 mortgage (their equity in the home is $343,000), $20,000 in a B of A account. And $92,302 in a teacher's retirement pension account. And $12,000 worth of crap in their garage that really should be sold on eBay. That's it. Oh, and they have love.
For corporations, the numbers are bigger but the idea is the same (minus the love unless you work for Southwest Airlines - look up the ticker).
Assets Under Management
The dollar amount managed by a given mutual fund, hedge fund, or whatever fund.
It sounds so devious. Like who or what are they associated with"? A criminal element? The dark underworld? Nah.
In reality, "associated person" means a registered representative or someone who is a principal of a FINRA covered firm. They are "associated" with it and thus held to a certain set of standards in their behavior and golf game. Yawn.
Asymmetry happens when one side is unequal to the other. Uma's eyes. Gramma's breasts. Any number times 2 then minus 1.
In Series-7-land, it refers to the dissemination of information relating to stocks and bonds and other securities wherein one set of players - maybe those closest to the company - get the information first, can trade or act on it, and then that information gets out to the rest of the world. This is illegal. Do not do this.
See Above Par. At par = 100 cents on the dollar and 72 strokes on most courses.
An order to happen at the close of the market and generally at the closing price. If Big Mac prices changed every minute, and you ordered one at the close (midnight in most McDonalds), the burger flippers' clerk would scream your name at 11:59. Whatever the price for BigMacs was at that moment is the price you would be charged.
At-the-money generally refers to stock prices relative to the strike price of the stock options that an investor has bought. That is, Joe Shmoe has paid 3 bucks for the right to buy a share of KO (Coke) for $80. That option expires in a week and the stock is at $76 a share today. If the stock climbs to $80.00 a share (the bid), then it is said to be "at the money" or at the strike price. If it climbs above $80.00 then it is "in the money" and below $80, it is "out of the money", honey. Note that KO could be $82.50 and the call option buyer has still lost money on the trade (she paid $3 for the call and KO ended up only $2.50 in the money so she lost half a buck.
Order to purchase or sell a security at the closing price of a given day's trading.
Exchanges are auction markets unlike the OTC where prices are negotiated. The New York Stock Exchange is an auction market - prices are set and adhered to. Buyers and sellers transact simultaneously so in essence two transactions are happening at once.
Auction Market Preferred Stock - AMPS
Think: Drunken Dutch Auction. In AMPS, an auctioneer resets the preferred's dividend about every 7 weeks. AMPS are useful for large investors managing through inflation, among other forces that favor adjustable interest/ dividend payouts (i.e. where liquidity needs change often).
Big fat hairy deal vocab word and a key question on the 7 and others. Authorized are the number of shares a company can issue by charter. So... let's say Company XXX wants to buy Company Y. Company XXX has an authorized limit of 100 million shares. It currently has 85 million shares and 5 million options, yet unvested, outstanding. Technically it has 90 million shares outstanding. It wants to print shares to buy Company Y. But company Y wants 20% of the primary shares of Company XXX or 17 million shares. Company XXX cannot print the shares to buy Y. Why? Because it needs to get approval to change the charter - doable only by a majority vote of the outstanding shares at the time. Company XXX is not meant to refer to a producer of internet porn.
Basically, the decision of a company's board of directors to undertake some specific corporate action.
Automated Client Account Transfer (ACAT)
Your client gets a bunch of shares in OpenTable as part of a venture capital investment distribution. The shares were delivered to Credit Suisse. But your client doesn't want an account set up there - he has his primary account with Goldman Sachs. So he wants the shares wired to his GS account whenever there is a venture capital distribution. Instead of having to grind through endless paperwork each time there is another distribution, he sets up an ACAT once and is done. The ACAT is respected by the brokerage community who comply with the processes of delivering customer assets like cash and stock and Christmas nut cakes to the core or main target account.
The key feature here is that the customer gets to reinvest dividends and distributed gains back into the fund without paying commish. Not all mutual funds offer this nifty feature but most do.
Average Cost Basis
It's a tax issue. You liked AT&T at $40 a share. You bought 500 shares. You liked it even more at $35 a share and bought 1,000 shares. You loved it at $30 a share and bought 2,000 shares. You adored it at $25 a share and bought 5,000 shares. Your average cost basis is $28.24 (forget commissions). The stock then went to $50 and you sold half or 4,250 shares. How much gain was there? Well, you take the average cost in for half of your shares - and you match it with the average cost out. In this case, you are realizing gains per share of $50 - $28.24 or $21.76 times 4,250 shares or $92,480.
Away From Market
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.
There are A, B and C shares and a few other flavors out there. The basic idea behind B-shares is that the buyer of the mutual fund pays his fees only when he sells the mutual fund. The advantage in part is that the commission he would have paid up front is now deferred - he pays it on a bigger lump of assets but he got to compound all of that time without the load, which came ahead of his investment.
The technical jargon around this name is "contingent deferred sales charge".
Back End Load Definition
This is the common term for the Contingent Deferred Sales Charge, which applies to mutual fund B-shares. Many people think about this concept if they are standing outside of Curves. But for better details, see b-shares
. "Load" is commission - think of it as a "weight" on your investment returns. "Back end" means that it is paid at the end of the holding period of your mutual fund - that is, it is paid when you sell the fund, as opposed to when you buy.
Ooh. This is bad. Scandals. Jail. Silicon Valley soap opera. There was a time when stock options were free and easy or at least perceived as such. Some semi-clever CFOs, noting that their stock prices were quickly appreciating, used overly favorable dates upon which to set strike prices for options granted to employees. See call option.
When a key employee is hired into a young company, they are typically given a modest salary and bonus plan - and a generous option plan as young companies generally don't have lots of cash with which to pay employees. A package might include the salary and bonus details but then also 100,000 options.
The options usually have a 4 year vest provision (the employee must be in good standing at the company for 4 years to end up owning those options) and they must be sold within 10 years or so of them being granted. They are also granted with a strike price, which is usually determined as something like the average closing price over the last 120 days of trading or something generic like that.
So in the case when the stock is rocketing, there is a big different in taking the average trading price or the price that the stock was at 120 days ago. This was a core issue in the backdating scandals that hit Silicon Valley in 2008/9. And the numbers are big.
XYZ stock was at $80 a share 20 weeks ago - now it's at $200. In 4 years it might be at $400. The employee getting the $80 strike price on 100,000 shares will have appreciated $320 per share times 100,000 shares or $32 million. But if the employee had received as their strike price the average of $200 and $80, assuming an arithmetic set of closing price gains, the strike on their options would have been $140. The gain would then only" be an appreciation of $260 or $26 million.
Since the scandals the laws have become dramatically more stringent and clear and little has been heard about backdating since then.
A no-no. A market maker offers to buy 100,000 shares of MSFT from you at $26.12 - then says "um, no". That's an NASD violation. In practice, trading is done among generally trusted and known parties so if a player backs away from trades, the rest of the field simply stops doing business with them and they wither and die.
A balance sheet in common parlance is just the assets a company has. From an accounting perspective, there are many more details of value but from a simple perspective a balance sheet is just the net cash a company has on hand. Think about a chocolate pretzel stand.
Your daddy gives you $100 to start one. After 3 weeks, you have burned through $50 dollars on advertising, chocolate, pretzels and a stand. At that moment on your 22nd day, given that the residual value of your chocolate, pretzels and stand is $2, your balance sheet should show something like $52 of tangible worth. You have $50 in cash, presumably no liabilities and $2 in net recoupment in scrap if and when you go out of business.
A mutual fund which has both stock and bonds in its portfolio.
Like if you want to buy 99 red ones. Think about the shape of a balloon on a string on a still non-windy day. There's a long steady string - then this big fat thing. That's a balloon loan - if you owe one, you make a long steady stream of payments and then a big fat one at the end to finish things off or conclude your debt.
When a balloon loan comes due. Usually it involves a large amount of money as balloon loans are structured so that the majority of the loan is paid back at the very end of the loan term instead of in little pieces along the way.
The big BK. Kapoot. Financial death. There are several flavors. Ever see Night of the Living Dead?
One hundredth of one percent. That is, if mortgage rates are quoted today at 6.274% and then next week are quoted at 6.284%, they have gone up one basis point. If they moved two weeks later to 6.074%, they have gone down 20 basis points from the original quote.
Esoteric. It is used with futures contracts and refers to a quote for one futures by referencing another futures. Example: The October futures contracts for widgets is quoted at $20, and the November contract is at $30. A basis quote for the November contract would be "October + $10."
When the market goes down. Technically a bear market is a prolonged period of falling stock prices accompanied by general investor pessimism. If it’s a short period of declines followed by price increases, it’s called a correction. What’s “prolonged?” It’s in the eye of the beholder, or to be more specific, it’s how the talking heads on CNBC define it. ‘Nuff said?
Porn shoot in Yosemite. Yogi-boy. It also refers to a stock option position where the trader is betting that the underlying security movements will be bearish. It limits both risks and rewards.
Bonds that are owned by whomever has physical possession. Not as common today, especially in developed countries, an owner has very little recourse if the bonds are stolen.
On a professional trader's computer screen, there is a "ledger" or set of numbers separated by a fine line - buy offers and sell offers. A client wants to buy a million shares of GOOG on a "best execution" basis. The trader looks at the offers to sell GOOG which are all over the place: $582.34, $582.12, $582.23, etc. He is obligated to take the "best bid" or best price for his client. That is, the cheapest price. But sometimes the cheapest price is only good for 100 shares. In that case, the trader takes the smaller chunks in pieces starting from best bid until he can fulfill the million-share order.
It was probably Anne Boleyn. But it might also have been Braveheart. Or maybe the last part of The Lottery. Those forms of execution are all great in the Town Square. But on Wall Street, best execution refers to giving the client the best price and service that the broker handling the trade can give. And best price alone might not always be the best deal - say the client wants a million shares. You can offer 100,000 at $23.13 but there is an offer to sell a million at the higher price of $23.18. If those million are sold to someone else and suddenly there is no supply in the market, the stock likely pops - so the client has 100,000 shares at $23.13 but now the best offer is $23.40. Was that best execution? No. A million shares at the $23.18 was the way to go.
Think: Volatility. Beta is the number associated with volatility. Not related to a 7 mile breakers run around the Golden Gate in San Francisco.
The price at which a buyer is willing to buy a security. See Ask for the other hemisphere.
This is a quote consisting of two prices that dealers give to potential customers. The Bid" is the price at which the dealer will buy the security. The "Ask" is the price at which the dealer will sell the security. The bid price will be lower than the ask price; the difference between the two prices represents the dealer's profit for the transaction. An example would be "20.00 - 20.50." The dealer is saying that he will buy at $20 and sell at $20.50.
A mathematical computation commonly used to price the value of stock options.
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 quality stocks. Think: Disney, American Express, Coke. Basically anything Warren Buffett owns.
Blue-Sky laws are the collective group of state-by-state regulations involving the marketing and sale of securities. If you want to make new issues and secondary offerings available in, say, Idaho, you have to register according to the relevant Idaho laws. Some states' regulations are more onerous than others.
Bond Anticipation Notes
Didn't Carly Simon sing about this one? When bonds are "certain" to come due, those desperately needing cash liquidity today will sell securities against those bonds, i.e. pay us now and you can have the proceeds from the bonds when they come due.
Bond At A Discount
A bond that is selling for less than its stated value. Think: Light bondage; yarn, not rope.
Bond At Par
Par value is the stated value of the bond when it is issued. For example, a company might seek to raise $10MM. It issues bonds at an 8% compound rate which it is obligated to pay, effectively renting the $10MM for the price of $800,000 per year.
Bond At Premium
A bond that is selling for more than it stated value. Investors might be certain the bond will pay off or its credit rating has been upgraded since the bond had been issued. In that case that 8% par value bond could be bought for $600,000. It still pays $40,000, its effective yield is $40,000/$600,000.
Principal - the original amount that you borrow that you eventually have to pay off. When people quote the size of their mortgage, the number they are quoting is usually the principle and it is your pal.
Interest rate - The percentage of the principle that you owe.
This number is usually compounded and amortized.
Compounding - The process of computing interest owed. In the case of bank interest for example, you might deposit $1,000 into a bank with a 5% savings account rate. That money is compounded daily as the marketing slogan toots of the bank is .05/365 * principle. So after one day your thousand dollars is worth $1,000.14
Duration refers to the length of time from which a loan is made to when it is paid off. Loans which have a very long expiration (Disney has issued 100 year bonds) will reflect prices that are much more volatile than bonds that come do in a few years. Over 100 year period, one would imagine that bond prices would be affected greatly by inflation, credit risk worries and individual corporate issues, all of which make prices in bond swings volatile for high duration bonds.
A mutual fund that invests in - yep, you guessed - bonds. Bond funds can be diversified, meaning that they will invest in many different types of bonds, or more specific. Some funds invest only in Treasuries, others only in municipal bonds, etc.
This measures the price of the bond relative to its par, or face value. A bond that has a face value of $100, and is currently trading at $90, is said to have a bond point of 90% of face.
An evaluation from a rating agency such as S&P, Moody's or Fitch as to the relative strength of a bond. The highest rating indicates that there is miniscule risk of default, either as to interest or principal. Lower ratings indicate gradually greater default risks. In the S&P world, BBB is the highest rating for an "investment grade" bond. Anything lower than BBB is considered junk, er, high-yield. Caveat emptor.
The percentage of a company's capital that is represented by debt. If a company has total capital (debt plus equity) of $100, and $30 of that consists of bonds, then the bond ratio is 30%. As a very general rule, any bond ratio over 30% shows a highly-leveraged company, but this is not uniform. Some industries, like the airlines, traditionally have much higher bond ratios.
Think: The cost of renting the money. That is, a bond is a loan - if a corporation is producing a bond, they are "bonded" by their word to pay it back (or secure the loan with assets they have like their secret sauce recipe). The yield is the money the loaner gets from the loanee.
No longer the hippest spy in the world (taken over by Matt Damon or Dragon), the dictionary definition takes bonds from its Latin roots is just "an agreement." " A bond is a man's word."
Financially, a bond is an obligation to pay back money. In return for renting that money for some period of time and for the risk of that borrower not being able to pay back the money, bonds charge rent or interest.
Bonds have levels of seniority and other features which can make them "feel like" stocks or other kinds of investments. For example, it is not uncommon in large public companies to have 8 or 9 layers of bonds with fancy names like preferred, senior, junior, convertible, subordinated, debenture.
Each of these flavors of bonds has a slightly different taste with the one common protein that they are all different forms of debt obligation.
You would likely have been raised in a barn and gotten your transportation to your soccer games in a horse and covered wagon if bonds or debt didn't exist. Almost nobody buys a home without debt. Most people buy cars with debt. Most students pay for their college education with debt and that plastic in your wallet, yeah, it's debt. The one unifying string that has woven the financial fabric of this country has been financial trust.
Because our laws around financial obligations are so strict, for hundreds of years, this country has developed a deep sense of trust in another party's promise to repay. That promise is taken seriously by everyone and anyone with whom you will do business in your future as you try to buy toys, shelter and self-actualization (a convertible Porsche) in your life.
Bonds - Major Classes - A Long-Form DefinitionDefinition
Just like ice cream and horny clowns, bonds come in flavors.
Senior debt typically is the most safe and secure type of bonds in a corporate balance sheet. If the company ever ran into bankruptcy problems, the first type of bond to be paid would be the senior obligation bonds. Just below that would be junior obligation bonds
. There are other bonds that are backed only by specific assets of a company. For example, airlines typically have separate bonds secured only by the airplanes they lease themselves. If you had a chain of chocolate pretzel stands with a unique formula for chocolate that you knew See's would pay you $1MM to have, you could likely borrow half that or so in the form of a bond backed only by your grandma's secret formula. These types of bonds are called asset backed
Another common form is a debenture
. Debentures are the lowest on the priority stack of bonds should something go wrong. Debentures are backed only by the full faith and credit
of the company, meaning the company promises to pay back the bond (unless it can't). Why would a person ever loan money only based on the company's promise and nothing tangible? If a company ever refused or couldn't pay any form of bond, it usually spells the end of the company's credit or trust from all of the company's vendors, shareholders and board. A debenture not paying is more or less as cataclysmic to a company's financial health as any other form of bond.
Because debentures are low on the risk stack, they typically come with one other Baptist feature: Convertibility. That is, $1,000 of United bonds might be convertible into 50 shares of United Airlines Series A common stock. Doing fancy math, that means that if the share price ever went meaningfully above $20, it would make sense for the bondholders to convert their bonds into equities and make a nice profit.
A Zero Coupon
bond is a type of bond, which pays no cash interest along the way (hence the zero coupon or zero payment). At the end of the bond's obligation period, both the principle and all of the accrued interest come due. For example, if you borrowed $1,000 for 6 years, at 12% rate of interest (see Rule of 72
), you would get nothing along the way and roughly $2,000 at the end in one lump sum payment. Zero coupon bonds are perceived as being more risky because coming up with that final lump sum payment at the end is sometimes difficult for corporations. To stem some fears, most corporations create what is called a sinking fund
, which is an amount of money, they "sink" into a piggy bank for the day that money comes due. In the case of a seven year zero, the company might put 1/7 of that money into its own bond which matures when the rest of the bond matures so paying off the accrued interest and principle is less painful.
Securities that are registered in an electronic form rather than through physical paper are known as book "entry" securities. Book entry is the way all companies register securities today. You can't get any actual bond certificates and very few stock certificates. But that's progress...
A balance sheet term. It's what things garner at liquidation, "net of costs of selling". Caterpillar Tractor bought a smelting stove to melt iron at high temperatures. They paid $10 million for it. It should last 20 years and then they can sell it for scrap for $2 million. Using advanced calculus, we can ascertain that it will have depreciated $8 million in the 20 years that they use it. Using arithmetic depreciation, it will have declined in value $8 million / 20 = $400,000 per year in value. By year 10 of having owned the smelting stove, it will have depreciated $4 million. The book value of that stove will be held on the balance sheet of CAT as $6 million.
The term refers to the cost of borrowing shares when an investor short sells a stock. Technically, the investor has to borrow the shares from the brokerage, paying high interest costs on them for the privilege. Those costs are "the borrow".
When the underwriter buys the shares directly from the issuer before the filing of the prospectus and the IPO. The advantage to the company is that they are guaranteed to sell all of their shares. The advantage to the underwriter is that they get a discount on the price of the shares and can thus offer them at a lower price (which means it won't be as difficult to sell them).
Yep. It's about David Bowie. Shaken, and stirred. In 1997 David Bowie the rock star legend, now with "Sir" before his name as in Loin of Beef pioneered a new kind of bond: He pledged the copyrights of his music library to back a loan - an asset backed bond. He had recorded 25 albums prior to 1990 and they were the collateral for his loan. For all the noise they made (rockers... grr...) the bonds were for only $55 million - a microscopic drop in the bucket in the scheme of all things bond. But it's Bowie. So it got play.
Brand equity is the value your brand has. That is, if nobody has heard of you, your "brand" ain't worth much. Or, uh, sorry, you don't have a brand. Similarly, you can have negative brand equity like, AL Qaeda Brand Aspirin likely wouldn't sell a lot, at least in America. "High brand equity" = a name you have heard of and trust. Think: Ferrari. Yeah, think a lot Ferrari.
Oxy 5 and 10 both fight this one. But it also refers to a stock which has "broken out" of its expected trading pattern. That is, the stock traded in a very flat U shaped pattern for the last 10 months between $17 and $19, then, suddenly with their recent earnings announcement, the stock's first print at 9:30 a.m. NYT is $26. The new pattern created from that $26 is a break out. Like Oxy 5 and 10, things have... popped.
In a mutual fund, there is scale. That is, buyers get volume discounts. For example, buying shares of One Eyed Man Mutual Fund Company's flagship fund, might cost 5.5% commission if you buy less than $25,000 worth. If you buy $500,000 worth of the fund, the commission might just be 1%. Over a million bucks, the commission might be free - the broker will be paid out of the management fee of the company, i.e. One Eyed.
Broker Call Rate
The interest rate broker's pay on the loans they take from the bank which they in turn loan to customers buying on margin.
Broker Loan Rate
The price of money to brokers who borrow.
Brokerage accounts are where you buy and sell stocks and other liquid securities. Setting up a brokerage account is easy and for an investment amount of usually less than $2,500, you too can trade stocks like a tie-wearing Wall Street guy. If you have the extra money to be able to invest then this part of Shmoop finance is really not for you.
What the broker gets for making a sale happen between buyers and sellers. Commission, flat fee, spreads can all be ways of calculating the fee. Fi fo fum.
A securities market that goes up for a sustained period of time.
In the vein of an alligator spread, see the fold out in BullBoy Magazine.
A bull spread is a bet that the market will go up, using options to create a vertical spread. Traders can create a bull call spread or a bull put spread but this gets fancy and confusing.
A butterfly spread trade is one based on the belief that volatility in the market (and thus the premium investors pay to expose themselves to options trades) will go down or up in the future - but be different from the current volatility conditions. Most butterfly trades are relatively low risk, low reward sets. The "butterfly" nomenclature is there because these trades tend to "land soft" - i.e. you don't make a ton; you don't lose a ton.
Buy And Hold
Buy and Hold is a style of equity investing. Using complex language decoders, we can decipher that the concept means that you "buy" stocks - and then "hold" them. Convoluted idea, we know. The King of Buy and Hold is Warren Buffett, the Tiger-when-Tiger-was-Great of the investing business. Except that Warren has been around longer than Tiger and is way wealthier.
The strategy for most buy-and-hold investors is to concentrate their portfolio on owning just a relatively few names - less than a dozen for most of the world - and then just own those companies "forever". For years, this strategy came under fire from stockbrokers who don't make any money when you just hold stocks and don't transact or trade them.
The core skill in this strategy revolves around getting the company right. For a while, AOL looked like a "forever" stock to some, only to die an ignominious death. Coca Cola might be a "forever" stock - Buffett bought it in the mid-1970s and has owned it ever since - and it's been a fabulous stock. Nothing like addictive substance and Teamster-blessed duopoly distribution economics to keep margins high.
The other big plus in the buy and hold strategy zone is that owners "never" realize gains - which means that they don't pay taxes. That is good - unless you are an IRS employee or a Communist. Or just stupid. The downside? Volatility. Owning a concentrated portfolio means that you will go through many more ups and downs than you would if you owned 100 names. Some people worry about the shorter term - and if you're 78 and retired, it's a valid concern.
But if you can handle air pockets and speed bumps, and you can identify great companies (as opposed to great stocks) the buy and hold strategy is hard to beat.
Buy Limit Order
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.
There are two sides of Wall Street - Buy - and - Sell. Duh. Why are there two sides like this? Because the antagonistic" nature of pricing for securities works, for the most part. The "sell-side" comprises the stock broker community, people who sell used companies. That august group includes investment bankers, capital markets makers and more or less all of the people who wear ties at Goldman Sachs.
The people who don't wear ties at Goldman are a sloppy division which runs mutual funds for Goldman or GSAM - Goldman Sachs Asset Management. The "buy-side" are people like mutual fund managers, hedge fund managers, pension fund managers. "Fund managers" is the key phrase there.
They are the ones responsible for the money. They have to report to shareholders whether they have made or lost money and how much risk they took to get there, for hedge fund managers, especially. Unlike the broker community of sell-siders, the buy side has a broader fiduciary obligation to their investing clients.
Buy Stop Order
Typically used to cover a short. You shorted MSFT at $24. If it goes up a lot, you don't want to be crushed. So you put a buy stop at $27 so that the most you can lose (forgetting the cost of the borrow and commissions) is $3 a share.
If a seller fails to deliver the securities, and the buyer must enter into another transaction to buy them, this is referred to as a "buy-in." The seller that caused this situation is liable to the buyer for the difference between the price that the buyer ultimately had to pay and the price the buyer would have paid.
. Then share. And share alike. And know that C-shares are for "come and go" investors. They charge a level load 1% for the 12b-1 fee
usually and there are other fees that hit if they exit the fund in less than a year or so.
Options come due the 3rd Friday of each month. Calendar spreads seek to arbitrage pricing differentials in timing of these due dates.
Think: Margin account loan. Margin and call loans are very short-term loans in nature, usually with interest rates "good" for just one day. That rate is the call loan rate. But they are generally pretty safe bets for the brokerage as the securities themselves are used as collateral on the loans and most margin accounts have strict limits - i.e., many brokerages won't loan more than twice the equity value of an account in margin. Your whole portfolio of securities would have to drop 50% in one day for them not to get back the money they loaned, so they figure that the risk is negligible. Usually they're right but baloney does happen. But because the odds of it happening are relatively low, call loans usually have a low interest rate.
The right to buy something for a set price for a predetermined finite period. IBM is trading at $130 at press time. And yeah, by the time you read this it will be some hugely different number but go with us on this one for now. I might pay $7 for the right to buy IBM for $150 in the next 5 months because I think their new cloud computing servers will generate huge profits and the stock will rock. That means that I am essentially paying $157 for IBM stock that is now trading at $130. Why on earth would I do that?
Greed. (It’s good again.)
Consider the math scenarios. If I buy 100 shares now, I will have spent $13,000 on IBM stock. If it goes to $180, I will have realized a 5 grand gain if I then sell. And if their cloud servers are not a hit and instead cloudy all day, the stock sinks back home on the range to $100 and my $13,000 has turned into $10,000. Sad face.
For the same $13,000 though, if I feel really spicy and aggressive and long, I could buy 13,000 / $7 or 1,857 call options (in practice, options are sold in buckets or contracts but for now think of it as one call for one share of stock). If the stock goes to $100 within the 5 months, I lose all of it. I also lose all of it if the stock is flat. And I also lose all of it if the stock only goes to $150. Forgetting commissions and taxes, if the stock goes to $153.50, I still lose half of the month I put in.
But if I’m right and the stock goes to $180, I’ve made $30 a share, less the $7 a share I paid for the options or $23 a share. I am exposed to 1,857 shares – and I made over 42 grand on the trade. Blows away the 5 grand in just owning the stock.
It's the amount you pay for a call option.
Sort of a condom for your bond returns. CP is a term built into the fine print of a bond offering that generally prohibits the company issuing the bond to repay the premium before the scheduled maturity date until after a certain period of time has passed (in practice, this tends to be 5 years). Consider a high interest rate environment where a company has to raise money and pay 8% interest on 20 year bonds. Then the Fed lowers rates and the company could reissue new bonds and just pay 5.5% interest. It would want to call its 8% bonds and issue new cheaper ones. The investor in the bonds is "protected" with call protection which might, say, prohibit the company from calling its bonds for 5 years from issuance.
See call protection
. It's just the language that spells out if or how a bond is callable by the issuer. Let's say Nike wants to buy a bunch of grammar schools in India and it doesn't have the cash on its books to do so. It would issue debt to the public, but current interest rates are high and Nike thinks that it will have a lot of cash coming in over the next few years as its shoes will get much cheaper to make after this acquisition. Consequently, Nike offers the bonds at a high rate - 8% - but there is a call provision. That is, they can buy the bonds back at 102.5 cents on the dollar at any time after the first two years have passed. The investor makes a little premium if Nike does redeem and Nike is happy because they have less debt outstanding (and smaller interest payments).
Your phone might ring in the middle of the night. If it does, the fear in a call risk is that a bonds
or preferred stock
will be called due to a big move in interest rates. The price of the bonds is inversely correlated to the interest rate environment and their coupons. That is, if your bonds have a coupon of 8% and prevailing rates fall, the price of that bond should go up - yield hungry investors will bid up the 8% payment streams. But if rates go up a lot then the bond price should fall and if it hits a threshold (many hedge funds for example, buy bonds levered with lots of margin/ borrowings to do so), the bonds could be called either by the company or by the brokerage, who will no longer allow huge margin draws to the client.
Refers to bonds. The paper may say it'll pay 9% for 30 years but in the fine print it notes that the bond is callable in 3 years at 102 cents on the dollar. Oh well. It woulda been nice.
Just see callable
. Relates to preferred stock papers as well.
Yes, we all appreciate having some money. But this term applies to when the value of the capital goes up or, well, appreciates. Note that the appreciation doesn't have to be realized or sold to be recognized as having appreciated. That is, the stock for which you paid $32.59 a share is now trading for $46.98 a share. You've done nothing with it. Haven't sold it. Haven't trimmed even a share. It has appreciated $14.39 a share, which you appreciate, especially since no taxman cometh until you do in fact sell.
Capital Asset Pricing Model
A model that prices securities in terms of the relative risk and return offered by the security.
There are basically 2 forms of tax - ordinary income (think: high rates) and capital gains (think: less high rates). Generally, if you hold a stock a year or more and it appreciates, you have a capital gain. The idea is to reward people for investing money rather than spending it by giving them a lower tax rate.
Capital Gains Distribution
You're an investor in a mutual fund. The fund has realized long-term gains on 10% of their portfolio. At the end of the year, they distribute those gains back out to shareholders in the form of cash - which is now taxable by the kindly loving folk at the IRS.
Capital Markets People
The people who live to have their bony little fingers on the pulse of trading activities around the world in their domains (i.e. tech, healthcare, real estate, etc.)
The total common and preferred stock that a company is authorized to issue.
Seen Mob Wives? Don't get divorced this way.
Capping also refers to a market violation where selling pressure is placed on a stock to either lower the price or keep the price below some threshold.
Stocks usually pay their dividends in cash. Sometimes they pay a dividend in stock which is odd because the company just gets diluted with more shares out. But some companies do this.
Balance sheet item. It's the just the cash or cash-like investment things like T-Bills or money market funds. The common thread is that cash equivalents can be quickly and easily converted to cash because they're liquid. It doesn't include things like the corporate campus which is certainly convertible into cash but not in a quick easy 30 day cycle.
This is a really cool term thrown around by financial analysts and bean counters hither and yon to refer to profits, but in the Old School definition. Meaning, how much actual cold, hard lucre is your business generating.
When your great grandparents ran their grocery store, at the start of the day there was likely something like $114.52 cents in a big fat cigar box with a lock on it. Then they sold lettuce. And Ipecac. And dead cow parts. They also bought pasta from the pasta purveyor who happened by. And paid the rent collector when he knocked. And they paid their help the day wages due. And so on. And at the end of that day, there was $122.68 in the cigar box. They had cash flow over that period of $8.16. And in those days, that bought a small house.
In fancier parlance, cash flow has a few other tags. Some quick and very dirty accounting, giggity. Bob.com streams his life from a webcam at his bed. People pay to watch. Bob buys a computer for $3,600. By law, he must depreciate" the value of the computer by $100 per month. By law, computers are worth zip at the end of 3 years. Yet Bob's computer will last way more than 3 years. While Bob shows a loss of $100 each month for computer amortization, he's not really losing $100. In fact, his computer is likely to last 72 months in which case he has "over-amortized" the computer costs by 50 bucks a month - on his income statement he'll show $50 less in real cash profits - or cash flow (wink- wink) - than he has in reported earnings.
When a trade is made, it gets "settled". See regular way
. Cash settlement is not the normal way trades get cleared. And to be clear, when a trade is made, it involves a lot more than "sold at $103.24". Papers must be signed. Documents must be filed. Notations of commissions and other risk factor issues must be mentioned. Much of this happens electronically today but legally for a trade to be good/ accepted/ recognized by the law, it must be settled properly.
The Chicago Board of Options Exchange. This is the main exchange where listed options on publicly-traded companies are bought and sold. Note that the options are "plain-vanilla" calls and puts, and all such options are American-style, meaning that they can be exercised at any time up to expiration.
Chicago Board (bored) of Trade (tirade on angry days)
Certificate Of Deposit
An unsecured promissory note issued by a bank. They can be either long- or short-term, bear interest at a fixed or a floating rate, and be issued in large or small face values.
Chief Financial Officer, rarely also known as chief fun officer.
Ironically this concept was named after the Chinese icon, The Great Wall, because it was perceived to be impenetrable. The Chinese Wall is supposed to represent the highest of ethics and securities regulatory respect so that an investment bank's traders are fully walled off from its M&A and other finance people. The latter regularly have access to inside information and are almost always totally prohibited from trading to take advantage of their knowledge. The bank's traders, however, are trying to trade "smarter than the market" - it's their job to go make profits. The Chinese Wall is supposed to be the barrier so that the two sides don't leak information. At the risk of understatement, it doesn't always work out that way.
That feeling in your gut when you're long and the market is going down. But for The Seven, it is an illegal activity that unscrupulous brokers do to garner ill-gotten commissions. Churning is making more trades than are justifiable economically; churners "over trade" a client's account so that they can collect more commission than they should. Registered Advisors have a fiduciary duty to clients to act in the clients' best interest. You'd think that shouldn't have to be made explicitly but sadly it does.
An agency of a futures or options exchange that is responsible for settling trades, collecting margin funds, regulating delivery and reporting relevant data. A clearinghouse acts as the counterparty to all futures and options contracts, so it guarantees performance.
Closed End FundDefinition
See mutual fund
. A closed-end fund is not required to purchase its shareholder's shares at NAV each day. Instead, the fund issues a fixed amount of shares as an IPO. Those shares then trade on an exchange. The price of a closed end fund share depends on supply and demand, so it is possible (and often happens) that the price could be at a premium or discount to the Net Asset Value
("NAV") of the fund's holdings.
A loan that has reached the maximum amount of borrowed funs. The bank is closed, folks, you'll need to find another way to pay for your dentures.
Chief Marketing Officer
COGS - Cost Of Goods Sold
It's the onions plus the oil plus the bottling plus the delivery plus the other bulk packaging plus the basic insurance needed and a few other things... think: the cost to get crap out the door.
When stuff happens that is generally aligned with other stuff that happens at the same time. For example, if the weather turns cold, gas consumption rises; they are coincident.
Stuff that you offer to the person lending you money so that if you miss a payment and default on your debt obligations, the lender has something that can be sold to satisfy the debt.
Collateral Trust Bonds
Kind of like throwing your daughter's hand in marriage into the betting pool while playing poker. Sure, you might have the right (if this is the 18th century) but should you really? Actually, this is more legit than the previous example, it's when a company takes shares they own of another company, locks them in an escrow account and uses them as collateral for raising funds.
Collateralized Mortgage Obligation
A bunch of mortgages are packaged together. The package pays interest, which comes in from Joe Sixpack's mortgage payments. The package pays distributions based on when various tranches of the mortgages come due. CMOs are complex - kids, don't try this at home. Actually, given that the subprime meltdown was precipitated by these beasts, maybe it would have been a good idea if the professionals hadn't tried it, either.
You'd think after the IRS snagged Al Capone and however many other master criminals in the name of "tax evasion," people would realize dodging the tax man is futile. Unfortunately this isn't always the case. The collection ratio measures the amount of taxes a city or government is supposed to take in versus the money they actually collect.
Like goes with like. Two legs good; four legs bad. Accounts of a given purpose must be kept separate from accounts with a different purpose.
It's the lifeblood of stockbrokers. What gets commissioned and how it gets commissions is an R-rated story, however. See wrap account; Churning; Sell-side analyst. One key theme is that commission rates have come down. A lot more shares trade today versus 30 years ago, but commission rates are a fraction (like 0.5-3%) of what they were in 1980.
Commodities, technically are things you find anywhere, can buy and sell easily and have low margins (but often high volumes) for the people who broker them. Commodities are things like copper and oil and sugar and coffee beans and evil lawyers (ha).
Commodities generally are very sensitive to global macro" incidents - i.e. a bomb in the Suez Canal likely restricting the export of oil from Saudi Arabia will send oil prices up a lot. A frost in Florida killing citrus will make frozen concentrated orange prices go up. The U.S. discontinuing the penny should crush copper prices because there would be lowered demand for copper (yeah, we're ignoring that pennies are mostly made from zinc, but you get the idea).
Commodities are also very sensitive to inflation. When the marketplace fears that prices are about to go up, companies, investors and other buyers tend to hoard the commodity, so supply is suddenly constrained and the price soars until, those inflation fears are "baked in" to the price - and then things plummet. The key idea is that it's a volatile mean nasty world out there. Hold on to your wallets.
Equity ownership in a corporation. Common shareholders are owners of the entity. As with owners of any business, they are the last to be paid if the company fails, but the attraction in owning shares in a company is the potentially unlimited upside.
Common Vs. Preferred Shares
The name generally gives it away. When something is common, it has the stench of the sweat of bricklayers, plumbers and people who actually work for a living, i.e., the commoners. They live at the bottom of the food chain. Yet, they are the most powerful force in structuring society. Common shareholders function the same way. They are the last to receive payment if a company defaults but if a company does extremely well, it is the common shareholders that make the fortune.
Preferred shares occupy a higher position on the corporate food chain. They are considered equity, but preferred shareholders stand in line before the commoners in a liquidation. Most preferred shares have a fixed dividend which the company cannot alter without the preferred shareholder's consent and they usually have the right to be paid in full on their dividends before the commoners are entitled to any payouts. In practice, preferred stock is almost always convertible into common stock at a given price. So, while preferred stock looks somewhat like a bond in that there is an obligation for the corporation to pay a fixed dividend on that stock, in non-convertible preferred, those pieces of paper are really more like debt in cross dressed clothing.
If you want the R rated version of this, click here (http://www.berkshirehathaway.com/reports.html)
When syndicate groups compete against one another to underwrite the IPO for a new company. They compete to offer the lowest or best bid.
See negotiated underwriting
. The underwriter will submit a bid for a new issue to the issuer. The issuer selects and underwriter based on a combination of best price and contract terms.
If you try really, really hard, you conduit. Sorry, we couldn't resist.
Conduit Theory relates to the tax treatment of an investment company - the basic idea is that if the vehicle passes through 90% or more of its net income to its shareholders, then it won't be taxed on its income; instead, the income (and losses, if any) will be attributed directly to the investors.
Constant Dollar Plan
A way of investing in mutual funds where the investor ponies up a constant sum each month (or quarter) that is used to purchase more shares of the fund.
Consumer Price IndexDefinition
A distant cousin of the shiny gold guy from Star Wars, CPI is an index, which tracks inflation. And see inflation
. See it twice. It’s important. Note that the CPI number does not include energy or food. Like people don’t spend a lot of their income on those things? The thinking is gas and food are just too volatile and are seen to cloud the "real" inflation numbers.
Contingent Deferred Sales ChargeDefinition
. A-, B- and C-share mutual funds have some kind of sales "load," or charge, tacked on to the NAV price. A-shares have a front-end load; you pay around 8% on top of the purchase price which goes to the selling broker. Aggravating, but it's over and done. B-shares, on the other hand, were marketed with the lure that there's potentially no load - but there's a catch (yes, campers, there's always a catch): You have to hold those shares for a minimum period. If you sell early, then the sales charge applies on the back end. That's the contingent deferred sales charge. It's computed on a sliding scale, so you pay more the earlier you are into the period, such as 7% in the first year, 6% in the second year, and so on. The SEC has really clamped down on these in recent years because most mutual fund investors hold shares for a period less than the CDSC period and the regulators thought that to be unfair and abusive. After the CDSC period has passed, B-shares just convert to being A-Shares - "no load"
, but there's no further sales charge.
The privilege is about being able to "convert" your policy, which expires this month into a similar policy, which continues for 3 more years, or something like that. Conversion privilege is a big deal for people with dicey health issues as the policy can't be cancelled for health problem reasons (and premiums generally stay the same).
A minister dips a lot of heads in a river. The number who actually adopt his believes relative to the total dunked is his conversion ratio. The term also refers to the number of shares a bond is "convertible into" - that is a $1,000 par value bond might convert into 100 shares. At ten bucks a share, the conversion is break-even-ish.
The right to convert. Refers to a bond converting into shares of equity, usually.
We all wish we could have a convertible bond we could go cruising down the PCH with...oh wait, we meant a convertible and a blond. A convertible bond is a bond that can, at given times and prices, be changed into straight up equity. Like the bond is a Twinky and there's a yummy stock option cream hidden inside.
Refers to the notion that convertible preferred stock might convert into so many shares of common. So lets say you have par value $25,000 in a preferred stock. It converts into 1,000 shares of common. So if the common is above about 25 bucks, you'd want to convert. Hal E. Lujah.
Chief Operating Officer
There is a cooling period in high school. Some guys smoke. Some girls wear cheerleading outfits. There is also a cooling period after an offering memorandum is circulated. The law wants to protect hot buyers from getting too excited about the fine salesmanship of the snake oil men in suits.
Hot buyers need chillin' time. Legally, at least 20 days must pass after a company files a registration statement with the SEC to sell stock or bonds. The company can't advertise during that period - when the 20 days have passed and assuming the company (and its underwriters) have behaved themselves, the SEC will issue a "release" so that the securities can be sold to the public
A bond backed by a corporations credit and/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.
A legal entity doing business for profit.
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.
A legal entity doing business for profit.
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.
A legal entity doing business for profit.
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.
A legal entity doing business for profit.
What'd it cost ya'? It matters because of the man who cometh (taxman, not iceman). You bought 1,000 shares of IBM at $100 and sold it 2 years later at $140 net of commissions. Great job. You made 40 grand. You get taxed on said 40 grand. But you wouldn't know it's 40 grand if you didn't know your cost basis of 100 grand. You laid out $100/share for 1000 shares. Even without the fancy calculus, that works out to a cost basis of $100,000.
This is municipal debt which was incurred in connection with some asset that benefits more than one municipality's citizens and which is a joint obligation of more than one municipality. An example would be a public park with a border between two cities running through it, and which is used by citizens of both cities. (Imagine Minneapolis-St. Paul, except there's a park instead of the Mississippi River between them.) If they issued debt to pay for upkeep in the park, the debt would be coterminous in that it would be owed by the citizens of both cities.
They're on the back of cereal boxes and today found at coupons.com en masse. You fight with a scissors to clip them out and mail them in - those who bother to make that effort save money. Coupons also apply to bonds
. A normal vanilla bond pays its interest twice a year. A $500,000 , 8% coupon bond pays $20,000 twice a year.
A bond which pays a coupon or interest. See Zero Coupon which pays no coupon until the very end.
Nuns hang out there. Oh, wait. That's different. A covenant is just a promise - usually a security is backed by a series of covenants or guarantees from the issuer.
See covered put, above. "Call" here is from the famous call option land. Covered calls relate to writing or selling a call option. That is, you are selling to someone the right to buy a stock from you at a given price by a certain deadline, aka, shorting a call. You can imagine that if you had sold a call on some hot internet stock, and it then went to the moon (up a lot), you would have gotten killed. Example: Yahoo came public at $22. For $3 a share you sold someone the right to buy the stock at $30 at some point in the next 8 months. The stock then goes to $200 five months later. They stretch out their open sweaty palm and say, "Okay, deliver unto me said shares." You then have to go out and buy them for $200. Each. Ouch.
Selling options where you have a sufficient position in the underlying security to shield you from adverse price movements. If you sell call options and have the underlying stock, you aren't going to be happy if the stock rises because you'll lose the stock, but at least you won't have to "cover" in the market at a higher price.
At Angelina and Brad's wedding, it rained. There was a big tent.... The term also refers to liability. Example: A couple is married. The husband buys and sells stocks on behalf of the money he and his wife have saved. His wife hears inside information about a big merger happening with her company, where she is CFO. The husband trades on this information and makes a bundle. Unfortunately there aren't co-ed prisons for this kind of thing. Since he was a covered party, the insider trading laws that applied to her, applied to him and then them collectively as well. So they both lose everything they had and date Bubba and Bubbina in prison for 5-10 with time off for good behavior.
Covered Put Writer
Writing is another common term for "selling." They mean the same thing. Writing a put is selling a put. The best way to visualize this is that for every buyer of a put option, there has to be another party that sells that put.
Let's walk through a transaction, but we'll start with a covered call because it is easier to understand: In a covered call trade, the trader buys shares, believing they will go up (duh) and then also sells a call against them. That is, she buys IBM at $130 a share and then for $4 a share, sells call options with a $150 strike which expire in 4 months. If IBM rockets upwards to $180 in the time period, the trader makes $20 a share from the shares that went from $130 to $150 - and also makes $4 from the call option she sold for a grand total of $24 in gains. But if she had just owned the stock and played golf the whole time, she would have made $50 in just owning the stock, nothing fancy.
In a covered put, things happen in reverse. She shorts IBM at $130, thinking it's going down like a horny teenager on a Saturday night. But she is nervous so she sells put options to go along with this trade. Here, she might sell puts with a strike price of $110 strike for $4, which expire in 4 months. That is, the buyer of the put has the right to "put," or sell, IBM back to our friendly female trader here at $110 a share. So if IBM tanks amid fraudulent accounting rumors and goes to $80 a share, our trader makes $20 a share from the decline from $130 to $110. And then she pockets another $4 from the put premium she sold. At $80, her IBM shares will be put to her but she will be "covered" because she has the shares that she shorted in the first place. That is, the risk is less. And the reward is less too: If she'd just shorted IBM and played golf, she would have made $50 from IBM's decline from $130 to $80 in that time period.
Crash Of 1929
It was bad. So sad. Made yer grampies mad. They felt had. There was only a Pretty Good Depression beforehand; the Crash fostered The Great Depression, a sizeable upgrade.
The legal handshake that occurs between the borrower and the lender.
A situation where the bid price is higher than the ask price. In other words, somebody is willing to pay more for a stock than the price at which the seller is willing to part with it. Crossed markets are almost always due to input errors on the by either the bidder or the seller, but they can create some excitement until the error is resolved.
Consolidated Tape System
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. In theory, the company could stiff the preferred holders forever, but eventually the common shareholders will revolt and throw the bastards out of those cushy jobs. Self-preservation usually trumps continued jerk-dom.
It's about how companies' boards of directors are voted in or out. In cumulative voting, shareholders get one vote for each director, but they can accumulate all of them and put all of the votes behind just one director. That is, if you have 500 shares of XYZ Corp., and there are 5 directors up for election, you have 2,500 votes to allocate and you can put them all behind your cousin Billy.
An asset that will be used (or converted to cash) within one year.
Debt owed within the one year. Not about risky raisins. Or Glenn Close for those of you who remember.
"Current Assets/Current Liabilities This is just a measure of wut we got against wut we owe, based on current (short-term) assets and liabilities. Accountants divide assets and liabilities into short and long term sections. It’s a long story as to why they do this and for this discussion it doesn’t really matter. These are both balance sheet items. Say current assets are $10,000,000 and current liabilities are $3,000,000. We like to see 3-1 or better for this ratio. It just means we’re paying our bills faster than we’re collecting them and says a lot about our cash liquidity.
But there’s another thing to look at here—what if our current assets were $100 mil and current liabilities $30 mil? Same ratio but much, much bigger numbers. Imagine the pressure on cash for such a tiny company. What if most of our sales are on credit and something happens so that we can’t collect bills for a while. We could find ourselves in a 1-3 ratio fast with a lot of money involved. This high volume CA/CL situation happens in commodity types of businesses and in banks. So in being a good banker you not only have to look at the ratio itself but the relative size of the gradients relative to what your competitors are doing.
Think of it as "market yield": The subordinated debentures for Cablevision have a coupon of 7%. That is, when Cablevision sold $100M of those bonds, they were on the hook for $7M a year in interest. Cablevision couldn't help that Wall Street didn't like their new programming deals, which didn't include C-SPAN and the bonds sold off heavily - down to 90 cents on the dollar. Anyone who now buys a bond unit (usually solid in increments of $1,000) for $900 still receives the 7% coupon from the good people at Cablevision. It's just that now that $70 in interest is paid out over the initial cost of $900 instead of $1,000. 70/1000 = 7%; 70/900 = 7.8%
It's like the bar code on a security. You need long hairy numbers to be assigned to each security to prevent confusion. Many stocks have multiple flavors - some have higher voting rights or other non-economic interests attached to them. Others have ADRs or non-US elements. For many bonds, there are a dozen or more series, many of which have barely discernable differences in terms and having a unique CUSIP allows for the securities to be individually identified so when you thought you were buying a cow, you actually got a cow and not a bunch of magic beans.
Richie Rich can't place his own trades but his custodian can. If Richie is either a minor or mentally incapable of doing the deed, a custodian has to give the green light to execute. Custody isn't a flavor comparison to yellow pudding.
Well, they should say, "I love my broker!" But technically a customer statement is a piece of paper (electronic or dead tree) which simply outlines what the customer did during the month: the trades they made, what their account is now worth, what they currently own, etc. The SEC requires quarterly notification but most brokerages send customer statements monthly - sort of a marketing thing.
Depreciation and Amortization. A method of valuing assets usually in decline.
The date at which interest begins to accrue on a fixed-income security. Investors who purchase a fixed-income security between interest payment dates must also pay the seller or issuer any interest that has accrued from the dated date to the purchase date, or settlement date, in addition to the face value.
If the fixed-income security's date of issuance is the same as the dated date, the dated date is also the issue date.
A security order good for only the day in which it was placed.
Dead Cat Bounce
The market has fallen from 5,000 to 1,200. Now it's at 1,400 and you think it's headed to below 1,000. That uplift of 200 points from 1,200 to 1,400 is the "dead cat bounce" - and with macabre tones comes from the notion of dropping a cat off of a high building. It hits the cement - is dead - and bounced a bit before a wet thud. Yeah, gross. (PETA: No cats were harmed in the production of this question.)
Slang expression for funds that aren't earning interest, or investments that have little chance of gaining in value.
A bond-like instrument backed only by the promise of the issuer that it will pay back the dough.
Debt Per Capita
In a given country, it is a ratio for the amount of debt per person in that country. That is, Greece has a lot. Dubai has a little.
It's the interest you have to pay to "service" a debt.
Debt Service Ratio
This ratio measures cash flow to total interest payments owed. A company could be bringing in tons of cash, but if it's leveraged up to its eyeballs, it won't have a lot of wiggle room.
Debt-to-EBITDA is a ratio used by bankers and investors as one key data point in determining how leveraged a company is - or rather, to determine how easy it will likely be for the company to pay back the debt it has taken out. EBITDA is basically a proxy for the company's cash flow and debt of more than 3 or 4 times cash flow is considered very high on most planets.
A very closely-watched metric by analysts. The percentage calculated by dividing a company's debt by its owners' equity. In general, a high D/E ratio is considered dangerous, because the company has borrowed a lot and this increases its chances of default and ultimate bankruptcy.
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.
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.
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
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.
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.
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 milk into black coffee, you dilute the blackness - it becomes brownish with gloppy things in it. Same deal with stocks. If a company has 50 million shares outstanding and grants 10 million options with a low strike price for this example, it has diluted itself about 20% because the options will be exercised and - presto! - the company now has 60 million shares outstanding. Early stage start-up companies usually have stock option plans so most "suffer" dilution as employees get paid low salaries on the promise of wampum from equity appreciation.
Direct Participation Programs
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.
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.
Investments carry risk. How MUCH risk they carry is where the discount rate comes in. The concept gets mapped to the concept of Present Value. Just read it.
If you have clients, the presumption is that you know how to keep your mouth shut. You don't talk about how much money they have at Sheila's wedding. You don't blog your client list. You don't feather your own cap. Discretion: It's the better form of valor.
Discretion also means that your client has given you the right to decide for him what to buy and sell, and at what price. It's a big responsibility. Clients do sue if you're wrong—they claim their losses were caused by your abuse of discretion. "Sometimes it works."
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%.
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
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.
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.
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.
Studyin' up on a company's books and business ties to be sure that the thoroughbred is really a thoroughbred and not a donkey.
Uh, an auction held in Amsterdam? Well, maybe. But in the land of The Seven, it's a public offering where the offering price is only determined after reviewing all bids and determining the highest price at which the total offering can be sold. In a Dutch Auction, investors place bids for the amounts that they are willing to buy in terms of both quantity and price.
This stands for "Delivery v. Payment." If you're selling stock, then you won't be keen on shipping it to the buyer until you've received the buyer's cold, hard cash. At the same time, the buyer ain't likely to part with the cash until it has the stock. A dilemma, indeed. It's resolved through the use of a clearing agent, who functions as the middleman and ensures that both parties get what they bargained for.
As opposed to income from ill-gotten-gains! This is just another way of saying "the company's earnings".
An eastern account requires that each member is responsible for their own accounts, as well as the accounts of all other members.
That is, Earnings Before Interest Taxes Depreciation and Amortization. This seems like a 5-eyeballed purple fish out of a Simpsons' nuclear plant river. Why on earth would anyone track this arcane piece of financial data?
Well, in theory EBITDA strips out noise, noise that isn't germane to the business being analyzed. The notion was popularized by high cap ex industries (like the cable industry) which generated very high unit margins but never had any capital available to give back to shareholders because the industry was busy buying content and itself (i.e. consolidating).
Many investors liken EBITDA to "cash flow" as a proxy for the unfettered operational cash earning power of the entity itself.
Electronic Communication Network. An ECN is a trading platform where computers match buyers and sellers of securities "off market" - that is, not as part of the registered group trading on the NYSE.
Efficient Market Theory
The theory says that you can't beat Mr. Market, that markets are in fact efficient and that new information pukes out into the marketplace like a burp in a small room. Everybody gets wind of it and digests it and reacts. The consequence of the efficient market theory is that all information is already reflected in the stock price, so you can't earn more than the market average returns from analysis or past price performance. In the "strong form" model, even insider information is said to already be reflected in the market price. Evidence, however, suggests that there is some validity that in the "strong form" markets are not efficient as insiders can (and do) earn higher-than-average returns from trading their companies' stock.
China was once viewed as an emerging market. Now that it owns a huge chunk of our debt, we can all agree that it has emerged. The notion of an emerging market is one that carries political and economic risk - but great reward potential in that its intrinsic economy is growing at a rapid rate.
Employee Stock Options
ESOP - stock options granted to employees to entice them to work for what is usually below market levels of cash salary.
The value of the whole enchilada…er…um…enterprise. That is, "what would it take to replace this thing right now?" Consider your home because that's easier to tackle intellectually as an enterprise. Your parents bought it last week and just paid, say $200,000 as the down payment and then took out a loan for $600,000. The equity value of the home is $200,000 but the enterprise value is $800,000—that's what it would cost to replace that home, more or less. Same applies to companies with debt (or cash).
Thing. That's what it means. Really.
Earnings Per Share. Earnings or Net Income are the famous "bottom line". Insert ill-fitting panties joke here. To get the number, you take the total earnings of the company and divided it by the number of shares outstanding.
Equipment Trust Certificates
Basically a bond backed by equipment. See Asset Backed. See those 40 tractors. On eBay we think they'd fetch a hundred grand. Can you loan us fift grand against them for 8% a year?
Ownership. Equity is about stocks and owning a sliver of the big fat pie called Corporate America. This is in apposition to debt, which is a loan to Corporate America, usually done in the form of bonds.
It's a hybrid of the ubiquitous "market cap" term. Equity cap usually refers what investors are paying for a company's earnings power - i.e. 'ignore the cash on the balance sheet' calculation.
Equity Funds are mutual or index funds comprising mostly stocks. Equity funds come in a range of flavors where various investment themes are stressed, e.g. "income equity funds", "growth equity funds", "fun equity funds", and so on.
Equity Income FundDefinition
See Equity Funds
. A form of equity fund which stresses income usually coming to shareholders in the form of dividends paid by relatively mature companies. A typical equity income fund holding might be Heinz or AT&T or Pfizer which are all well-developed companies growing at relatively slow rates but who have lots of "excess" cash to give back to investors.
It's just a market where equities are traded like marbles, Pez dispensers or livers on eBay. NASDAQ is an equity market. So is the New York Stock Exchange.
. "Equity options" refers to options where the underlying security is equity share of stock, rather than a bond.
Employee Retirement Security Income Act
Federal legislation that strives to protect retirement accounts through rules that govern appropriate investments, segregation of plan assets, etc.
Something held by an independent third party on behalf of the buyer and seller in a transaction. Securities and cash are often held in escrow pending confirmation by the escrow agent (the guy who's holding this stuff) that both sides have fulfilled their obligations; the agent then releases the assets to the respective parties.
ETF - Exchange Traded Fund
Index Funds vs. ETFs One key elemental thing worth understanding is the difference between index funds and exchange traded funds. Index funds are NAV beasts - that is, each day, an uber-bean-counter adds up the stocks and/or bonds in a fund and calculates its value. Periodically (monthly-ish), the fund manager rebalances the fund. Let's say that a company in the S&P 500 is acquired by another or (more poignant lately), goes bankrupt. Well, it has to be replaced in the index. Or let's say a stock has a monster run and gets huge - should Apple still be 16% of the QQQQ index? Is that reflective of a NASDAQ portfolio? (AAPL is currently about 5% of the NASDAQ composite). It depends on the original documentation of the fund and the fund manager's job is to rebalance" over time.
ETFs (exchange-traded funds) don't do this. They are a set basket of stocks, which just live on more or less indefinitely, drifting away from their original indices as various stocks perform differently from the market and weightings change - sometimes dramatically over time.
Slow dinners. Fancy loafers. Disgust over the acoustics of the room. Cigarettes. Unshaved pits.
European Style" also refers to options that can only be exercised on the date that they expire. See "American Style" (as in Love). American style options can be exercised at any time until they expire.
Sort of like JDate, only with former relationships being the entire dating population. Ex-Date also refers to the deadline for when an investor is entitled to receive the declared dividend on a given stock. You have to own the stock by a certain date, which the company declares in advance. To own it, you have to account for the settlement process, and in the U.S., settlement occurs two days after the trade. If you buy after the ex-dividend date, you won't receive the dividend; the seller will. If the record date is October 15, you have to actually buy the stock on or before October 13. If you don't, you won't "own" the stock on October 15 Also known as the "ex-dividend" date.
Without rights. Warrants are often attached to bonds as a little pot-sweetener to entire otherwise skittish bond investors. The warrants are separable from the bond and can be sold on their own. A bond trading "ex-rights" means that if you buy it, you don't get the warrants; either the seller is keeping them or has already sold them.
It's not about how much you pay to get in to your gym. It's about the strike price of the stock option you own. Let's say you joined GerbilDating.com in its infancy. You were granted 100,000 options at a $2 strike price. It's now publicly traded on NASDAQ. The stock just hit $40. You can exercise your options, paying $2 to GerbilDating.com to buy out that share of stock, and then sell it for $40 through your broker to net $38 in gain per share.
Exercise Settlement Date
ESD refers to the date at which an option has been converted into equity (exercised)—shares of stock—and that conversion trade is now being settled.
The expense ratio of a fund is a fraction. In the numerator are the fees charged to the investors and in the denominator are the total assets under management. A high expense ratio means that the investor is being charged a lot for services rendered - so the performance better be really good.
Options expire the 3rd Friday of each month. Those dates are the expiration dates. Like the numbers on the top rung of milk cartons and low fat cottage cheese.
When the world was older and slower, trading during "normal hours" went from 9:30 until 4:00 New York time. Today, the world's markets drink lots of Red Bull. "Extended hours" means in theory 24/7. In practice, most after-hours trading dries up around 8PM and most pre-market trading begins around 5:30 A.M. Money never sleeps.
What's your face worth? Guess it depends on your face... It also refers to the numbers on the front of a bond or other debt-like certificate.
Bonds on sale! In this case a company guarantees to pay whatever is on the face of the bond - yep, the amount. Catchy.
The super wealthy set up their own family office to manage their money. They can deduct a wider range of expenses and have other tax and control benefits.
Fast Market Rule
Fast markets is a term used when a market is exhibiting both heavy trading volume and high volatility. In fast markets, some rules that govern broker behavior, such as firm quotes, can be relaxed.
When prices are moving quickly in heavy trading, the ticker can give a range of recent trading prices rather than discrete prices. This usually happens in futures markets that utilize trading pits for transactions.
Can we actually build the buidling over this lake bed or will the driveway kill the Republican salamanders? The answer comes from a feasability study.
Federal Funds Rate
The rate charged by the Fed to its best bank borrowers.
Federal Reserve Board
Our nation’s central bank. Acts as a regulator of money supply and is a big driver of interest rates. It was created with three mandates: (1) control inflation; (2) enable full employment; and (3) promote stability within the banking system. It also serves as a lender of last resort to banks.
Federal Reserve System
The United States is divided into different districts, and there is a Federal Reserve Bank branch located within each district. Collectively, this is the Federal Reserve System. Each district has a governor, and the governors meet from time to time so that the Fed Chairman can tell them how they should vote on interest rates. No? You mean, these governors actually possess independent thought? Well, damn! It sure doesn’t seem that way.
First Financial BanCorp
Federal Home Loan Mortgage Corp, aka, Freddie Mac.
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.
FIFO = First in First Out. It is an accounting term which refers to the method of accounting for inventory. Let's say you live in a high inflation time and you have stocked yacht bolts (they last forever) in your warehouse. The bolts you made 10 years ago cost $2 each; the bolts you made last year cost $5. FIFO accounting would have you recognize the $2 bolts first until you had sold all of them out of your warehouse and then you'd start accounting for the cost as $5 each instead of $2.
Another term for registered representative. A little bit of marketing hype, because "financial advisor" has a more refined image than "stockbroker." In reality, most brokers don't have additional qualifications that would make them true financial advisors.
A financial planner is someone who advises individuals about their overall financial situation. Planners can work on a "fee only" basis, where they do not recommend any specific financial product, or they can offer general advice in conjunction with a sales effort that revolves around different classes of products - stocks, bonds, mutual funds, etc.
So. Okay. You should really know who these people are, as they are the ones putting you through the hell of studying right now. But it's the Financial Industry Regulatory Authority.
The Underwriters are making a firm commitment to the IPO by agreeing that they'll be on the hook for any unsold shares.
A dealer is asked for a price upon which she will transact to trade 100,000 shares of XYZ, makers of zipper examiners for the masses. The dealer will give a price at which it will buy, and a slightly higher price at which it will sell. This is the "firm price" so if the other party says "I buy," then the dealer has to sell at the quoted price. Note that firm prices are only for 1 round lot of 100 shares. In this instance, a trade this large would involve some negotiation on the price.
An annuity where the earnings on the investment are at a fixed rate. Very similar to interest on a bond or a savings account.
These weren't broken at one time. Rather, "fixed assets" refers to assets that are "hard items" like property, plant and equipment. That is, these are assets that the company paid for in cash (99.999% of the time) and now carry an asset value on the company's balance sheet. These are also considered "non-current" assets as they aren't expiring soon.
Was it broken? The dividend is set or glued or fixed. Preferred stocks generally have fixed dividends.
The lowest acceptable limit as established by the parties to a particular transaction. In an underwriting, the floor is the lowest acceptable IPO price. In other contexts it could refer to the lowest interest rate that a party will pay.
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.
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.
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.
Kinda like it sounds - unfettered trade. No taxes. No friction. Let the markets rule. Adam Smith, baby.
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 LoadDefinition
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 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.
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.
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.
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.
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.
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."
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.
(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.
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.
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."
High Octane Stock
A volatile stock but one that is perceived to generally be very "growthy", hence the octane in the gas tank.
This term refers to bonds, which pay a high level of interest - usually because they have to. That is, they are considered relatively risky. In a prevailing interest rate world where T-Bills are yielding around 3%, grade B bonds might yield 5% and "junk" or high yield bonds might yield 8% and much, much more... and often carry ratings of CCC or worse.
The holder of stock options is the owner of them.
Right after sex. For most couples, it's about three minutes; less clingy people want it to be two. As the term refers to tax treatment, if a security is held a year or more, it usually gets long term gain tax treatment which is a lower rate by a lot, usually, than shorter term holds which are treated as ordinary income.
In the Olympic finals, it will be fast. On Wall Street, the hurdle rate refers to a minimum per cent return on investment that an opportunity must surpass in order to get funded. That is, "we think this building will cost $100 million all in and in 7 years we'll sell it for $200 million. Our cost of capital is 5% and our hurdle rate is 7%; in this case the investment would return 10% so it passes our hurdle rate. Let's do it, baby."
To pledge. Perchance to guarantee. When you want to borrow (margin), you need collateral. Hypothecate means that the lender has an interest in the securities purchased with the borrowed funds, but does not actually take possession of that collateral.
Really, a margin agreement. The borrower pledges the securities to the lender as collateral, but the securities stay in the borrower's account until the borrower defaults. If that happens, the lender can swoop in and grab the collateral.
An immediate annuity is a twisted version of a life insurance policy. In a typical life insurance plan, say it's term life, you pay $75 a month "forever" and when you die, your wife and the pool boy she later marries get a million dollar check. In an immediate annuity, you write a big check to the insurer up front who then pays you in partial payments over time. That is, the annuity "annuitizes" immediately. Yes.
Immediate Or Cancel Order
A type of order fulfill request to a brokerage. "Now or never."
In Street Name
Kermit. Bert. Ernie. Cookie Monster. When you purchase securities, you can have them registered in your name or in the name of your representative's institution. In other words, the shares can be formally registered to Merrill-Lynch, or Goldman Sachs, or whomever, to be held in an account designated for you. This allows Merrill to lend your stock to people who what to sell it short.
In The MoneyDefinition
. The basic idea is that if you have a stock option where immediate exercise results in a profit. That is, you own a $65 strike KO call option. KO is trading at $75. You are $10 "in the money".
See Equity Income Fund
. Income funds are usually the domain of old people. Or just retired people. Or people scared of their own shadows... or at least scared of the market. An income fund's goal is to produce income. Most income funds are comprised mostly of bonds. They don't grow. They just produce cash, which gets distributed back to the shareholders. Sometimes income funds consist of dividend-paying stocks.
The infamous P&L or profit and loss statement. This shows a company's revenues, expenses and earnings. Note that these are prepared based on accounting principles, so the link between what they report and the company's "real" financial situation can be tenuous. See Enron, WorldCom, Adelphi and a host of other financial catastrophes.
If you have fake teeth and they stay in your mouth, that's called an indenture.
An indenture is also the paperwork behind a loan. You are "indentured" to pay it off or you more or less lose the land with which it was secured.
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.
See ETF vs. Index Fund
. An index fund is just a big fat basket of stocks or bonds geared to reflect a market "strategy" (i.e. whatever logic that consumers will buy). If you believed in sin doing well over time, you might try to find an index with tobacco, alcohol, gun sales, porn, and gambling. The more generic funds are those baskets that reflect a popular index like NASDAQ or the S&P 500 or the Dow. Here’s the composition of the Dow-Jones Industrials which are 30 big fat cap companies that are supposed to reflect the industrial strength of this country and the world (you have probably heard of a few):
Alcoa American Express Boeing Bank of America Caterpillar
Cisco Chevron EI DuPont Walt Disney General Electric
Home Depot Hewlett-Packard IBM Intel Johnson & Johnson
JP Morgan Kraft Coca-Cola McDonald’s 3M Merck
Microsoft Pfizer Procter & Gamble AT&T Travelers
United Technologies Verizon Wal-Mart Exxon Mobil
Index Funds - Why Buy?
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.
Options on an index fund.
An account owned by one, individual person. For the introvert in you who wants to say, "No touch, mine!"
When a dollar buys less today than it did yesterday, it has suffered the ill-effects of inflation.
This is the amount that your broker will lend you to purchase securities. The minimum margin percentage is 50%, which is required by Regulation T, but brokers can impose higher margin. If a broker has a 60% margin policy, that means that you have to put up 60% of the purchase price; the broker will lend the balance.
Initial Public Offering
The first sale of stock by a private company to the public. The company will select an underwriter, which helps it determine the optimal sales price and when to sell.
See Approved List
and Chinese Wall
. Inside information is knowledge you have which lets you invest with an unfair advantage over everyone else who would normally be buying or selling related securities. You happen to be at Verizon having lunch with a buddy who did something bad in a former life and now works in the business development office. While he whines, you leave to take a wiz. While you are standing there streaming broadband, you see the CEO of Verizon who you recognize from the distinctive comb-over, stand and stream next to you in stereo. He has one hand on the steering wheel and the other is holding his iPhone (white). Its volume is turned up loudly. Nobody else is in the men's room there and you can hear the voice on the other end say, "Okay, it's confirmed. Goldman is committed now to helping you raise $20 billion to buy RIMM/Blackberry." The Verizon CEO says, "I'm very excited. Let's get this process started tomorrow."
is inside information. You heard something you shouldn't have heard. You can't short VZ and you can't buy RIMM. Neither can any of the people you work with or friends or family. See covered party
What do you do? You immediately finish the streaming, zip up, wash, using soap, and then phone your compliance lawyer and tell him to stop trading in either stock until you can come in and explain all of the facts and details to your compliance lawyers. Inside Information is not illegal to have - it's only illegal to use it as a basis to trade. And most newly minted investors believe that if they see Punxsutawney Phil's shadow when nobody else did, that they have inside information on solar power companies. So get smart - this vocab word is in our top ten most important to really grok.
Insider Trading And Securities Fraud Enforcement Act Of 1988
It has been illegal since the Securities and Exchange Act of 1934 (the '34 Act) to use inside information to trade on stocks. This 1988 legislation was basically Congress saying, "We're really serious about this." Provided some beefed-up penalties if you get caught. See Raj Rajnaratram.
This is a ratio that determines how easily a company can pay interest on its debt. The ratio is calculated as EBIT/Annual Interest Expense. The lower the ratio, the more questionable the ability to pay. Investors like this metric to be really high.
Interest Rate Options
Options on interest rate vehicles.
Internal Revenue Code
The Internal Revenue Code is the collection of income, transfer and excise tax laws currently in effect in the United States.
Internal Revenue Service
The IRS. The guys who bill you for your taxes.
Intrinsic Value (of An Option)
In the previous example, the intrinsic value of the KO call option is $10. There may be time left on the option before it expires so it is likely that the option would trade for more than its intrinsic value. There are two components to value in an option: intrinsic value and time value. Intrinsic value can never be less than zero. If the intrinsic value is zero, then any value in the option is strictly time value.
Some representatives don't actually handle client accounts. Instead, they know a lot of wealthy investors and will steer them to other brokers in exchange for a flat fee or a percentage of the commissions.
This measures how often a company sells and replaces its inventory over a discrete time period (i.e., a year, a month, etc.). It is calculated by dividing a company's Cost of Goods Sold (COGS) by its Average Inventory. Average Inventory is calculated by adding its beginning inventory and ending inventory (as shown on the balance sheet) and dividing by 2.
It's an upside down head and shoulders chart. Not the shampoo. But to visualize, think about the shampoo bottle being emptied by you. That should do it.
They sell used companies.
Investment Company Act Of 1940
This act regulates companies that create and distribute mutual funds to the public.
This is really a grade, more or less. The USDA grades beef. Why shouldn't a bond rating agency grade bonds? Using the S&P system, all ratings at BBB and up are considered investment grade. For more information, see www.moodys.com.
Well, we all wanna make money, right? Duh. But the question revolves around how we wanna make money. As a registered adviser, you have to know what your client is trying to accomplish, and this requires you to know something about the client's age, current life situation, attitude toward risk and other variables so that you can guide him to appropriate investments.
Investment Policy Statement
This is related to "know your customer." Once you determine the investment strategy, an investment policy statement is a written document that serves as your road map going forward.
What is the investment strategy? Growth? Income? Some blend of both? Value? The answers will indicate the investment style.
Retirement. That’s what the IRA is about and we don’t mean new Goodyear’s. Whether you realize it or not, your parents have probably paid into an IRA much or all of their working lives. They will live off of that nest egg (rather than off of you) until they are Gone. The IRA was set up to wean American workers away from the ‘retirement-to-grave’ pension structure that American corporations were so desperate to shed.
A well-publicized pithy maxim about the stock market in the late 1990s. Alan Greenspan was Chairman of the Fed in those heady days and he couldn't figure out why stocks traded at such high multiples relative to their earnings. Or maybe he was just torqued because his buddies were making the sick money and he wasn't. Anyway, he testified before Congress and uttered his deathless opinion that valuations were "irrational" as the exuberance of the market had pushed the S&P 500 to trade at all time high multiples of about 27x earnings. For a few days, the markets collapsed, but then exuberance again took hold and the markets continued their rise.
Issued shares are the shares outstanding which represent ownership in the company who issued them.
IBM wants to raise debt to buy a competitor. It issues debt - and it is the issuer who is on the hook to pay it back. Facebook wants to raise equity capital to further suck time from web users. Facebook sells shares of its stock on an IPO - it is the issuer of that stock.
Many states are legalizing the distribution. The magic dragon, he did puff, uh huh.
A joint account is also one that is held in more than one name and therefore has multiple owners.
Joint Tenants With Right Of Survivorship
Here's a hint: If you married someone significantly more attractive than you and twenty years younger, or someone who may or may not be on the "FBI's black widow" list, this may not be the brokerage account for you. In a JTWROS account (the acronym just flows off the tongue) the partner automatically gets everything in the account on the death of the other account-holder.
See high yield bond.
Junk is just a "sexy" term from the 1980s when bad hair was in.
A tax-deferred qualified retirement plan that is utilized by self-employed individuals.
It's a flying butterfly karate move on a karate mat but on Wall Street and in corporate America, it's illegal. Specifically, a kickback is when a buyer who is supposed to be buying on behalf of the best interests of her company, gets money "under the table" or privately (think: briefcase full of cash exchanged on a wharf at midnight) in return for placing a big buy order with the seller.
Know Your Client
You should. And you are legally bound to do so. Before opening the account, you need to know with whom you are dealing (note the exquisitely proper grammar). And "know your client" also applies to the investment advice that you render. You need to know your client's overall situation to determine the appropriate investment strategy.
As in large market capitalization companies - lots of shares times lots of dollars per share. Most mutual funds these days define large cap stocks as those with market caps over $15 billion. AOL used to be a Large Cap ($100 billion+ market cap; Today its market cap is about $2 billion).
Law Of Supply
This fundamental economic principle states that as prices rise supply will increases, and as prices fall supply will decrease.
The quarterback investment bank in an IPO.
LEAPs are "long-dated options". They are used for hedging positions with longer term holdings. Example: Crazy Uncle Fester died and left you his fortune, which amounts to 10 million shares of GE. (He had a thing for light bulbs.) You are very happy being worth a few hundred million dollars and just don't want to lose that money. But if you sell the shares, you will pay a tax because the IRS views that process as a "constructive sale". But you would likely be able to construct a LEAP which hedges your position and allows you to play golf all day and quit the burger flipping gig you used to have.
This is a list kept by fiduciaries of specific investments that they are allowed to make on behalf of their beneficiaries. Legal lists apply mostly to the Prudent Man Rule but are not used much today.
Letter Of IntentDefinition
A signed document by an investor purchasing shares in a front-loaded mutual fund that will allow the investor to achieve a lower sales charge (see sales load
) immediately, even if the investor has not actually purchased enough shares to qualify for the reduced charge. The LOI indicates the investor's intent to buy additional shares in the future, but note that it does not require the investor to do so. To ensure that the investor actually follows through, the mutual fund company will hold some of the shares in escrow and if the shareholder ultimately fails to purchase enough shares, it will sell those escrowed shares. End result: the mutual fund company is not getting screwed in this arrangement.
London Interbank Borrowing - LIBOR is the rate at which the British banks loan money to their safest customers.
Last In First Out - it refers to an accounting system where inventory is assessed based on the most recent purchases.
This is a method for buying or selling securities wherein the buyer sets a limit on how much he will pay or how little he will sell a given security. So aptly named. A buyer might be looking at GOOG trading at $500 a share but only wants to pay $490 a share for it so she'd type in the "limit" box on her E*TRADE account 490, 100 shares. If GOOG trades down to that level during the time at which the limit trade is set, then she is the proud new owner of 100 shares of GOOG. If it never gets there and takes off screaming to $600, then she's out of luck and never got the ride.
Refers to a business having a corporate structure wherein the company shelters the individual from unlimited liability.
A Limited Partnership is a financial gathering of investors who come together for a purpose. A common and popular form of limited partnership is a venture capital investment company. The guys who invest the money are called the General Partners and the suckers - er, people who give them the money are called Limited Partners. Limited partnerships have a lot of potential tax goodies but only if the limited partners are truly passive - they can't participate in the management of the partnership. Being a limited partner can require a lot of faith and a very strong stomach.
Line Of Credit
A commitment from a bank to lend money to a borrower. Basically, the money is "available" should the borrower decide to borrow the money. The borrower typically pays some fee to the lender in return for extending the commitment. Loans made pursuant to a line of credit can be either secured or unsecured, but usually they are unsecured.
A market with lots of volumes - investors can convert their holdings into cash quickly.
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.
Securities that are listed on an exchange, such as the New York Stock Exchange or the London Stock Exchange.
A mutual fund which charges a (usually up front) commission or load to get in. It then usually has lower fees as a result of the load up front.
See bondage. But also note that "lockup period" refers to the time during which investors in a company cannot sell their shares, usually after an offering to the public has occurred. For example, in most cases, a "standard" lock up is 6 months in the case of venture investors in an IPO, for example.
In most IPOs, there is a required lock up provision for insiders. Those people are the earliest investors in the company, its senior management and others of similar ilk. The required lock up is an integral part of the 144a laws which tried to prevent insiders from dumping their shares on the unknowing public 5 minutes after the stock went public - and they knew that the company was a total dog who'd miss its earnings numbers but a lot. For most lock ups, the provision is a minimum of 6 months' hold time before insiders can sell.
Some guys brag about this. Others just keep it to themselves.
Long in the stock market generally refers to believing a security will go up or increase in value. Being short is the opposite and some guys compensate by driving convertible sports cars fast.
Long also means that you own something outright.
A s tock option trader term in which they make a bet that the market is going to get more volatile or that the VIX will go up.
Long Term Capital GainDefinition
Long term capital gain is a type of tax on investment gains. It happens when an investor holds a security for 1 year or longer and the tax rate is meaningfully less than its ugly step-sister, the short term capital gain. At the Federal level, the current Long term capital gain tax rate is 25% but this figure is likely to change when/ if Congress finally tackles the issue. There is usually an incremental tax at the State level on these gains. The goal of this system is to encourage investors to be more patient, to hold their investments longer, the broader gain being, in theory, a more stable stock market. See Short Term Capital Gain
A management company is the group of professionals hired by a mutual fund distribution company to manage the money that the distribution company has raised. The management company may or may not be related to the distribution company, but in either case will receive a fee for the management.
The fee that the investment manager charges for, yes, managing the investment. Shocking.
See Margin Debt
. You are borrowing from your broker for a portion of the investment. If Schwab is offering up to 50% margin and you have opened an account with them for $100,000, you can buy up to $200,000 worth of securities. The margin is the amount you have to put up; the broker lends you the rest. In this case, your $100,000 would represent 50% of the purchase price of $200,000 in stock.
An account in which an investor can borrow against his or her own securities.
If you are on margin and your position gains in value, that's great. But if you're losing ground, remember that your broker who loaned you part of the purchase price is along for the ride. That losing position is the collateral for the loan, so if the collateral is eroding, your broker will call you and demand that you put more money -i.e., more collateral - into your account or else the broker will close out that position.
Margin debt usually refers to the notion of borrowing from yourself. More or less. Here's how it works in practice: You want to buy a car, a new one. You can do one of three things really.
One: Sell stocks that you've owned "forever" since your Bar Mitzvah and pay a lot of tax on them because they have huge gains. It's nice that they have big gains but net of the taxes, they look cheap to you and you wouldn't want to sell them if you didn't have to because you think they can double in the next couple of years.
Two: Borrow money from the auto dealer to buy the car. You know what kindly loving people auto dealers are, right? They'd give you the loan cheap and the car cheap because you are their friend...right. You want to be able to negotiation hard and with your own cash rather than have to turn your pockets inside out and beg. So rather than have your pockets picked by the friendly auto dealer, you try Door Number Three:
Three: Borrow from yourself. Yeah, you can do that. Set up your shares at a Schwab or E*TRADE or Scottrade or any other brokerage. You pledge your $50,000 or so of stocks (most brokerages will let you margin up to 50% of the total). So you could borrow in theory up to $25,000 from yourself.
Now the brokerage will charge you margin interest but that price is almost certainly less than the auto dealer would charge you and by coming in with cash to buy the car you almost certainly get a better deal. The big risk in margin debt like this is borrowing "too much" - that is, if you borrow $25,000 and your stock portfolio goes down 2% the next day, you will suffer what's called a "margin call" and will be forced to either find cash from mom or some other source to make up the difference or sell stocks, pay taxes on them and then meet your margin minimums.
Specifically, a 2% loss on a $50,000 portfolio is a loss of $1,000.
The cost of renting the cash to borrow against your own securities in a margin account.
The number of shares outstanding times the stock price gives you this figure. It's the value that the market is placing on the company.
Market If Touched
A limit order that becomes a market order when a certain price is reached, or "touched."
A market maker "makes a market" in a given security. That is, some guy at the NYSE put up a few million dollars of his own money to buy and sell shares of GM. He has various rules he must follow and as long as he is a good boy, he can offer GM at $34.12 (where he is a seller) and bid for GM at $34.02 where he is a buyer - and live off of the dime per share spread. He'll need a lot of dimes to pay his bills.
Manipulating a market is a nasty thing to do and is illegal in the United States. (Good luck in other markets...) There are a lot of different schemes, such as wash trades, but the common element for all market manipulation is that they attempt to influence the price of a security or a basket of securities through buying and selling actions that have nothing to do with the fundamentals of the security itself.
A market order is a way a customer places an order for a security. That is, she calls her broker and says, "Gimme 1,000 shares of Coke at market." The broker looks at her screen and says, "Okay, KO is trading at $68.42. It's yours here." "Market order" means that it's the price that the market is giving that moment for the securities.
There are various ways in which risk manifests itself. Company risk refers to the risk that an individual company blows up - that is, it turns out that vitamins are actually bad for you and the industry that sells expensive horse serum that contains some rare form of Vitamin X goes under. There is currency risk as well - you buy shares in a Brazilian real estate builder who does great, but the Brazilian currency suffers in the world market because of local inflation and the investment ends up sucking. Market risk is just the risk of the entire market going down.
Illegal manipulation of a security's price by trading back and forth between two different brokerage firms without any economic rationale for the trading. The act of frequent trading would alter the price of the security to the detriment of other investors.
In determining whether or not you have inside information which would preclude you from making a trade, you have to determine whether or not the information you stumbled upon was material - or worth anything. You're standing in a Manhattan elevator and you overhear the CEO's doorman say, "His chief competitor has been here every night the last 3 nights for poker. I bet they are merging. Both stocks should go up a ton." That's almost certainly not material. But if the CEO's wife is standing there with the doorman and nods slowly after he utters this hypothesis, then it's almost certainly material and you can't trade in either stock.
What we don't have a Shmoop. It's also when a bond comes due and is payable. Like a fine wine, it matures". We hope to never get there."
Mergers And Acquisitions
Refers to the arena in investment banking that services the purchase and sale of used companies.
For margin transactions, the minimum level of equity that the investor must maintain in the account. It is calculated based on the market value of the securities in the account. In simple terms, "equity" in an account means the market value of the securities minus the margin loan. "Maintenance" is a percentage of the market value. If the minimum maintenance percentage is 25% (and it is, but most brokerages have a higher requirement), the value of the account is $20,000 and the equity (market value minus loan) is $4,000 (this means that the margin loan was $16,000), you first multiply the market value by the minimum required percentage, or $20,000 X 25%, which is $5,000. Compare the equity ($4,000) to the required amount ($5,000). If the equity is less than the required amount, the investor must either sell some of the securities or deposit enough money to bring the account equity back to the minimum requirement.
Modern Portfolio Theory
Think: Diversity is good. Risk equals reward. Modern portfolio theory builds a portfolio of securities that aims at offering a reward commiserate with the risk of the portfolio.
The process of using legitimate activities to hide the proceeds of illegal activities. Investing in securities is one way how the bad guys "cleanse" their ill-gotten gains. Money laundering is highly illegal and, if found guilty, you will spend some time in the Crossbar Hotel. Don't do it.
The money market is an odd name for short term bond paper. Many people want to park money for just a few months or so. As a result there is always huge demand for short term money which is relatively safe and highly liquid. It's called "money market" because it was sold as being the same as your checking account, i.e., money in the bank.
A ratings service for the credit worthiness of... credit.
Moral Obligation Bond
San Diego issues a bond and the state of California might decide to pay the bondholders if San Diego defaults. This isn't a legal obligation, but rather California deciding to "do the right thing."
There is a widely quoted list of the most actively traded securities each day. If a security is active, it usually means that something is going on that investors should pay attention to - either the stock whiffed their quarter or is getting bought and arbitrageurs are buying the snot out of if or there is some new fancy product announcement that the Street gets all excited about.
A bond issued by a municipality - think: Parking facility, water rights, power, The muni bonds are often backed by the assets themselves and the big discerning feature of muni bonds is that they are exempt from Federal taxes.
The folks who get together and sell muni bonds to the public.
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."
See covered options
. To be "naked" means to sell options where you don't have enough of the underlying security to protect you against adverse price movements. If you have sold call options and don't own the stock, you stand to lose a boatload of money if the stock price rises, because you have to buy the stock on the open market in order to satisfy your delivery obligation with respect to the option.
National Association of Securities Dealers. Known by its acronym of NASD, this was the predecessor to FINRA and was established as an industry trade association. The SEC elevated its status when it gave NASD the authority to police its own members.
The "electronic exchange." Dealers in OTC stocks and other securities indicate their bid and ask prices. Orders are submitted and filled electronically.
NAV - Net Asset ValueDefinition
NAV is the price at which a mutual fund closes each day. See mutual fund
and closed end fund
. It is calculated by dividing the end-of-day market values for the portfolio by the number of shares issued.
A type of binding contract that sets the standards under which bankers will underwrite an IPO - the deal is... negotiated. Duh.
See competitive underwriting
. A process where both the purchase price and the offering price for a new issue are negotiated directly between the issuer and a single underwriter.
The infamous "bottom line" and not related to housewives shopping at Wal-Mart in overly tight spandex. Net income is the after tax earnings of a company.
Net Present Value
NPV is the summation of all of the discounted cash flows in the future plus a terminal value of the company. It is the net after time-value-of-money discounting has happened for what the company should be trading for (its valuation) today.
Having a lot gets you on the Forbes Top 100, and gets you lots of dates. But for a company, it boils down to assets minus liabilities. Nice and straight forward.
New Account Form
The form that the SEC and FINRA require for all new accounts.
Nine Bond Rule
Very esoteric. We love showing how much trivial information we know. The nine bond rule is a NYSE rule that says that all orders involving 9 or fewer bonds must be kept on the floor of the exchange for one hour. If the order is not filled within that time, the customer can ask the broker to try to fill the order away from the exchange, or Over The Counter.
One of the great financial marketing phrases of all time, "no load" refers to commissions paid when investors buy mutual funds (and index funds and other funds but when this term was coined mutual funds ruled the Earth like dinosaurs 80 million years ago). Ever hear of a free lunch? Ain't none. Same deal with this concept. Instead of paying a 2-5% commission up front and then having an investment management company manage the money for 0.8% a year in management fees, no load funds charged 0% commission up front but then investors paid 2% per year in management fees. So if they held their funds more than a few years, they screwed themselves by not reading the fine print. No load funds are fine if investors are trading mutual funds like stocks but most investors have better things to do with their time like put braces on kids' teeth and sink 12 footers to win the U.S. Open.
A bond may say, $1,000 par value, 8% coupon, due 2034. The bond may trade up or down from that $1,000 but its nominal yield is 8%. Nom" is name in Latin. We showed up in class that day.
Non-Cumulative Preferred Stock
Preferred stock that does not require the issuer to pay any missed dividends before it pays dividends to the common stockholders. Definitely not the best investment, because the company is basically saying, "Yeah, here's a juicy 10% dividend, but if we decide it's not in our best interest to pay you, too bad."
Specialty funds - like a fund just in tech or healthcare or commodities. Think: Sector.
See qualified plan
. A non-qualified plan is a retirement plan that does not permit contributions to be made on a pre-tax basis. Instead, the deductions are allowed only when the employee begins withdrawing funds from the account.
Stock that doesn't carry a vote with it. Duh.
Ever wonder why Mo'hmar Qadaffi (Chief Disney character of Libya) ended up being so mean? We're guessing that he wasn't held as a child.
But on Wall Street, not held" means that the broker can choose when to submit a trade for execution if he thinks that he can get the customer a better price later than what's currently being shown. Not held orders only deal with timing. The broker takes no discretion on whether to buy or sell, nor as to how much.
New York Mercantile Exchange. Trades commodities like cotton, oil, lawyers.
NYSE - New York Stock Exchange
The Big Board. This is the oldest stock exchange in the United States. Although companies still might want to be listed on this exchange, the advent of NASDAQ and electronic trading networks has diminished its importance over the past decade or so. But don't tell them that; they get very touchy about it.
We are. Oh, man, how we are. But our spouses put up with us in spite of it.
But an odd lot also refers to an uneven number of shares traded in a transaction. Specifically, an odd lot is a multiple of shares that is less than 100. The reason odd lot is shouted out is that the transaction costs for a trade can be high and if the number is so small that the commission is a meaningful percentage of a given trade, maybe the trade isn't such a hot idea.
Odd Lot Theory
Small retail investors are so small that many can't afford a round lot of over 100 shares. Small retail investors usually suck. So the theory is that if you see a lot of odd lots trading, invest the other direction - it means lots of dental hygienists are starting to invest in complex technology stocks at 200x earnings.
. This is the price at which somebody is willing to sell you a security; the "asking" price, hence it represents the "ask" side of the bid-ask spread.
An account that has a number of investors. Similar to a mutual fund, but there are no formal shares issued; investor records are maintained internally by the fund. In theory, this provides anonymity to the investors.
Open End FundDefinition
See Closed End Fund
first. An open end fund is your typical vanilla mutual fund. That fund owns hundreds of securities and maybe millions of shares in them. Each day, the prices of those securities change and close at a given value. At that value, the fund then prices itself with a Net Asset Value which reflects the total value of the securities prices times the number of shares of each that the fund owns - then divided by the number of shares outstanding that are owned by investors in the mutual fund. An open-end fund must buy and sell shares in the fund at each day's NAV. Since NAV isn't determined until the end of the day, an open end fund will have no transactions in its shares during a trading day.
The price that is established for a security at the beginning of the trading day.
An option is the right to do something at a later date. It can be the right to buy or sell a security. Or it can be the right to date someone else.
Marybeth wants to buy $70 strike options in KO, which is trading for $67 a share now. The options expire in 3 months. She is willing to pay $6 for those options because she thinks KO will be at $85 or more in 3 months. The $6 she is willing to pay is her option premium.
An option schedule is a listing of the different strike prices and expiration dates available for a given security.
Options Clearing Corporation
A clearing organization that issues and guarantees both exchange-traded options and futures. It is owned jointly by many different exchanges, including the American Stock Exchange and the Chicago Board Options Exchange. It is regulated both by the SEC and the Commodities and Futures Trading Commission (CFTC).
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 refers to a tax rate which is applied to individuals' earnings. There are two primary tax rates in the United States: Capital Gains and Ordinary Income. Capital gains are applied to gains from investments and generally speaking, if they are held a year or longer, rates about half of the Ordinary Income rates are applied; if they are held less than a year, then Ordinary Income taxes are applied. At press time, the top ordinary income rate is about 36% and is applied to every dollar earned over about $380,000 for a married couple filing jointly.
Another term for common stock. "Ordinary," as opposed to "preferred."
Original Issue Discount
Bonds are usually issued so that the investor pays the face value. If an issuer is not paying interest on the bond, such as with a zero-coupon bond, then the issuer will have to reduce the upfront amount it receives. The difference between the face, or par value, and the amount received is the Original Issue Discount.
OTC - Over The Counter
Some babies are made this way. But on Wall Street, OTC refers to a marketplace which is entirely electronic. OTC transactions are not done through a formal exchange.
Out Of The Money
A stock option has a strike price of $88; then the CFO committed fraud. The stock is now at $5. The $88 strike options are $83 out of the money.
A market that is too high - too many buyers - they need to "sell" to rebalance. The term is complete journalist b.s. but it sounds cool.
How much capital was invested in the company? This is that number.
Paid in surplus is a balance sheet item. A company's common shares will have a par value. Assume that par value is $1. If it prices these shares at $10 on the IPO, the paid-in surplus is the difference between the par value and the IPO price, or $9.
Painting The Tape
A form of market manipulation. Two parties do trades back and forth with no economic substance. The trades appear on the broad ticker so it looks like there's a lot of activity in the stock. This is intended to create some buzz and attract "real" investors. Illegal. You can go to jail and marry Bubba for 3 to 5 years.
The stated value, usually of a bond. Most bonds are sold in $1,000 increments - you'd say par of a grand (if you were too cool for school).
"On equal footing" - meaning that legally the deal terms are the same among pari-passu investment term sets.
Polly wants the exact same cracker that her sister got. It means that a and b are the same.
Participating Preferred Stock
PPS is a term popular in venture capital circles. It is preferred stock that also participates in the profits of the company. Think of it as common stock on steroids.
When an intermediate, like a Mutual Fund or a REIT, immediately passes through" all income made to the members in order to avoid double-taxation. "
You work all day hauling bricks for a living. You get paid $18 an hour for doing so. That is NOT passive income. The passive stuff happens every 6 months when you clip your coupon from the $10,000 of bonds you have bought which pay $400 every 6 months. It's income that you don't have to labor for directly.
Occurs through investments in limited partnerships that invest in real estate, oil exploration, etc. These investments generate huge accounting losses at the beginning, which pass through the partnership entity to the limited partners. This could be beneficial to those partners who might have a lot of income from other sources and would love to offset that income with these investment losses. Sadly, the IRS has put a stop to that. Passive losses can only be used to offset passive income, i.e., the income that you get from those limited partnership investments.
Usually associated with companies that are considered very speculative. Often, penny stocks literally trade for, well, pennies. But there is no uniform definition. In fact, the NYSE considers any stock that trades for less than $5 a share to be a "penny stock." 500 pennies, in fact. So you could have some very large companies that are near financial death be classified as penny stocks, while some very small, extremely speculative and wildly volatile companies could sell for more than $5.
Where the rock star sleeps. Raise your glass to ‘em, baby.
The “pink sheets,” however, are the arena in which shares of delisted or very small, thinly-traded companies trade. These shares tend to be highly illiquid and have (maybe) a single dealer. They are the financial securities equivalent of the alien outpost from Men In Black II.
See Regulation D. A sale of securities to a small number of investors rather than to the general public. These types of offerings usually occur under a Regulation D registration.
A portfolio is a basket of securities. An art student carries a portfolio of her work in a big fat folder. Same idea.
Rights that prevent something from happening or give the owner of those rights to do something ahead of others. Like you get to invest in the next 2 rounds on the same terms as everyone else - you have a pre-emptive right to invest.
Another illegal activity (my, there seem to be a lot of no-no's). In a prearranged trade, a customer agrees in advance to buy or sell a security at a pre-agreed price.
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.
Here's the Red Herring, light - it's not official. It's like kinda sorta like what the real one will have but things are so hot, that we have to put one light weight version out now or our marketing people will kill us.
A bond that trades at a price higher than par value. This can happen if the bond has a higher coupon than the prevalent market rate.
Price Limit Orders
I'll buy 1,000 shares of KO at $85 and not a penny more." That's a limit order to buy at that price."
An IPO where a company sells shares that it minted in its own little share-minting facility.
Shares sold from a company which dilute other holders. See Secondary Shares.
The best interest rate charged by banks to its best customers.
Principal Protected Fund
Nothing in life is guaranteed except death and taxes, right? A principal-protected fund can be added to that list - sort of. The investment managers guarantee that the investor will do no worse than get their entire principal back. There are some caveats, however. First, you have to hold the fund for a predetermined minimum period. Second, the protection is achieved through investing in zero-coupon bonds that mature at the end of the protection period. As a result, the overall return on the fund will be lower by design. As a rule, these aren't good investments - in fact, they're like the sucker bets that exist in casinos.
Think of a bond as really being two parts - there is the principal from the bond which is due at some point in the future, almost like a zero coupon bond. Then there are the stream of coupon payments that happen monthly. Investors can strip out these two cash flows from bonds to suit their needs and then sell the bonds as principal-only.
That is, not publicly traded securities investing.
A sale of securities sold to private parties.
Pro Rata Rights
It means that you get to keep your proportionate ownership interest in the company in the next investing round rather than suffer dilution at the hands of other investors.
Computerized trades made by institutional investor. Program trades are generally for very large quantities and are done by entering the order directly into the market's computer systems. Because this can cause significant volatility, the exchanges usually limit the times when program trades can be placed.
The wealthier you are, the harder you get dinged with a progressive tax. The rates increase as your wealth does. Income tax is a good example of this: Make less than a given amount, and the IRS lets you keep it all. Make more than a given amount, your income tax rate increases more and more.
A document issued by a company that lays out everything an investor may need to know in order to make an informed decision.
If the US taxed 100% all imports, we would in theory be protecting" our domestic businesses - that policy would be protectionist."
Somebody who is authorized to act as an agent on behalf of another. In the context of The Seven, a proxy is a shareholder or representative of the company who solicits another shareholder for authority to cast that shareholder’s vote at the company’s annual meeting.
A vote. Bad management and board out; good management and board in.
A written document that the SEC requires to be sent to company shareholders in order to give those shareholders sufficient information about matters that will be voted on at the company annual meeting.
Is an investment appropriate given the investor's life situation, financial means, tolerance for risk, etc.? For instance, Bubbie should not be writing naked call options. Too much risk that Bubbie can lose a boatload of money.
Prudent Investor RuleDefinition
An outgrowth of the "prudent man rule
." Under this standard, fiduciaries are now permitted to invest funds in the same manner that a "prudent investor" would invest. As a practical matter, this now requires investing in a diversified portfolio, which means that stocks as well as bonds can be considered suitable investments.
Prudent Man Rule
A concept that applies to fiduciary responsibility. A fiduciary was required to invest funds entrusted to it in a manner that was consistent with how a "prudent" person would invest. The rule arose in Massachusetts and courts that interpreted it gradually accorded to it the meaning that the only "prudent" investment were in bonds. Equity was considered a totally imprudent investment. Most states no longer apply this rule, instead applying the "prudent investor" standard.
The sale of securities to the public. This offering can come in a few forms. There is an initial one - when a company has never sold that security to the public before, famously called an IPO. And there are also secondary offerings - a company's stock is already traded but it is either raising money for itself or a group of insiders want to sell as one block trade their shares to the public, seeking liquidity
Public Offering Price
This is the difference between the price you pay for a mutual fund and its NAV. The Public Offering Price is relevant only for mutual funds that impose a sales charge.
In the Golden Age of Times Past a nickel bought you a candy bar. You had the power to purchase twenty candy bars with one dollar. Now a Big Hunk costs you a big chunk of change, $1. So the purchasing power of a dollar declined from then to now. Purchasing power is a measure of how much one unit of currency buys in a certain place or time compared to what it buys elsewhere. How much candy could you buy with $1 in Quebec?
A put is a type of option, which allows the holder to sell at a given price and by a given date a security to the gal who sold him the put.
These are dividends that carry a maximum 15% tax rate. Restrictions apply. See manufacturer for details.
A "qualified" retirement plan means that your retirement plan is in compliance with regulations which make it tax advantaged.
Harvard used to have a quota for how many... blonds and how many brunettes it would admit. They don't have that quota system any more. Quotas are limits on how many of a certain item can be imported at a time.
RAN - Revenue Anticipation Note
A form of a municipal bond. Very short-term. The municipality is borrowing money as a "bridge loan" until it completes a larger muni bond offering and part of the proceeds from the larger offering will be used to repay these notes.
A belief that the market is unpredictable - it will randomly walk where it wants to and you can't beat it. Don't tell Warren.
You bought GE at 10 bucks a share. You have held it a few years now and it's at $30. Nice big fat hefty gain. The problem is that it now represents almost 30% of all of your holdings. So you want to sell half and take off some GE-specific risk. When you sell, you will "realize a gain" of $20 a share. Converting stock into cash is "realizing". If you'd just held and not sold, the gain would be "un-realized". You aren't taxed in the U.S. on unrealized gains (but you can be in some other countries).
See realized gain
. You bought GE at $30 and then sold it a few years later at $10 a share. You have realized a loss of $20 and likely also realized that you have no clue when it comes to investing in GE.
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.
When a person who did something bad, like Ghost Rider, does something good to make up for it, that's redemption. When your cousin Larry pays back that thousand dollars he borrowed over three years ago, that's also redemption (and a good way to keep the family on friendly terms). Redemption is the paying off of debt.
When a security is issued, it can take one of two forms - either registered or bearer. When in registered form, the corporation acts essentially as the transfer agent - that is, they know who has the security. If you sell it, they are notified and then keep a record of the new owner, how to reach them, how to beg them to vote YES on board resolution 19, etc.
Most securities today are issued in registered form - governments want to track who owns what in what companies. Shares of stock and store tremendous amounts of wealth as well - so evil-doers of the world have loved bearer form securities because they could hide the wealth in creative ways before unleashing their next attacks.
A person who passes The Seven and who has good moral character (sorry, that previous meth lab conviction will be a problem).
A document filed with the SEC prior to an IPO that includes the company prospectus and other vital statistics.
The opposite of a progressive tax, this is tax that affects the poor more than the wealthy. An example of a regressive tax is a sales tax--everyone has to pay the same amount of sales tax, no matter what they buy, but 10% extra for groceries is a much greater burden for the poor than the wealthy.
Refers to the way in which trades are settled.
Any offering valued at less than $5 million in any 12-month period is not required to be "full-monty" registered, but there is an abbreviated registration that is required.
This refers to private placement offerings, which don't need SEC registration. An offer of Regulation D securities can be made to an unlimited number of accredited investors and up to 35 unaccredited investors. Investors purchasing Regulation D securities are subject to Rule 144 lockup provisions.
FD = full disclosure, not fire department. Although you'll need one if you don't fully disclose.
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.
Real Estate Investment Trust. Kind of a mutual fund for real estate investments.
Relative Strength Index
The stock was up 10%. Great. But the whole market was up 20%. That stock had low relative strength.
The date when the rate adjustment of a dividend is set. "The preferred shares of BUBB will pay an interest rate no less than 50 basis points more than whatever the 10 year T-Bill is yielding on the last trading day of each quarter." That day is the reset date and it has nothing to do with post-divorce match.com subscriptions.
Residual Claim To Assets
Common shareholders have this. If the company goes big bankrupt, they have a residual claim - basically after everyone is paid off, they get the residual.
A company will sell stock, often to a large investor, and not have to comply with the whole SEC registration stuff. The tradeoff is that the investor will not be able to sell that stock until it becomes properly registered.
Average shlubs. Dentists. Lawyers. School teachers. People who are not sophisticated investors.
Like an IRA, 401k, pension fund, etc. Key: not immediately or trading tax sensitive to short term gains.
Return On Assets (ROA)
Net Income/Beginning of Year Total Assets
We’ve got to get this figure from the balance sheet. But there isn’t much that’s interesting going on with SnowPlow’s balance sheet (for this discussion) so let’s make some numbers up. The assets of the company are simply the things it owns—land, leases, brand name’s it has purchased, etc. This ratio begs the question: How well are our assets being used? Let’s say the assets of SnowPlow are $50,000,000. Then the ROA is 16%. We have to ask what if these assets were used by someone else—could that other person use our assets better? Say SnowPlow’s assets consist mostly of the land its factory is on, the machinery to press the skis and a brand name “Rossignol” to whom it paid a lump sum up front plus royalties on sales (Rossignol doesn’t really do this but you get the basic idea).
What if we found that mini-mall developers were getting 50% return on land adjacent to where our factory was sitting? What if we found other applications for our ski-pressing machinery—high tech ironing boards?—and that return competitors in the high-tech ironing biz were getting 50% return. What if we found that the low-bran ski maker also leased Rossignol’s name and was getting much better returns than ours? Maybe at this point we have to reevaluate our company. What if we just picked up our team and moved our factory elsewhere? Maybe it’s not such a good company after all (relative to our competitors) and the next market downturn we’ll be out of business.
If we flip the number completely around so that it looks like we’re getting great ROA then maybe we can leverage ourselves a bit more based on our returns—maybe we can buy some other poor schlep’s lousy-running factory and land for a relatively cheap price (if he’s getting low ROA then we should be able to buy it for a low price). We can then turn those assets into better returns and we’re golden—this is sort of what Henry Ford did when he automated the car-making world.
Return On Investment
Put in a dollar. You expect to get more than a dollar back. If you invested a dollar and 3 years later you got back $3, your return was 300%. You made $2 in profits. But it's still written nomenclature as a return of 300%. If you invested $3 and 3 years later got back (like baby) just $1, your return was negative 67%.
The bucks you get from sellin' your wares. Also called "top-line" in kitsch Wall Street circles.
A municipal bond that that pledges the revenues generated from the project that is built with the amount borrowed. Toll roads, municipal parking garages, etc., are examples of projects that are funded through revenue bonds.
When a stock is sucking so bad, where it may be in risk of trading below a dollar and getting delisted, it reverse splits like 1 for 10 so that 100 million shares outstanding at a dollar each becomes 10 million shares outstanding at 10 dollars each.
Reverse Stock Split
Sort of like a stock regeneration. Instead of 1 share becoming 2, 2 shares become 1. Just like with regular stock splits, there is no economic impact from this action; it's really just window-dressing. If you had 20 shares at $10 before the reverse, you'll have 10 shares worth $20 after, but your investment is still worth $200.
Grannies. Tea-totalers. And those afraid of their own shadows. They are all risk-averse people. They don't want to take unnecessary risk. So you look hard at putting them into T-bills, bonds, and other super safe stuff. A basket of leveraged small cap equities is likely not the right recommendation for them.
When the band bangs a tambourine, hoping to get all the relevant investor to put in buy orders for an IPO.
Typically using debt, when a company buys a bunch of smaller companies to create market power in a domain - it can then raise prices and margins go up a load. That's the theory, anywya.
A hundred shares.
Rule Of 72
A nifty little equation that lets you use the number 72 to figure out how long it will take for you to double the value of your investment. Just divide 72 by the annual rate of return on an investment to find out how many years will take for it be worth twice as much.
You buy a bond for $1,000 at an annual rate of 8%. Divide 72 by 8 and you'll find out that it'll take you nine years to double that 1G.
A broad market index of 500 major companies
in the US. Most investors think of the S&P 500 index as being the market.
Sales Charge, Sales Load
The amounts that mutual fund companies and/or their distribution companies or partners tack on in addition to the NAV price to pay the sales force for having sold the fund.
Bonds generally operate in two modes: either they have a high sales charge or load and have low annual fees, or they have low or no load and high annual fees. Which should you buy? The answer depends on old time duration. If you are going to trade funds on a regular short-term basis, then no-load funds are probably just fine. But do the math on a no-load fund charging 2% per year versus a load fund charging half a percent per year. If you paid a 5% commission to buy a load fund, you make back all of your commission and then some if you have held the fund for years or longer.
When a company "hopes" that next quarter they can do $82 million in sales - and then they actually print $114 million. They are said to have been sandbagging when they gave the $82 million guidance. Aapl is the most famous company in the world for doing this.
Accounting laws enacted in the early 2000s era in response to accounting chicanery that befell some major companies and got a few CEOs and CFOs 10-20 year dates with Big Bubbah.
Back in the day, this was your grandmother's preferred birthday present to you. Savings bonds are issued by the Treasury and are a simple and cheap way of lending to Uncle Sam. There is no stated maturity date, but interest would be paid for a certain period. After that period ends, the bonds no longer pay interest. Also, interest isn't paid each year; instead, it's tacked on to the existing principal, so when you cash it in for college (or that bitchin' '69 Barracuda), you receive the face value (they're usually sold with a $500 face value) plus all that accrued interest.
Do re mi fa so la ti do! The term also refers to the way companies can grow. If a company sells a widget for a buck and that widget costs them 85 cents if they make a million them a year; and it only drops to costing them 80 cents if they make a billion of them a year, then that company 'does not scale'. The opposite would be a software company which might cost $30 per unit for the first million units but might drop to $2 a unit on the next hundre million - if the retail price stays around 50 bucks, thats a lotta mega profit.
An offmarket offering platform for selling shares of non-public companies. Facebook "made" 'em.
When a company sells shares after an IPO.
Seems sort of obvious, yeah? A mutual fund that invests in a particular sector, such as semiconductor companies, or companies that supply equipment for oil and gas drilling.
A secured bond is just a bond that has a specific element on a company's balance sheet that guarantees that should things go awry, that bond will be paid by liquidating that asset. The asset "secures" payment of the principal and back interest of that bond.
A lender who has taken a security interest in some asset of the borrower. Secured is better than unsecured because you have something to grab and sell if the borrower defaults. But you have to ask how real that security is: if you have a security interest in a nuclear power generator, just how easy is that thing gonna be to sell?
Securities Act 1933
The Granddaddy of all the securities law. Imposed a regime that companies had to register their offerings before they could be sold to the public.
Securities Exchange Act 1934
This law basically made the New York Stock Exchange a quasi-government entity. It also established the SEC as the watchdog for the industry. And made insider trading a no-no. And a few other things. But the ones we listed are the biggies.
The generic term for anything that you can invest in. Stocks, bonds, mutual funds, REITS - all of them are securities.
An order to sell a security, but you have restricted it so that it can be sold only at or above a certain price.
Brokers. Brokerages. People who SELL stocks for a living. Their counterparts are the BUY side who manage money for a living. The two arenas are tangential but vastly different in mindsets.
Sell Side Analyst
An analyst who covers a given area of expertise - like oil drillers or autos or internet media. They publish reports in hopes that because of their witty insights, clients will trade with their desk instead of those of the competition and pay nice little commissions many times over.
If you have sold a security short, you lose money if the security goes up in price. To cap your losses, you would issue a "sell stop" order. This would close out the short position once the price reaches a certain point.
An investing account that is in the name or names of specific individuals or entities.
The process of clearing trades, so that the buyer gets his stock and the seller gets her money.
Sales, General and Administrative expenses - this is a key line on an income statement
One who holds a share. Duh.
The number of shares a company has that are outstanding. That's not like "outstanding" as in amazing, mind you.
Company X has all hundred million shares outstanding in the stock moved from $12 a share in January to $34 a share by December. How much market capitalization or the value did it gain? Well, at $12 a share, the company was worth, according to Wall Street, $1.2 billion. By December, it was worth $3.4 billion for a gain of $2.2 billion. The shares outstanding did not change. It was only price appreciation, which added value to the company. The company could have acquired another company using only its stock. For example, it might have paid 50 million shares to buy company Y. It would then have 150 million shares outstanding. If the street liked the purchase and the stock traded up to $20 a share, then the new market capitalization would be $3 billion.
Short Interest Theory
This investing theory notes that stocks with lots of investors betting that the stock will go down—will in fact likely go the other direction. Part of the reason for this is that eventually the shorts have to buy back their short position or cover it so if they are "spooked" by good news, the stock should rock.
Selling something that you don't currently own because you think the price will go down. You borrow the security and sell it. If you're right, the price drops and you buy it back later for less. Put another way: your Granddad always said, "buy low, sell high." This is just "sell high, buy low." The net result is the same.
Short Term Capital Gain
Gains on the sale of securities that you held for less than 1 year.
Short Term Capital Loss
Loss on the sale of securities that you held for less than 1 year.
When an investor makes a bet that the price of shares will decline. Being long a stock means just owning it.
A company with bonds outstanding will buy a portion of the bonds each year by making periodic payments to a trustee who then buys a portion of the issue on the open market. Investors prefer sinking funds since they greatly reduce the risk of the issuer's defaulting on repaying the principal at maturity.
Company X has $100 million a year in free cash flow production. It has 10 bonds outstanding, each of which has a $50 million face value. The company takes half of its free cash flow to retire those bonds—or buy them back—thus reducing the leverage and risk to the company's balance sheet.
The Securities Investor Protection Act
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.
This refers to stocks that have a small market capitalization. Usually this means that the company doesn't have a lot of shares outstanding.
The term "small cap" usually refers to companies under $1 billion in capitalization. Yep—on Wall Street, that's small.
Not a Nike store. It's when one person just owns a company. Key issue: Unlimited liability should something go wrong.
Special Memorandum Account
In transactions involving the use of margin, SMA represents the available credit that the customer is able to borrow from his account or use to purchase additional securities.
A member of a stock exchange who is responsible for maintaining an orderly market in a particular stock or stocks that are traded on the exchange. The specialist is required to provide liquidity through purchasing shares when there are no other buyers, and selling when there are no other sellers. The specialist maintains a book that shows all limit and stop orders for the stock. This is considered inside information, but specialists are specifically exempted from the normal insider trading rules as long as the trades made on inside information are to maintain an orderly market.
The difference between the bid and the ask price. (See bid-ask spread
Spread To Treasuries
It's how bonds are priced, a high spread is like Treasuries-plus-a-thousand-basis-points or if Treasuries are yielding 4%, these risky bonds would be yielding 14%.
Imagine this as being the "perfect storm" of economics. The economy is not growing, so there is a lot of unemployment, low interest rates and general malaise, but at the same time prices are growing. A combination of stagnation and inflation - most assuredly NOT good situation to be in.
For every share you have, you get one vote. Yawn.
The company might decide that it can put its extra cash to better use than paying it as a dividend, so it might instead decide to give the shareholders a stock bonus. Stock dividends don't have any effect on the shareholders' overall wealth. Yes, they own more stock, but the pie hasn't gotten larger; all that happened with the stock dividend is that there are more (and thinner) slices in the pie.
Stock Option PlanDefinition
A stock option plan is just the uh…plan…under which the company can issue stock options. That is, it specifies the number of options allowed to be issued, what the options are like - i.e. their vesting provisions (how many years before your work tenure has earned them), the rules they will follow for giving a strike price (i.e. 409a Plan
), and the duration or life they will live (i.e. 7 years and then you use 'em or lose 'em).
See stock dividend
. They are identical in result.
Investors get all excited when they hear news of a stock splitting. Economically, this event means next to nothing. All it does is take a pie that's divided into six slices, and in the case of a 2 for 1 stock split, divide that pie into 12 slices. Or, said another way, an $80 stock becomes two shares of a $40 stock.
That said, companies usually only split their stock this way when they are bullish on the future returns. There is also a funky thing called a reverse stock split, in which case a company goes from having, say, a two-dollar stock, and in a 1 to 5 reverse split, that two dollar a share hundred-million share company becomes a $10 a share 20,000,000 share company.
Stop Limit OrderDefinition
See Stop Loss
, Buy Stop
, Sell Stop
...hell, all the stop references. The wrinkle is that this type of order combines the features of a stop order and a limit order. If you're short the stock, you probably entered a buy stop to limit your losses. The "limit" is that you don't want to execute that buy stop at a higher price than the buy stop price.
A trade order that is designed, as the name suggests, to stop the bleeding. See buy stop
and sell stop
Okay so you've bought a stock at 43 bucks share average cost. 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 $43 to sell everything at $25. It’s lucky you did so because the stock closed the day at three bucks a share as it was sold to Jhirmack shampoo for a song. La la la.
An option trade that involves buying both a call and a put with the same strike price and expiration. You'd do this because you think the stock is going to make a big move, but you don't know whether it will be up or down.
When those stocks are going crazy, straddle them! Or in this case, strangle them! A long strangle takes advantage of volatility. An investor must buy a call option and a put option with the call strike higher than the put strike. Capture that craziness!
Shares are held in the name of the broker, rather than in the customer's name. It makes transfer easier when the customer sells them.
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.
A corporate bond that is lower in priority—i.e., subordinated—to other debt that the company has incurred. Typically, large companies have many series of debt. Comcast, for example, has had over two dozen different layers of debt in its history. The lowest rated bonds in that stack get paid off after all of the more senior bonds are paid. Hence, the nomenclature as "subordinated."
A written form that is used to determine if an applicant is suitable to become a limited partner in a DPP. The subscription agreement will contain item such as the applicant's net worth, income and past history of similar investments. It will also spell out the risks that are entailed with investing in the DPP. The lawyers who drafted the thing will use all kinds of weasel language that confuses more than enlightens, but basically you know going in that (a) DPPs are really risky, and (b) it's likely that you'll lose all your investment. Even if they don't really believe that it will be quite so bad, they'll make like it is. Like those annoying forms that fall out of your magazines, this is a form and an agreement that investors have to fill out in order to become members of a limited partnership.
Like the over-powered Superman, Super-Vote Stock owners have beefed up voting abilities above and beyond the rest of the stockholders.
Sometimes founders have an emotional connection with their companies that extends far beyond their financial involvement. So they give you a special clause in the governance of the company that gives them a special class of stock. That stock often carries a much greater voting power than the economics would dictate for the number of shares that they own.
For example, a founder who economically owns 20% of a company might have 5 to 1 super voting stock, in which case that founder's 20% economic share gets treated under of vote as if it is hundred points votes against the 1 for 1 normal shares owned by everyone else. That is, the founder can't be fired by the board.
Super voting stock isn't always just about ego. Wall Street often acts with short-term greed and the super voting stock allows companies to make long-term backs in the best long-term greed interests of the company.
This is the trading system used by the New York Stock Exchange for limit orders, small orders and program trades. It is considered more efficient in that it routes order directly to a floor specialist for execution rather than through a broker.
A term applied to a series of economic theories that emphasize strengthening the economy through policies aimed at producers and suppliers of goods and services. Supply-side advocates support lowering business and corporate taxes and reducing the capital gains tax.
This applies to annuities. Most annuities require you to keep the investment for a minimum period (usually 7 years). If you surrender the annuity before then, the annuity company will usually charge you 1 - 5% for the privilege of doing so.
This is the amount of the surrender charge, usually expressed as a percentage of the original investment.
A group of underwriters assembled to handle jobs (issues) too big for one underwriter alone. Like the Avengers of finance. Only less cool and more nerdy. Actually, a lot of the Avengers are quite nerdy, so strike that last one. Syndicates usually consist of a lead underwriter, like Captain America, investment banks, and smaller broker/dealers.
The T here is time. And the 3 here are days. The T+3 thing refers to the time period from when your order to buy or sell stock is executed until you actually have the stock or the money in your hot little hand.
The shortest maturity Federal debt. T-bills have maturities of 91, 182 or 365 days.
Another form of Federal debt, but with a longer maturity. Anything that matures in 10 years or more is called a T-Bond.
Treasury securities with original maturities of between 2 and 10 years. Currently the Treasury issues T-Notes only with maturities of 2, 3, 5 and 7 years. Why not for 6 or 8 years? Who knows; the Treasury feels that's on a need-to-know basis but it seems that nobody is on that list.
Usually calculated on a per-share basis, this is the profit that a syndicate member makes when selling a stock.
$5 word for taxes.
Tax Anticipation Notes
Tax anticipation notes or tans use the collateral of a tax which a city knows it is due to collect n months from now; they issue bonds today in anticipation of that tax collection so that they have cash today to pay the cops' pensions. cops gotta eat them donuts, right?
For certain vehicles such as qualified retirement accounts, all ordinary income and capital gains are not subject to taxation until the account owner begins withdrawals. Such accounts are said to be tax deferred.
Tax Equivalent Yield
You have a choice between buying a corporate bond and a muni bond. The muni bond pays 5%, but the income is tax-free, while the corporate bond pays 10%, but is fully taxed. You are in the 30% tax bracket. Which bond should you buy? Answer: The bond that puts the most dollars in your pocket on an after-tax basis. Tax-equivalent yield = (Muni bond yield)/(1-tax rate). Doing the math here shows that the tax-equivalent yield for the 5% muni bond is 7.14%. In other words, you should be indifferent to buying a 5% muni bond or a 7.14% corporate bond if your tax rate is 30% because you'll have the same amount of money after tax. With our example, the 10% corporate bond is the way to go.
Tax Exempt BondsDefinition
Bonds whose interest is exempt from federal, state and local taxes. Municipal bonds
are an example of tax-exempt bonds.
Tax Loss Carry-forward
It sorta is what it says it is: If you have a tax loss - that is, a loss in operating profits in one year - you can "carry them forward" into next year. In fact, GAAP states that you have 7 years in which to use tax losses.
Do the math: Company X - Scooby Dude - pays 30% tax and it is based in The People's Republic of California. It has been a taxpayer all along, profiting nicely from its van decal painting business. This year it lost $1M on $5M of sales. It had just enough money in the bank to keep going.
When a popular political candidate adopted Scooby Dude to paint vans as part of their media blitz, SD made $3M in profits the following year. Normally SD would pay $900K (30% of $3M) in taxes but because they had $1M in tax loss carry-forwards, they deduct the $1M loss from the $3M to show a taxable profit of $2M this year on which they then pay 30% or $600K. Get it? Got it. Good.
The process of viewing whether or not stocks are a good buy (or a short or whatever...) based just on their generally recent trading history. The 90-day moving average is a big deal for traders, many of whom have ‘algorithmically driven' trading strategies - that is, when certain variables are mathematically hit, a "buy" (or whatever) signal tells them to ... do stuff.
A type of account with multiple owners. Each owner's share is proportionate to the amount of money they invested, and if they die their share goes to their estate and not to the other owners/members/tenants.
"Giving." Tenderly. A company might tender to buy back a million shares of stock from the public at $25 a share.
Why is it "tender
"? Because you gently, tenderly want sellers to voluntarily show up and sell you shares on the terms you outline. More flies with honey, honey.
A piece of paper that sets out terms of a deal. Sometimes on a napkin.
I invest $1,000,000.00 in you.com today.
In return, I get:
- 51% of your company;
- your lungs;
- your liver;
- your soul.
The Maloney Act
Another one responsible for the exam you're taking today, this created FINRA, the CBOE, and the SRO.
Greek symbol for time, usually in reference to stock option trades. Why not just say "time"? Theta sounds way cooler.
. When time decays or rather the stock option approaches its expiration date - the time value of the option "decays" over time.
Okay, so you got the "T" in theta as being the same letter that kicks off the word "time." Clever.
So let's set up a trade: 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.
That old thin streamy paper that used to be google finance in 1927. Stock prices were printed in ink on dead trees. When someone pitched a no hitter in a World Series game, they threw a lot of this stuff down on them in Manhattan.
See intrinsic value. All options have two components of value. Intrinsic value is how much you'd make if you exercised the option right now - intrinsic value can range from 0 to infinity. Time value is just the difference between the current price for that option and its intrinsic value.
The concept of time value relates to all of investing. That is, "a dollar today is worth more than a dollar tomorrow" (in a normal world). Why? Because today you can invest that dollar. You can buy stocks, real estate, commodities, bonds, ...whatever. And those investments give positive returns (risk adjusted) or you wouldn't make those investments. Even if you only buy a 1% very safe T-Bill that dollar today will be worth something like 1.00001 dollars tomorrow. The TIME involved in investing matters a ton: Warren Buffet has a great quote here that goes something like: "Wanna be a billionaire? Easy. Start with 100 grand of savings, put it in an index fund that goes up about 10% a year, and live to be 400 or so." For the R rated version of Time Value, see Discounted Cash Flow Analysis
Treasury Inflation Protected Securities. Exactly what they sound like, treasury securities designed to protect the investor from the negative effects of inflation. They are very low risk.
How LOUD IT IS ON THE TRADING FLOOR!!!! But really, refers to how many shares trade in a security over a given period of time.
ExampleCan you find it?
Keep lookin'...that's the number of shares that have traded thus far today.
The one in charge of making sure that a sold security gets properly placed with its new owner.
When a company buys back its own stock, it holds it as Treasury Stock on its balance sheet.
In a bond contract, the trust indenture outlines where the money is coming from and what happens in the unfortunate case of a default.
Trust Indenture Act 1939
This Federal Act requires any bond issue over $5,000,000 have an indenture before being offered to the public. An indenture is the laundry list of details about the bond, such as coupon, maturity date, collateral, etc. "The Trust" in the act refers to the requirement that the issuer hire an independent trustee who acts on behalf of the bondholders.
Two Dollar BrokerDefinition
An independent broker on the floor of the exchange who transacts business for other exchange brokers. Back in the day, they were paid $2 a trade.
. He's a two-dollar broker. (Hopefully not yours.)
UGMA is what you say when your mother tells you to go wash your face. It is also the acronym for Uniform Gift to Minors Act which is a law that was enacted in the '70s which set out the code under which minors can receive gifts from others and the taxes they'll pay for the privilege.
This is the entity that brings new securities to the market. They act as middlemen by purchasing the new stock from the issuer and immediately reselling it to the public. They get a nice profit from it, too.
Not to be confused with underTAKER—that's a different dark suit. 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 to The Street at a mark-up in price.
Unfunded Pension Liabilities
If a municipality offers a pension to its employees, often that pension results in obligations that won't come due for a long time, maybe several decades. It would be nice if the municipality put money in the bank on a regular basis to pay this obligation when it comes due, but there are two problems with this: (1) the municipality doesn't really known when this obligation will actually arise, and (2) it uses up money that politicians like to use for other things - things that get them reelected, for instance. As a result, the pension obligation is sitting on the books, but there's nothing yet going to pay for it. Until the city does start laying money aside, it's an unfunded obligation.
Welcome to Detroit, the place where greatness comes to die.
Oh, it was once such a great city. It was the Silicon Valley of the 1950s. The best and brightest from Harvard Business School all wanted to work there. Cars were King and the city bustled.
Then along came lots of public workers who wanted pensions as part of their compensation. Voters didn't really pay attention to the true costs of things and didn't think a lot about the future —and couldn't imagine that Detroit would one day be renamed LoserVille (and become part of a popular mobile video game).
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.
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 result was that the pensioners sued and will likely end up getting only a small part of their pensions. So much for great negotiating and financial mismanagement. Lethal combos.
Uniform Securities Act
An act that lays out the requirements for registering securities.
Unit Investment Trust
Aka a UIT. This is like a mutual fund, but without the management and with an expiration date. Like buying a pre-assembled bundle of securities.
It means you can have your pants sued off, literally. If you house your company inside of a corporate shell, there is usually not unlimited liability, i.e. if your asbestos truck blows up and kills a city, it's only your company that goes BK but you can take your own personal money and run.
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 so much 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.
Two words not by Nike: Do it.
Outlaws short selling on a "down tick." In order to short sell a share, you can only by on a plus tick/up tick, or on a zero-plus tick. Meaning, you can only short sell if the price of the share is higher than the previous trade. No jumping on the the roller coaster as it begins to roll down the hill.
After sleeping around, don't the Jersey Shore people have this? Oh, it's also the US Treasury Department. Same dif.
Uniform Trust to Minors Act was a law passed which allowed parents to reserve money for their kids in a tidy little legal entity which would then seamlessly pass to control of their kids by the time they were, say, 21. At that point, the kids can make their own mistakes investing instead of letting the parents make all the mistakes.
What's it worth? Why? If you can answer those two questions, you can snatch the pebble from our hand.
Let's pick a few systems which Wall Streeters use to "formally" value companies:
- Comparable multiple. That is, MyCompany.com trades at 27x this year's earnings; the S&P average is 16.5x earnings. But MyCompany.com is growing way faster than the "average" S&P company. But that S&P company pays a dividend. Yours doesn't. (Neener.) That's more or less how the conversation goes, anyway.
- This thing.
- Discounted Cash Flow Analysis.
A small menu of how bankers, investors and Cramer compare and value companies:
- Multiple of Sales—The company does $100 mil a year in sales. Buy it for... twice? Thrice times sales? What’s the industry standard? How are others trading?
- Multiple of Margin (Gross or Operating)—Same as above, only with margins instead of sales used as the delimiter.
- Multiple of Cash Flow—Often used in industries which don't really depreciate (like the entertainment industry—"Gone with the Wind" or "Snow White" might be worth more today than in 1932).
- Multiple of Earnings—the most common denominator. This valuation ideology is based on the precept that a company is worth the value of dividends it will throw off in the future. This means dividends paid to common stockholders plus the value of the company when the Argentineans buy it in 2009.
- Establishing the Health of the Company (We're going to pick some of the McDonald "dirty" Dozen ratios to illustrate some valuation techniques)—We'll use SnowPlow and just focus on today. In real life you’d have to cover every single blasted year but we’re in Cyberspace now so it's all right to slide a bit.
The McDonald "Dirty Dozen" Ratios:
on Sales (ROS) or Net Margin||After
Tax Profit/Total Sales|
Sales - COGS)/Total Sales|
on Assets (ROA)||Net
Income/Beginning of Year Total Assets|
on Equity (ROE)||Net
Income/Beginning of Year Shareholders’ Equity|
+ Stocks & Bonds… + Accounts Receivable)/Current Liabilities|
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)|
Interest Coverage (times Interest Earned)||(Pretax
Income + Interest Expense)/Interest Expense|
Turns (TURNS): Sales/Assets||Total
Sales/Beginning of Year Total Assets|
Sales Outstanding (DSO)||(Accounts
Receivable x 365)/Total Sales on Credit|
Payable Outstanding (DPO)||(Accounts
Payable x 365)/Total Purchases on Credit|
Value investing is associated with conservative" investing but in practice, that's not always how things pan out. Is it better to own a company trading at a low price to earnings ratio that is dying (would you want to own a bookshelf producing company today at any price?)? Or is it better to pay a high multiple for Facebook? Value investors generally believe that the company's shares will grow either because they will grow earnings and keep their low multiple - or they will be perceived as having better growth prospects and achieve higher multiples."
Basic bonds. Nothin' fancy.
"Vanilla" as in "pretty standard practice"... what "everyone" does. Applies to offerings of stocks, bonds, and love. Basic terms. Nothin' fancy.
An annuity where the investment can be placed into equity mutual funds, fixed income mutual funds and/or money market mutual funds. Variable" refers to the likelihood that the investment returns will vary over time. They could do really, really well, or really, really not. The amount that's in the account when the annuity feature is activated determines the amount of the annuity payments."
Vested refers to the act of having earned granted stock options in return for having remained at your job for a longish period of time, like 4 years. At least that's the "standard" vest provision in most Silicon Valley start-ups.
ExampleAt Shmoop, we pay in 3 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 anniversary, she owned 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 into them 48/80 per month. She's only just turned 30 but this is what Shmoop has done to her: here she is.
Volatility Index, ticker: VIX. It's about how choppy the market has been the last 200 days.
's the VIX.
It's mapping investor worry. But its most important contribution to the world is its use in pricing derivatives. Puts and calls rely heavily on what the VIX is doing when they view the cost of risk mitigation. And oddly, when the market is cratering / low / falling / letting the bears crap all over the front lawn...the VIX is usually a HIGH number, meaning that it is discounting MORE risk rather than less. You'd think that if the prices of the stocks in the market were low, there'd be LESS risk in the market. But we live in a highly momentum-and-trading-driven investment world so things that are low are perceived to be going lower; and visa versa.
Odd, but welcome to our world.
Beta. Ups vs. downs. If the market moves 2% and your stock moves 4% on average, it's beta is 2, roughly.
's a volatile stock chart. And here's one that's (relatively) a dead man's pulse.Why the diff? Well, people don't really have any clue as to how Netflix makes real money long term. There are dreams, plans, hopes, wishes—but no proven track record of regular free cash. The company doesn't pay a dividend and it has monster competitors looming in the form of Hulu, YouTube, the studios (who it buys from) and others.
But what about GM? Well, GM is a slowly dying-ish company. In fact, were it not for a very Left-leaning President in the office at the time, GM would no longer exist as it would have gone bankrupt in the 2008/9 financial crisis.
GM isn't going gangbusters, but it won't die next year either; it has relatively steady (albeit scant) earnings, and it pays a dividend. A nice one, in fact, which keeps its stock price relatively stable.
For a better encapsulation of volatility, we suggest Real Housewives
(really any city)—tune to the parts where the housewives are off their meds. That's
Variable Rate Demand Obligation
You have a variable rate bond. It adjusts annually based on whatever LIBOR averaged 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.
After you go to the bathroom you really should do this. With soap. It also refers to the notion that you cannot sell a stock and buy it back within 30 days and then claim it as a loss with the IRS.
You bought Netflix at $400 a share in October. It cratered on a weaker-than-expected Christmas. 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. Like it didn't happen. Like the soda that never, uh, really spilled on your aunt's carpet.
Clever replacing is what the wash rule is trying to avoid. For a sale to be recognized by the IRS as a clean qualified sale, 30 days have to pass from when you sold it to when you bought it back—so if you wait until Jan 26th (31 days in December) to buy back Netflix, then you're good to go. If it skyrocketed before then, well, too bad.
Next time, try Hulu.
"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 transaction that is conditional because the security has been authorized to have been issued, but has not yet been issued. This applies to IPOs, secondary offerings and stock splits. Trading can occur in these shares, but the transactions are subject to the shares actually coming into existence. If for some reason they don't, the transaction is canceled.
Shmoop Enterprises Global or SHMEG decides to spin off its European business as a separate company based in Paris. (We like the food.) 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, duh). 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.
A stock appears to trade at 100x earnings with the Wall Street consensus estimate for next year's earnings being $1 a share. The company has no debt and just a little cash. But nothing trades at 100x earnings. The $1 a share for next year is not what investors believe who are paying $100 a share - rather, they believe that the real earnings by the time the company is done printing its quarterlies will be more like $3 and the next year, more like $7. So on two year forward earnings, investors are paying just 14ish times earnings. That number isn't published anywhere except maybe on analyst's private company write-ups - those are analysts inside of mutual and hedge funds who don't, well, publish. Those numbers are the earnings numbers that investors are "whispering" about.
Work In Process InventoryDefinition
A balance sheet item which tracks production process - i.e. many companies carry a lot of value in half-made widgets - their process must be tracked financially over the course of the quarter.
Just see the Shmoorb (Shmoop blurb) on working capital
. The inventory "in process" is in the process of being paid for, drunk, and then whizzed. It's the 500 stored glasses a day of Miss Havisham's bitter lemonade times 100 days' worth of inventory.
The difference between a company's current assets and current liabilities. This is a measure of liquidity; does the company have enough of a cushion to satisfy its short-term cash needs? You might think the higher the "better" but too much working capital might mean that the company isn't utilizing its assets as efficiently as it could.
Okay, you're at the prototypical lemonade stand. It's a special lemonade that 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 grand 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; you may have sold a slice of your equity pie to raise it—but you have it all now.
So what's the fancy accounting term for the cash that went in to getting all of your bitterness? Yes, working capital. It's uh...capital...that let's you...work.
No, not the kind of account that Jay-Z opens just because he's Jay-Z. He might, but not because he's a (w)rapper. A wrap account is one where the broker manages the portfolio for an annual fee, usually based as a percentage of the assets in the account. The fee covers all administrative, commissions and other expenses (but usually does not cover any fees or charges imposed by an exchange or a regulatory body). The benefit of a wrap account is that it prevents investors from being swamped by commissions because they have a trigger-happy broker who trades like a lab rat on crack.
Clients like wrap accounts—they are the equivalent of the all-you-can-eat salad bar. And banks like them as well because they provide income predictability and a longer term consultative relationship with clients.
A typical wrap might cost a standard client 1% of assets under management
, so if Jay-Z gives his broker $100 million under a wrap account, 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. And for many large brokerages, wrap accounts allow for their clients to be able to buy various flavors of funds (mutual
) 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.
We're a bunch of people at Shmoop who do this for a living. But in this case, "writer" refers to an option. That is, the person who sells an option is the writer of it and the term likely hails from an era in which option contracts weren't fully standardized so the person selling it literally had to write it, or at least a decent portion of it.
I think GOOG is going to be flat to down from the $500 a share it sits at right now...for the next year. I want to take in some money and I'm willing to risk letting GOOG take off and go to $600 or $700—that is, I don't think it'll happen. So I write you a call option that gives you the right to buy a share of GOOG from me for $550 a share. The offer is good any time from now until one year from now (my option expires on the 3rd Friday of that month) and note that American style options are "any time"; European style options expire on a specified single date (i.e., much more vulnerable to short term market gyrations and manipulations so usually priced cheaper).
So what's the deal? Well, I am making a bet that GOOG doesn't trade above $600 between now and then (and I'm conveniently ignoring taxes). Why $600 and not $550? Well, the call option strikes at $550—that is, it's at that price I'm willing to sell you a share of GOOG. And you're paying me $50 for the privilege. So, all in, if you execute the call option I just wrote you, you'll pay me the $50 gate fee plus the $550 a share. And if the stock never gets appreciably above $600 so that you execute your call, then I made 100% on my "investment of risk" in writing you that call; that is, I keep the 50 bucks and buy a nice steak din, on you.
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 big note: equities pay dividends 4 times a year; bonds pay twice.
In this document we’ve covered far too much analysis and not enough stories in my opinion but there’s one more analytical tool you must have on the top of your head before you dive into the recruiting pool: The Yield Curve.
The YC is simply the graphic representation of what investors believe will happen to interest rates in the future. Here’s the story: The U.S. government has a ton of bills to pay. They keep our troops strong, our interstate highways clean, and our White House lights burning bright.
To pay for all of this, the U.S. government like all governments exploits its opportunities to run the best business in the world in printing its own money. This money goes out into the marketplace in the form of T-Bills, T-Bonds, and T-Notes... all various and sundry forms of bond paper backed up by the U.S. government’s ability to collect taxes from the paltry coffers of its humble subjects. Each week there is an auction and paper is sold to flippers - investment banking traders who will buy the bonds with yields of 5.217% and sell them for yields of 5.222%. It doesn’t seem like much of a spread but when you pump trillions of dollars through the pipeline, it adds up.
Here’s what a yield curve looks like:
Notice a few things about it. The vertical axis is the interest rate paid and the horizontal axis is time. Notice that over the short term, money is ""cheap""... around 1% for 1-year paper. But also notice that as we move out 10 years, the yield curve is flirting with 4%. What this curve is saying is that investors believe that 10 years from now, odds are best that bonds will be trading around 4%.
The curve is now said to be positively sloped because rates today are lower than they are expected to be in the future. But in the Carter years the curve was inverted... negatively sloped. At one point prime rate hovered around 20%. But investors believed it would come down and the yield curve settled in around 10% 10 years into the future.
Yield To CallDefinition
If a bond is callable, the relevant metric is determining the yield from date of purchase (or issue) to the first possible date that it could be called.
Okay, first you gotta go read yield to maturity
And then add the curveball that companies are afraid. Very very afraid. Of what? Inflation. And deflation. And, mainly, of looking stupid.
So let's step into the Wayback Machine and go to 1977 when prevailing corporate bond rates were, give or take, 12%. Very expensive money rental—and that was for pretty high quality companies. If a company needed cash, a very bad path to have taken would have been to issue 30 year standard (un-callable) paper. The investors who bought it would have feasted on the 12% interest rates for 30 freakin' years. Awesome deal for the investors; horrible deal for the company.
To protect their careers, the finance people inside the company would likely have issued a call provision, say, 5 years after they'd issued, usually at a modest premium like 102 or something. That is, if the premium they pay over par is 2%, then after 5 years of paying outrageous 12% interest on paper issued at the peak of the horrible-for-investors Jimmy Carter era, the company could buy back its own paper. And pay $1,020 for each grand of par bonds out there. The prevailing rates might then be, say, 7%—so it makes a ton of sense for a company to repurchase and refinance.
So when you see a "yield to call" provision on a bond, if you think rates are going down, be wary of it; if rates are going up during the duration of that bond, it's likely that the bond's call provision won't ever be exercised. It'll just sit its fat lazy duff on the couch, clipping coupons twice a year.
Yield To MaturityDefinition
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.