I can smell an animal from almost two miles away. Think of the buffalo: shower before you start studying next time.
Vocabulary
1035 Exchange
Definition
Why don't they give these things a name? Like what pathos is there in a number? It makes your life miserable remembering all of them—and frankly doesn't make our life any easier writing pithy epithets about 'em either. But here we go.
A 1035 exchange is a swap. More specifically, it's a swap relating to life insurance policies or annuities. You have one annuity or life insurance policy and want to exchange it with another one (of similar value), so you use a 1035 exchange to do it.
Why, you ask? Because a 1035 exchange is tax free. Taxxxx freeeee [insert Homer Simpson drool sound].
12B-1 Fee
Definition
So along came the Investment Advisers Act of 1940, which basically recognized that mutual funds did, in fact, have expenses that were more than bonuses to the senior partners.
The 12b-1 fee system allowed a fairly set and standard amount of fees to be charged to customers, so that a given mutual fund could recoup the money it had to spend mailing annual reports and performance data and tax information and all kinds of other things to its customers.
The 12b-1 fee system was basically a pass-through set of charges, such that the customer paid for her own paperwork…incentivizing mutual funds to actually do a good job communicating with their constituency.
1933 Securities Act
Definition
Before this law, securities trading was the Wild West. Companies could lie about their shares and financials and do all kinds of other unethical things. This was the first major securities law, and it required companies to register before their shares could be sold to the public.
Suddenly, overseeing the securities market in the U.S. became possible.
1934 Securities And Exchange Act
Definition
A law that helped make securities trading safer for investors.
Thanks to this law, the SEC came to oversee the industry, the New York Stock Exchange became linked to the government, and insider trading became a major no-no.
1940 Investment Advisors Act
Definition
Wondering why you're reading these definitions instead of working on your short game? This is why.
After people claiming to be "investment advisors" scammed a lot of innocent folks in the 1930s (and before), this act created a bunch of rules you have to follow to become a registered investment advisor. After this rule was created, you couldn't just open up shop and claim to be an investment advisor—you needed to pass a test and get a piece of paper to prove it.
200 Day, 50 Day Moving Averages
Definition
Moving averages are a series of snap shots of stocks' closing prices over a 50- or 200-day period when the market actually ran (or walked... or crawled).
The charts you see on traders' websites that show a bunch of lines going up and down? Those are the moving averages. Look closely and you'll see a line following the closing prices of a stock and another line either above or below that line. If a stock's price is headed up, there might be what traders call a support line under it. This one shows how low the price will drop before bouncing back up. If a stock is heading to tank-ville, there will be a line drawn above the averages. That one shows how far the stock will jump before it's pulled back down.
The idea is that you can use this info to get an idea of how the stock's doing and how it might do in the future.
Of course, trying to predict how stocks will do over the long term is a lousy idea. Even financial types in big jets who are paid to predict how stocks will do are right only about as often as the Psychic Friends Network. Stocks don't always follow averages: when they don't they surge past the resistance or support lines, it's called a break out.
2001 USA Patriot Act
Definition
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism. Talk about an acronym. This here was a series of laws enacted after 9/11 to prevent terrorists from laundering money and using the stock market to fund their illegal activities.
The relevant part when it comes to money is Title III of the Act. It's called the "International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001" (seriously, who names these things?). That part of the act requires banks to report suspected money-laundering activities and to create tougher rules to prevent money laundering in the first place. It also makes it tougher to do some types of high-falutin' banking between U.S. banks and financial institutions around the world.
401(k) And Roth 401(k)
Definition
Want to retire with dignity and not have to rely on spam sandwiches and off-brand prune juice? Retirement savings are pretty much a must.
If you work in the good ol' U.S. of A. in a typical job, part of your hard-earned cash is going towards Social Security, which is supposed to give you some moolah for when you retire. The problem: it's not really enough for most folks who get used to the idea of things like decent food and hot water. That's why retirement accounts were created: so that you can put even more of your hard-earned money away to pay for retirement.
The most popular type of retirement accounts are the 401k and Roth 401k.
- The Roth 401k was created back in 1978. It's a "qualified" plan, meaning that you don’t automatically get it just for showing up. Instead, you and the company you work for are going to have to sign a bunch of papers and properly structure the thing.
- The 401k is a "defined contribution plan," meaning that the money put in by the employer and worker are defined. It is not a "defined benefit plan" where your boss would be on the hook for investment return minimums.
A lot of people choose 401k because most employers will match contributions. For every buck you put in, your employer may give you another buck—until you retire. It's like a twofer on your investing dollar before you even start investing the dough, and it's probably the closest you're going to get to free money from your boss.
401k vs. Roth 401k
So what's the difference between a 401k and a Roth 401k?
With a 401k, you get your retirement account from your boss, and the money you put in gets taken out of your paycheck before you pay income taxes. Let's say that you make $40,000 a year and invest $5,000 in your 401k. Instead of being taxed on $40,000 you're taxed on $35,000, like that $5,000 never happened. Presto—a lower tax bill. But (of course there's a but), while you don't pay the taxes now, when you retire, you're taxed on the money you take out of the 401k, so the IRS won't be sobbing into their pillow at night. Like Vegas, the house always wins.
With a Roth 401k, you can set up your account with a bank or financial advisor, so it's an option if your boss doesn't offer retirement benefits. The Roth 401k also doesn't give you any tax advantages now. If you make $40,000 this year and contribute $5,000, you still pay income taxes on $40,000. Sorry. But when you're a golden oldie and ready to invest in salsa classes, you can take money out of your Roth 401k without having to worry about paying taxes then. So more cash for you when you're grey.
403(b) Plan
Definition
Think: 401k Plan...Lite. That is, for companies with fewer than 25 employees.
409a Valuation
Definition
409a valuations set the price of the common stock generally after preferred stock has been purchased by the investing angel or venture capitalist. Preferred stock might have been purchased for a dollar a share—but once preferred stock has been sold by the company, it has to be paid back first before common stock has any value.
So imagine an extreme situation where a company which just started last week raises $80 million in preferred stock. The odds that the full $80 million is ever even paid back is probably low so it wouldn't be crazy to see the common stock valued at almost zero/nothing. Employees get stock options in common stock—not preferred—so somebody has to set the strike price for the options on their common. That's the purpose of the 409a valuation—it sets the price at which common stock options can be bought and thus converted from options into actual stock ownership.
75-5-10 Rule
Definition
"75! 5! 10!" isn't what a quarterback screams to signal a roll out pass.
Instead, the term refers to a formula investment managers use to market or advertise their funds: To legally be able to say that their fund is diversified, managers must follow the 75-5-10 Rule. That means their fund needs to have 75% invested in securities from other issuers and can only have 5% (or less) of the fund's assets sunk into one company. The "10" in this rule refers to the fact that the fund can't own more than 10% of any one issuer's outstanding securities. So no buying up 30% of Google stock and sticking that in the fund.
A-Shares
Definition
A-Shares. Think: front end load. When a buyer of a mutual fund pays the commission up front and that's it; nothing fancy like paying the commission as you go ("no load") or paying the commission on the back end, i.e. when you sell the mutual fund. Example: You buy a grand worth of The Mutual Fun Fund and pay a 4% load or commission when you buy the A-Shares. Your money managers start out your sojourn with the Fun Fund then with $960 to invest. They'll take an annual fee as well but in funds which charge loads up front, they almost always carry meaningfully lower annual fees.
Above Full-Employment Equilibrium
Definition
Question: Wouldn’t full employment mean that everyone is employed? Wouldn't that be full employment? Well…no. It’s a government statistic, so full…isn’t really full. Its full-ish. And full is probably impossible anyway, because there will always be college students, part-time Uber drivers, derelicts and, well…actors.
So when economists talk about full employment, they mean that everyone who is actively seeking work is generally finding work...but it recognizes that a lot of people have either given up the hunt and are happy living on the equivalent of replacement value of 48 grand-a-year of welfare, or they’re, ya know…off the grid. The equilibrium notion is the hard part to conceive of here. When "almost every single living being" is employed, it likely means that the economy is on fire (in the good way). Tons of demand for...stuff. Tons of shortages of labor and supplies. And it also probably means that we have roaring inflation. Which is…bad. There is a balance of employed and unemployed, which makes for a stable set of parameters that keep the people employed who want to be employed. And it keeps inflation at small numbers, such that old people who generally retire on bonds aren’t forced to live inhuman lives in their station wagons parked on the side of the road, because roaring inflation at 6% has made their 2%-a-year bond investment returns destroy most of the buying power of their life savings.
Historically, economists have generally targeted 95% as the full employment equilibrium number. Or 5% unemployment. In other words, at that level, there is low, or just very modest inflation. And the employment-seeking masses have generally found what they’ve been looking for. Like Bono. Turns out he was just looking for his car keys. Go figure.
Above Par
Definition
We all know how this one feels on the course, but that's not what we're going for here. When you buy a bond, it has a face value: that's the set price of the bond when it was issued. That bond will pay interest each year. Bonds trade like stocks, more or less and sometimes, the actual trading value of the bond goes up because investors are willing to pay more than the face value or par value of the bond. Why would they do that? Well, if overall interest rates have dropped, then bonds with coupon rates paying higher interest levels will be bid up. When this happens, your bond can be bid up to be selling above par.
Example: Galactic Empire incorporates and decides to issue bonds because they're in debt after building a new space station. Darth Vader decides he wants to buy a $1,000 bond. He's getting up there in years and wants to be able to enjoy his days in retirement at some point. He gets himself a 5-year bond with a 10% coupon. That means that, every year, he'll get $100 for handing over his cash, and at the end of five years, he’ll get his original $1,000 back. After two years, Darth is dreaming about what he'll do with that money if there's a disturbance in the Force. Interest rates drop. Now the same type of bond from the Empire comes with a 6% coupon because of the change. Good ol' Darth is feeling pretty smug because his bond 10% interest or $100 a year is locked in, but what happens to anyone who wants to invest now?
Account At Maintenance
Definition
See margin maintenance.
You can set up a brokerage account if you want to buy and sell stocks and other securities like a rock star. If your account gets listed as "account at maintenance," consider it a yellow flashing light warning you that... there's a problem. Danger, danger, Will Robinson.
Example
This situation usually happens if you borrow from yourself or your brokerage firm to invest. For example, you might get a brokerage account with Fidelity that has a 50% margin. That means that if you pony up $15,000 of your own dough, Fidelity will let you buy up to $30,000 in securities. You might decide to get $29,500 in investments, which leaves you about $500 in wiggle room or equity (you have $15,000 of your own cash in there, but the $14,500 from Fidelity is kind of a loan).
The tiny print in your brokerage account agreement says that you can't go too far into debt on the account. If the Fed Chairman sneezes and the market goes down a percent or two, you will suffer a margin call, which means you'll be forced to sell securities likely just at the wrong time; i.e. when the market is down.
Don't let this happen to you.
Account Executive
Definition
Fancy name for "broker." This person (or company) is in charge of taking orders from whoever is buying and selling investments. If you want to buy and sell stocks, for example, you're going to do that through a broker or account executive—and pay some commission for the whole thing. See Registered Advisor, Registered Investment Advisor, and Financial Advisor.
Account In Trust
Definition
In account we trust. An account in trust is an account held for someone else (usually because that someone else is a minor). The idea is that the adult manages the account, because the person named on the account can't manage it themselves. Example: When Uncle Joe manages the account for little Sally, Sally trusts Joe. She's a minor and knows that Joe will manage the account for her with all due good intent until she turns 18—and can then go shopping for Beemers. UTMA is an example of an "Account in Trust."
Accounting Period
Definition
An accounting period is usually a statement of what happened financially in the last quarter or year.
Here's what matters: Wall Street reporting, tax status, employee contracts, union contracts, etc. It all needs to be reconciled and reported on a regular basis. Some companies live on a calendar annual basis, i.e. from Jan 1 to Dec 31; others use a June fiscal, i.e. living annually financially, from July 1 to June 30. See the opus video Fiscal versus Calendar Year for gory details.
Accounts Payable
Definition
Think MasterCard: you bought it but you haven't paid for it yet.
If you run your own business, these puppies tend to show up on your balance sheet, and they're the things you need to pay up soonish (think short-term loan).
Accounts Receivable
Definition
You own a business and have offered a line of credit to someone who really wants to buy your Star Wars-themed phone cases. On your balance sheet, that transaction is listed under accounts receivable, or the tab you're keeping open for customers you hope pay up soon.
Accredited Investor
Definition
The difference between an accredited college and an unaccredited college can be the difference between Princeton and the School of Feel Good Energy your Great-Aunt Bertha set up in her garage last year.
Accredited investors work on a similar idea: a bunch of someones have come along and agreed that accredited investors have certain qualifications. So accredited investors are simply investors who qualify to do a certain investment. Usually, "accredited" means that they have...credit. Or assets. Or wampum. Or knowledge. Which means that they're big boys and girls who are able to invest a large amount of money in a risky venture.
Officially, they're investors who have an income of at least $200,000 for the past two years ($300,000 for joint accredited investors), or have a net worth of at least $1,000,000 (individually or jointly), or are executives, partners, or directors of the entity issuing securities. Institutional investors such as mutual funds, hedge funds, and pension funds also fit the bill.
Accrual Accounting
Definition
Accrual accounting refers to the practice of tallying up revenues and costs when a transaction occurs rather than when cash changes hands.
Example
Let's say you pay for a new tattoo with a credit card. If Tattoo Joe uses the accrual method of accounting, he adds the money he charged you to his accounts before your Tylenol even wears off—even if MasterCard takes months to pay up.
The opposite of accrual accounting is cash accounting, where money is only counted when it changes hands. That means Tattoo Joe would only add the price of your tattoo to his coffers after MasterCard had actually transferred the money to his account.
Accrued Interest
Definition
You invest in a bond that has an 8% coupon. It pays interest twice a year. A quarter of the year in (and half way to the first interest payment), your cat starts upchucking something blue, and you decide to take Miss Snuggles to the vet. To pay for it, you sell your bond. When selling your bond, you can tack on the 2% you would have earned so far in interest. Only a quarter of the year has passed, so a quarter of the annual 8 percent interest gets paid. That's the amount that has accrued.
Accumulation Period
Definition
You're pouring your hard-earned bux into an annuity so that one day you can live comfortably.
But here's the thing: funding an annuity takes time. The time you spend funding that annuity and gathering money into it is the accumulation period. What happens after this period? The good stuff—also known as the annuitization phase. That's when your annuity pays you so that you can play golf and show up for the blue plate special dinners at 4:59PM.
Accumulation Units
Definition
Let's say you buy life insurance after seeing just one too many heart-rending commercials. As you pay money on that life insurance policy, you are "accumulating" value in it (duh).
But that accumulation is usually broken into distinct chunks. A chunk or unit might be described as
- a hundred grand
- the first 6 months of your policy
- the first two years
Or something else. These units are known as accumulation units, and they decide what value is there, should you one day bite the proverbial dust. These units are also why someone who has been paying into a life insurance policy for a year will get a smaller payout than someone who has been paying in for twenty years.
Active Investing
Definition
Active investing means that someone (hopefully someone who knows what they're doing) is in charge of managing the money and investments in a fund. When you buy shares in a mutual fund, for example, you're paying a fee because someone has hired theoretically smart analysts and portfolio managers who spend all day looking at stocks and bonds to make investments on your behalf.
The idea is that these managers and analysts are...active. They are using their own experience, forecasts, and research to decide which investments are best. The opposite of active investing is passive investing (duh), which is just...buying an index fund. Index funds don't have portfolio managers. What they do have are rebalancers. Might sound like Marvel villains, but they're really just finance folks who check every so often (usually quarterly) to make sure that the index still reflects what you think you bought in the first place.
Active Risk
Definition
In a portfolio which is actively managed (like a mutual fund or a hedge fund but not an index fund or ETF), "active risk" is the risk in the portfolio taken on by the investments (and the analysts and portfolio managers who put together the fund).
See, risk is a fine line. The riskier stocks might explode and help a fund do really well... or they might tank and pull down the fund with them. Good managers balance risk so that the fund doesn't tank but also has a chance to grow. Investment companies usually put together products with different risk levels: higher risk investments for those who like the money equivalent of skydiving and want a shot at big cash and lower risk investments for those who want fewer late nights with antacids because they're worried about their mutual fund.
Adjustable Rate Preferred Stock
Definition
Okay, first see preferred stock for the gist.
Preferred stock is preferred because stockholders with these puppies are paid before common stockholders if a company goes belly-up. If your stock says "preferred stock—ARPS," then the rate paid out depends on a specific set standard or yardstick (usually T-bills). So if T-bills (or whatever the benchmark the company uses) suddenly pay out more, your stock will, too.
And that's how it's adjustable.
Adjusted Closing Price
Definition
On any day, you can look up a stock’s closing price and get one number. Clear as clear can be, right?
Not so fast. Closing price can be one number, but it can be affected behind the scenes by corporate stuff like rights offerings, dividends, stock splits, and other corporate actions. The closing price, if it's affected by this stuff, gets adjusted to reflect said actions.
A famous example is the one-time enormous dividend made by MSFT (Microsoft) when Bill Gates retired from the CEO role. That little action required some adjusting. Without it, the closing price of MSFT would have looked less spectacular than it really was.
BTW, adjusted closing price is important when looking at historic closing prices or when doing analysis on historic returns. If you're just an average investor, though, you probably won't even run into it.
Adjustment Bond
Definition
An adjustment bond can choose to pay interest—or not—at will. If the responsible party for the bond punts a payment, they don't go into default—they just keep rollin' over the debt they owe.
Now you might be thinking, “Why would anyone want an adjustment bond when there are bonds that promise to pony up cash faithfully?”
Good question. Adjustment bonds are usually issued when a company is facing bankruptcy or is restructuring. If you’re popping antacids like Tic Tacs because you have bonds that might be useless if a company goes under, you (and other bondholders) might get adjustment bonds if the company is really struggling. It eases some of the pressure on the company by letting them pay off what they owe, and it means you might get at least some of your cash (and some of your expected returns) back. It’s better than nothing, which is what you’d get with a bankruptcy and no adjustment bonds.
Advance Refunding
Definition
Let's say you want to buy a shiny, used Bugatti on credit. The debt service costs a cool $3,000 per month—how can you make sure you can make the payments? Well, you might want to sock away a bunch of Gs in the bank.
Advance prefunding works the same way—but with bonds, not cars. With "safe" bonds, or bonds where an administrator is worried about the cash actually getting to the people for whom it was intended, a prefunding feature can ensure that money is socked away.
When a bond is issued, a chunk of money is tucked away safely in a nice escrow account with a bank or trust company so that the odds of the money actually being there for a distribution or a call provision are high. It's extra netting under the financial high wire.
What happens if a government issues bonds and then runs a little short when it's time to pay up? One option is to issue a new bond to pay off the outstanding bond (that means a past due bond—not great). That's called advance refunding, and it buys the issuer a little extra time in paying off their debt.
P.S. The concept is kind of arcane.
Advance/Decline Ratio
Definition
It's an index. Just an index... but one that is widely quoted in the financial press. Specifically, an advance/decline ratio is the number of stocks which are up vs. the number which are down (hence the catchy "advance" and "decline" talk).
Money guys and financial reporters use this ratio when trying to decide whether the market is about to change. When the ratio is high, there's a lot of buying (maybe even too much), and when it's low, that could be a sign of overbuying. You can imagine, though, how this index has wide ranges for error; i.e., every stock could be down one penny and the ratio would be 0 - which would be like "as bad as it's ever been"— when, in fact, the day was basically as flat as the opposing team on Glee.
Advisor
Definition
The money-whisperer.
Yeah, this is the person who actually manages the money. If you buy a mutual fund, for example, there's a distribution company that brings in customers like you and brings in the dough for investing. That company hires the advisors, who sit around in suits and decide what investments go where. The money you pay in fees for your mutual fund is used to pay for these advisors.
Advisor Account
Definition
You're an at-least-semi fat cat. You think you have some Buffett in you (Warren, not Jimmy). You want to be intimately involved in managing your money. You have an X-Files "Trust No One" phone case (The 90s were cool, we get it).
So you set up an advisor account. The advisor works directly with you, the client, to figure out where you're puttin' your dough. You stay in the driver's seat and decide which investments you want in there and which ones you don't (Apple? Puh-lease—you want something more obscure than that.)
You pay for that kind of control, though—and it's usually a percentage of the assets in your account (so if you're quite a fat cat, you might have to get a little fatter to pay for it).
Affiliated Person/ Investor
Definition
Let’s say you enter the school spelling bee. And so does your older brother Sam, who’s the top-notch linguist in the country. Should you be treated the same? Not hardly fair, is it?
It works the same with securities. When it comes to trading, buying, or selling stocks and other securities, people working inside a company have a leg up when it comes to their own securities. Why? Because they have special insider information. These people—including C-level officers and board members—are considered affiliated persons and they have to follow a bunch of extra laws. If these types own more than 10% of their own company's securities, they're considered affiliated investors and they face even more restrictions.
It all helps level the playing field between insiders and you, the average Joe or Jane investor.
Aftermarket Securities Transactions
Definition
Traders in New York City work until 4:00PM. They have busy schedules and fancy dinners to get to, you know. But what happens if you get a burning desire to buy securities after 4 o'clock? What happens if you live in a different time zone and think the world shouldn't revolve around NY time? If you're buying or selling stocks outside of regular hours, you're making an aftermarket securities transaction.
And yes, if you're investing in another country's securities, you're making an aftermarket securities transaction if you buy or sell securities outside of the business hours of that country’s stock exchange.
Money never sleeps.
Agency Bond
Definition
When you're a big dog like the federal government and want to issue bonds or T-Bills, you guarantee your paper with the right of the government to tax its people.
But what happens when you're a medium-sized dog...like a government agency? If you're Fannie Mae or another government agency, and the government won't guarantee your bonds, you can issue agency bonds.
Agency Broker
Definition
Honey, baby, cookie, lovey—that's the hello of a different kind of agent: the guy in the bright yellow suit with awesome Hollywood hair.
But a broker agent, or agency broker, is just an agent for a fund or any large agency. This guy usually works for large companies placing big block orders on exchanges. Broker agents must try to get their clients the best prices and look out for the clients' best interests—in theory. In reality, there's lots of fancy footwork they can do to get around these rules (see front running for the gory details).
Broker-dealers are self-dealers: they look out for numero uno and buy on behalf of themselves. They aren't agents and they must only fulfill orders they intend to see through. Ciao, baby.
Agent
Definition
Real estate agents represent their clients to negotiate the terms of the buying and selling of a house. Stockbrokers are agents who represent their clients for the purchase and sale of stocks and investments.
Agents have specialized knowledge and negotiate deals on behalf of their clients, also called the principal, who feel like they need someone looking out for them. Some agents have a broader power of representation, such as having power of attorney. Other agents represent their clients for a specific reason, or for a single transaction. Basically, an agent is a third party who is somehow getting a piece of the money pie.
All Or None - AON
Definition
The order: 100 shares at $15. All or None (AON).
If your broker can't find 100 shares of whatever stock you want at $15, she buys nothing. You've basically told her to go whole hog or abandon ship. Example: Imagine if Warren Buffett decided to buy 10% of Netflix (yes, it would mean the world was ending, but that's a different story). NFLX stock would almost certainly shoot up a ton.
So let's say his brokers were told that it was an all or none order. If his brokers are able to grab the 10% before anyone gets wind of the deal, Sir Warren ends up with a big chunk of a company stock that's about to go sky-high in price. But if the broker gets about 2.3% and then start hemming and hawing very politely, he's stuck. He either has to pay more for the 7.7% (he wanted to get to 10%—and now that everyone's onto him, those NFLX shares are more expensive) or he can turn around and sell the 2.3% so that he has no part of Netflix.
AON deals are done when an investor has enormous Assets Under Management, and the notion is that, unless he has a huge stake in something, it's not worth it for him to have any stake in it. Hence the AON positioning with brokers.
Alligator Spread
Definition
This could refer to a gourmet lunch in Louisiana or a centerfold of glossy pages in PlayGator magazine.
In finance, an alligator spread refers to a situation where huge commissions gobble up any profits that could have happened with a trade. Usually, it happens when put options and call options are used to give the investor a chance to buy at a specific price later on.
Allocational Efficiency
Definition
Here's the theory: if markets were absolutely efficient, capital would be used in a way that had benefits for everyone—customers, companies, and investors. The idea is that there is a near-perfect balance, where companies make the right amounts of the right stuff using the right techniques, while keeping costs fair, so that customers get what they want at good prices. In the world of optimal allocational efficiency, jobs are plentiful, investors profit, and everyone sits around their dining room tables holding hands and singing "Kumbaya."
Look out the window—we're definitely not there yet, and not just because no one knows the words to "Kumbaya" (we're not sure if you can see people's dining room tables from your window, but you get the idea).
Alpha Risk
Definition
Alpha risk is a ratio that your portfolio manager uses to compare her picks for your fund or portfolio against a benchmark (that could be other funds or the S&P 500).
If your manager picks a bunch of stocks and investments that push your fund up 10% in a year when the S&P 500 (or whatever the benchmark is) is doing 8%, your manager gets bragging rights (and possibly a nicer office and a promotion).
Alpha risk is often expressed in math equations that would only make a mathlete happy, but the main thing to remember is that when someone talks about High Alpha, that's good (low Alpha is bad).
Alternative Investment
Definition
See Alternative Asset. Investments of a vanilla flavor are things like stocks, bonds, and good ol' hard cash in the Serta. Alternative investments are things like hedge funds, real estate, commodities, and fancy derivatives. They're sometimes known as alts and are usually only owned by "accredited investors” (people with lots of money and the sophistication to understand that it's really easy to lose 100% of your money in these roll-the-dice kinds of situations).
Alternative Minimum Tax (AMT)
Definition
It might sound like a tax invented for Coachella, but it's really a tax created to make sure that the rich pay their fair share. It has nothing to do with "alternative" or "minimum" anything, really. Created by Congress and the IRS, AMT adds stuff back to the "adjusted gross income" line of your IRS tax return. If you’re really rich, you might find that you can't claim the same deductibles you did before—and you'll end up paying more taxes.
AMT ignores one basic thing: the rich don’t fill out the "adjusted gross income" line of their tax forms. They have people who do that for them... people who incidentally know tax laws really well and can find loopholes anyway. Thanks to the fact that AMT is complex and not really doing much, there was much grumbling about it (as there is with any tax).
In response, President Obama signed a law in 2013 that was supposed to be a patch to fix some of the problems. People kept grumbling anyway and voted for Trump.
Alternative Trading System
Definition
ATS is like a corner cafe eBay for stocks and bonds. It's another way to buy and sell shares without going through NASDAQ. It’s sort of the off-Wall Street, off-grid, off-Broadway version of NASDAQ. Examples include crossing networks and ECNs (Electronic Communication Networks).
American Callable Bond
Definition
Them silly Americans...callin' their bonds any time they want. That's what an American callable bond is: the company or government issuing the bond can call it at any time prior to its coming due.
Why would an issuer call a bond? Not because they're lonely on a Friday night ("hey bond, u up?"), but because interest rates have gone down or their rating at Moody's went up. The issuer can call the bonds and issue new ones at a lower interest rate, saving them cash.
Why would an investor want to buy these bonds if they can be called at any time? They usually carry higher coupons than non-callable bonds.
Example: Let's say that a pretzel company issues a callable bond paying 9.5% interest. They release a new kind of pretzel that turns out very popular ("now with mustard on the inside!"). The added revenue allows the company to pay off some debts, so their credit gets better and Moody's upgrades them from CCC to BBB status. Meanwhile, interest rates overall drop. The company calls the bonds and reissues new bonds that pay just 7% interest, saving them enough money to invest in new kale-flavored pretzels (the Moody's ratings boost made them very confident).
American Depository Receipt (ADR)
Definition
Ever noticed that some of the things you like aren't as American as apple pie? Thanks to the freedom of liquid international trade, the Internet, and a global economy, you can buy crap from all over the world. The same applies to investing. You can buy domestic stocks like Google, but if you want to buy shares in foreign companies you likely need American Depository Receipts (ADRs).
ADRs are bank certificates that represent ownership in shares of foreign companies. These stocks are sponsored by U.S. brokerage companies, and they can be bought and sold in the U.S. just like your favorite U.S.-based stocks. Example: Sony wants its shares to be traded everywhere it can—more buyers, more demand, higher-stock price (usually). So instead of just listing its shares on the Nikkei in Japan, Sony lists in the U.S. as well. How? Well, a bank or series of banks essentially buys its shares in Japan and then a nanosecond later turns around and sells them in the U.S. on, say, the New York Stock Exchange for some conversion price.
If they are 40,000 yen in Japan, they might be $28ish in the U.S. Note the subtle issue here: not only are investors buying shares in a foreign company, but they are buying the shares with dollars...and the U.S. investors buying these shares really only care about dollars. So if the yen goes the wrong way and Sony stock doesn't go up to accommodate for it, U.S. investors get doubly hosed.
American Stock Exchange - AMEX
Definition
The AMEX is a stock exchange, which is a place where securities can be bought or sold. The AMEX happens to be the third-largest stock exchange in the U.S. and it's a private intentionally non-profit company.
About 15% of all trades in the U.S. are made through the AMEX, and its competitive brethren are NYSE and NASDAQ.
American Style Stock Option
Definition
American style can include jeans, cowboy hats, or Jersey accents. In the finance world, American style options refer to how you exercise your stock options. No, we don't mean popping them on a treadmill. Stock options let you buy or sell options later at a set price—and it's a privilege you pay for. If your stock option is American style, you can exercise it at any time. With a European Style stock option, you can only buy or sell at the specific price on a specific date (the expiry date).
Example
Let's say you have an option to buy shares of the company you work for at $75/share. The current asking price for the shares is $100. If you exercise your options and buy, you stand to make $25/share if you turn around and sell right away. But hold on a sec. Your strike price (that’s the $75) has an expiry date. If your options are American style, you can exercise them (make good on that strike price) any ol' time. But if you have European style stock options, you'll have to wait until the day your option expires to exercise it. Silly Europeans.
Amortization
Definition
When...you repay a loan...over time on your own...that’s amor...tization…
Amortization. Big word. We’ve got the root word “mort” in there…which means “death"...and yeah, when you’re amortizing a loan, you’re...killing it. Softly. With your song. You’re gradually reducing your obligation by paying back whatever you borrowed. So that, once a loan is fully amortized, the amount you owe is...zero.
That’s one definition of the term. It’s also a fancy way of saying “allocate costs." The same process of slow killing (metaphorically that is) applies to other financial situations.
You pay a thousand dollars for an amazing bed. Did you get value from it? Well, if you USE it a lot, you’ll AMORTIZE the costs in such a way that the bed is…cheap. How so? Well, if you sleep on it for 2,000 nights before you toss it, you’ve paid 50 cents per night for your bed. That’s like a nickel an hour of use. And that assumes it’s just you in the bed. Giggity.
What about a prom dress or tux? Well, the finest Walmart prom dress runs about 300 bucks. But you wear it once before Tyler Hendricks vomits on it and…then you’re done. So it cost 300 bucks a night, or about 50 bucks an hour, for the 6 hours you wore it. Way expensive per use because you only had 6 hours of amortization.
Loans work the same way. You borrow 120 grand to buy a home with a 30-year mortgage. Over those 30 years, you amortize the loan, or allocate the paying-down of that $120k you just borrowed, over a long period of time. So...something to keep in mind the next time you go shopping for a bed...or a dress.
It also works when applying amortization to the process of assigning costs or revenues across time. Example: You license one year of house-sitting duties on an as-needed basis for $1,200. You are paid all $1,200 up front. But you might be fired after 3 months. Or you might quit after 9. You amortize the value of that contract as $100 a month over the life of the license.
Amortized Bond
Definition
The Simple: You buy a bond that comes due in 10 years. It has a coupon of 7%. But instead of paying par value of a grand, you've bought it at $800. So over the course of 10 years, you'll amortize the appreciation of that bond from 800 bucks to a grand at the pace of 20 bucks a year....assuming it's not distressed or in trouble in some other way.
And oh, by the way, you'll pay ordinary income tax each year on that 20 bucks of gain. Sorry. Bonds are a tough way to get wealthy. (Unless you're E.L. James, but that's a different type of bonds.)
Analyst Expectation
Definition
Analysts and the rest of the Wall Street community spend a lot of time eagerly waiting for reports and financial information with the same eagerness your local Comic-Con goers await the newest Star Wars trailer. And both sci-fi junkies and analysts have lots of expectations. The sci-fi fans might expect the latest special effects, while money guys might expect that companies will post certain earnings or reach certain benchmarks on other metrics. These Wall Street predictions are known as "analyst expectations."
Analyst expectations are also known as "Street Numbers," or sometimes, collectively, as the "consensus estimate." These figures represent the numbers that money folks think a company will post for their quarterly earnings or other estimates—before said company actually posts the numbers.
Example: Let's say Cisco has told the Wall Street analysts (employees who work for brokerage houses to provide "expert" advice to investors) that it expects to earn 40-45 cents a share on $10.5-11 billion in revenues. One analyst publishes that they expect 43 cents on $10.652 billion; another analyst publishes that they expect 40 cents on $11.1 billion, etc. These individual estimates are then compiled into a consensus estimate that's used to judge the final result. When you see headlines like "Cisco Beats Expectations With Earnings Report" these are the estimates being referenced. See Whisper Number, Buy Side, and Sell Side for more gory details.
Analyst Sponsorship
Definition
Most brokerages employ analysts. (See sell-side analyst for details.) Despite being wrong quite often, these analysts continue to write opinions about stocks and publish financial models. And Wall Street still listens, even though they know their track record. Stock brokerages even pony up money in trading dollars and commissions for these guys—much like your local weather channel continues to pay for the meteorologist who's only right about 30% of the time.
Analyst sponsorship happens when an analyst gives a thumbs-up, positive review of a stock. When that happens, the stock usually goes up. If the sell-side analyst works for a big brokerage like Goldman, he or she can have an especially big impact on a stock. Dolla dolla billz, y'all.
Annual Return
Definition
Annual return is simply what you get back from your investment each year. It's the whole enchilada of what your investment makes you (or costs you), including capital gains or losses and interest or dividends.
You owned Smooshem Ketchup Company last year on January 1. The stock traded at $50 a share. By the next New Year's Eve, the stock was trading for $55. But it also paid $2 in dividends through the year. Its annual return, in simple terms (i.e., not worrying about the time value of dividends paid at different times of the year) was $7 total from a base of $50 or 7 / 50 = 14%.
Annualized Total Return
Definition
Well, when you invest a dollar…you hope or even expect to get more than a dollar back. At some point. And let’s say you invested that dollar in Terminator's Closet, a leading dealer in cybernetic body enhancements. And let's say it went from $1 a share to a dollar ten…6 months later.
Nice return. You made 10 percent in just 6 months. But in most investing discussions, investment returns are discussed in the form of annual returns...not monthly or daily or bi-annual numbers.
So you need to convert your 6-month return into an annualized one. You can do the process here of imputing those numbers: that is, if you made 10 percent in SIX months…then in a year, presumably, you could notion that you’d have made 20 percent.
It’s not that you are guaranteed to make 20 percent...it's just the math saying that IF YOU HAD COMPOUNDED AT THAT RATE, then you’d have made 20 percent.
So what if you made 10 percent in a month? The stock went from a buck a share Jan. 1 to a buck 10 a share by Feb. 1? Using the same math, that month's gain of 10 percent would carry a compound rate of 120 percent on an annualized basis, meaning that at that rate you are more than doubling your money on an annualized return basis.
And that's more than enough dough to keep Terminator's Closet popping out those Wi-Fi-enabled contact lenses faster than people can wear 'em.
Annuitize
Definition
When a lump sum is converted into regular payments over a chunk of time. If you have big chunk saved up with a retirement plan or life insurance, the amount will be annuitized so you get a regular income from your cash.
Example
Let's say you've been saving up with a life insurance plan that's also an investment for your later years. You hit 65 and decide you've had enough of office politics. SnoopyInsurance agrees to annuitize the $500K you've set aside as an asset in the account and pay you $2,500 a month for the rest of your life, no matter how long you live—but the benefits stop the moment you do.
Eek.
If you're one of those people who's convinced you're gonna Highlander it and live forever, great. But if you think you might be on the losing end of a Clamor and bite the dust sooner than expected, clearly you aren't going to get the best return on your investment.
Annuity
Definition
An annuity is a contract written by an insurance company, which guarantees income for the rest of your life in return for a set of payments up front. Note the "ann" in the word, which is also coincidentally the opening of the word "annual"—as in the payments happen annually. These payments either come in one plop or are "accumulated" over time.
In theory, it has less risk than just buying a bunch of stocks. But there is a price to pay for that risk mitigation...usually in the form of lower returns to annuitants.
Annuity Due
Definition
Annuity due is different from annuity dude, the guy who sold you the annuity in the first place.
An annuity due is an annuity that pays at the beginning of a time period. If you have an annuity due and you get monthly checks from it, you can expect those checks to start showing up at the start of the month (rather than later).
Anti-Dilution Covenants
Definition
Dilution happens when a company issues a bunch of additional shares or options, which can lower the amount of ownership or the value of investments for current shareholders. (Not to be confused with delusion—similar, but not quite the same.)
An anti-dilution covenant sounds like something out of Indiana Jones, but it's really just the tiny fine print that helps protect you if you own shares. If you own convertible shares or preferred stock, you might see this little clause somewhere in the paperwork. If the company issues more shares (diluting your ownership), the clause lets you get more shares if you're an early investor.
Anti-Money Laundering Laws
Definition
See Anti-Money Laundering - AML
Antidilutive
Definition
First see dilution. Recap: dilution is bad. If you have a nice glass of lemonade and put a bunch of ice in it, eventually the lemonade will start to get watery...a.k.a. diluted. (Science!) If you own 50% of the shares of a company with 1 million shares outstanding and the company issues 1 million more shares, you'll own only 25% of the company. (Finance!)
Consider dilution from the eyes of an entrepreneur: the eventual goal in any company is to create wealth for shareholders. In the beginning, the founder owns all of the "wealth" or at least the shares in the company. Over time, that founder gives away pieces of the company in the form of shares to investors (in exchange for money). The problem is that the more shares the founder hands over, the less of her own company she owns.
An anti-dilutive act is anything the founder does to stop this problem. For example, she might buy back some of her own shares. Example: Some companies are anti-dilutive from the start, especially if they don't need a ton of money to get started. Yahoo! required only a little over $1 million of total capital until it reached break even. It chose to take on more capital because it believed that the dilution was worth the incremental capital raised so that it could take advantage of market opportunities. eBay was about the same.
The great fortunes of the Internet era were made in part because the founders suffered so little dilution that, at the end, they had tens of billions of dollars of wealth via their large percentage ownership stakes in the companies they founded.
Approved List
Definition
If you're on the approved list at a club, you can probably sweep into the VIP lounge without having to wait in line. If your company is on an approved list at a money manager's office, your shares could end up in an investment portfolio.
Active money managers have an "approved list" written out (or at least in mind) to purposely choose and limit the securities they can put in a fund. For example, a money manager might have a fund that's advertised as an ethical fund. That might mean no "sin stocks" get put on the list: no tobacco, no adult entertainment stocks, you get the point. For these guys, SmokeBombNightGuzzle Corp. would likely not be on the approved list.
Arbitrage
Definition
Talk about a great word to use at cocktail parties (especially if you can say it with a vaguely Euro posh accent). Arbitrage is the business of finding something for cheap and then turning around and selling it for more to another customer, keeping the profits...basically, it's the art of taking advantage of the spaces that open up within markets.
Let's say that the kid down the block is selling lemonade for $0.50 a glass, but the local construction workers are willing to pay $1.00 a glass. You buy from the kid, upsell to the construction guys, and pocket the $0.50 difference each time.
Back in the good old days, arbitrage was considered easy money. Thanks to online and electronic trading, though, it's gotten a lot less profitable. For one thing, any 14-year-old with an Internet connection can find a cheaper deal online, so there's less opportunity. There's also less need for the middle man. The construction workers probably have an app on their phone that lets them find the cheapest lemonade around, meaning they don't need your help.
Another current problem with arbitrage is the commissions and other costs and fees. Every trade you make online is going to cost you something, so there needs to be a big difference between buy and sell prices for you to make a profit.
ARM (Adjustable Rate Mortgage)
Definition
The key letter in ARM is A, and it stands for adjustable, as in Adjustable Rate Mortgage. Most mortgages have a fixed interest rate. That means you pay 5% interest (or whatever your rate is) during the first year you have your mortgage, during the third year, and all the way to the final day you have that loan and can throw your big "We Paid it Off" party.
With an adjustable rate mortgage, your rate can change.
Why would you want to get an ARM rather than a fixed rate mortgage? Well, maybe you like the element of surprise. More likely, you can save a few bucks at the start of the mortgage loan. If interest rates are expected to rise, you can get a better rate (at first) with an ARM than you can with a fixed rate mortgage. By the time your ARM rates go up and you have to pay more, maybe you'll have gotten that promotion at work. Lots of folks choose ARMs because they seem like a better deal on paper, but you'll want to run side-by-side comparisons to figure out whether they'll cost you more in the long run. You'll also want to make sure you can afford your home loan—even if interest rates go up. If you're just barely making payments now and your monthly mortgage costs go up $300, what are going to do? That's the sort of situation that causes people to lose their homes.
ARMs have a couple parts. They usually start with a low interest rate and have a guaranteed period of time for that interest rate, so you know your interest rate won't go up right away. An ARM also usually comes with an index (like LIBOR) against which it is adjusted, a step up percentage (how much the interest rate will likely grow each period), and maybe a cap (the maximum rate it can be raised in a given period). That all makes sure that the rate won't balloon out of control.
Some ARMs are interest-only for the first few years. The monthly amount you pay is really low, but you're also not paying down the principal or the amount you borrowed. That means the total amount you owe to the bank is not going down any. The upside is that your payments will be affordable at first, and you'll have time to increase your income or get a great job (and hopefully give interest rates a chance to drop).
Example
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 |
Bank consortia, which price mortgages, are usually smarter about the pricing of mortgages than Joe the Plumber. Yet there's always a guy who wins the lottery. What happens if the interest rate steps up at intervals of 1% instead of .25%?
| 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 | $25,753 |
Let’s compare this to a fixed rate 5.25% mortgage.
| Year | Interest Rate | Monthly Payment | Annual Payment |
| 1-5 | 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 in the later years (Fixed).
Ask
Definition
What you do when you want a prom date. In finance, the ask or the bid-ask is what the seller wants to sell for. The price includes the commission or other fees the dealer will get.
So, basically, a seller asks and a buyer bids and once these bids and asks get together and pair up, it becomes the price. And that's how baby prices are made (hope we didn't get too graphic, but we think you're old enough).
Assessed Value
Definition
If you own a home, there are two prices attached to it:
- The price you pay for it or can sell it for (that's the market value).
- What your home is officially worth (that's the assessed value).
Why two house prices? To keep things interesting—and to get you to pay your taxes. Your state charges you property taxes just for the privilege of living in the state. They charge more for the guy living in the McMansion than they do for the guy living in the one-bedroom bungalow (usually), but they still need to figure out who pays what.
Each state is a little different. Some states use a formula and don't even worry too much about what you paid for your house or what your house's value is. In California, you pony up 1.25% of the price you paid for your home, with some adjustments for inflation. In other states, an assessor takes a look at your home every so often and comes up with a dollar figure of what the house is officially worth for tax purposes. Usually, that number is lower than what you actually paid for your hose, and if you whine enough, the assessor may make an adjustment so that for that year at least, your tax bill can come down.
Asset Allocation
Definition
Think about the assets you have. Maybe you have biceps like Channing Tatum or a smile like Beyoncé. Great, but not really relevant to this discussion.
Now think about your financial assets...like cash, real estate, stocks, and so on. Asset allocation is all about where you put your financial assets so that they make sense for you. If you're young, you might want to put a lot of your assets into stocks because you have lots of time for them to grow, and you want to make money more aggressively. If you're getting close to old geezerhood, you might want to invest in bonds or more stable investments because you and your ticker can't handle the shock of sudden market downturn.
The point is that asset allocation is all about putting your assets into the right combos to balance the risk of losing money against the possibility of making more dough. When you're older, you'll want lower risk, and when you're young and cute (and can put those Channing Tatum arms and Beyoncé smile to work), you'll want a better possibility of earning more. Generally: YMMV.
Asset Backed
Definition
This term is used to describe a type of security that's got an asset backing it up.
It's usually a specific physical security like a wad of cash backing a company that's issuing bonds. In theory, this type of security should be safer—if things go belly up, the company can sell the asset to have the money to pay its shareholders.
Assets
Definition
These aren't the sorts of assets people are talking about when they talk about Marilyn Monroe. In financial terms, assets just refer to stuff you own that's worth something. You might have a lot of love, but financial types are more interested in the value of your home, your retirement fund, your stocks, and anything you can sell to make a buck.
Tally it all up, subtract your debts, and that's where your assets are. We hope it's as impressive as Marilyn.
Example
An orthodontist is married to a school teacher in Peoria, IL. Their assets consist of $253,432 in a Schwab One brokerage account, a home valued at $643,000 with a $300,000 mortgage (their equity in the home is $343,000), $20,000 in a B of A account, and $92,302 in a teacher's retirement pension account. Oh, and $12,000 worth of crap in their garage that really should be sold on eBay. Those are all assets.
Assets Under Management
Definition
It's the amount of dough the money manager manages. Why does it matter? Because the fees that the manager earns are based on the size of those assets.
And the public market investing business really scales...that is, if a company is managing 20 billion dollars and has 40 analysts and employees and charges 1% average fee, they are charging $200 million a year to manage that money. Then the market goes up and some more money comes in and a year later, they're managing 30 billion. Their fee might go down to 0.9% on that next 10 billion so the average fee income might be like a shade under $300 million. And yet they still have 40 analysts and employees. HUGELY more profitable, the more assets there are under management.
Nice work if you can get it...and are good at it.
Associated Person
Definition
It sounds so devious. Picture a bright light shining in your face and a dark voice asking, "Are you now or have you ever been associated with an associated person?" The reality is far less ominous.
An "associated person" is just a principal of a FINRA-covered firm. They are "associated" with it and have to follow the firm's standards in their behavior (and in their golf game). If the firm has a softball team, they're probably part of it. Yawn.
Asymmetric Information
Definition
Asymmetry happens when two sides of something aren't equal. Think: fiddler crabs. In the financial world, asymmetrical information exists when one side of a transaction has more information about stocks, bonds or securities than another.
Example: Insiders may get some information about their company and then sell or trade stocks before other shareholders get wind of the same info. It's illegal. Do not do it. We love Orange is the New Black, too, but no one looks good in prison colors.
At Par
Definition
Most bonds sell in units of $1,000. For all kinds of weird historical reasons, the thousand figure there isn't the primary quote when brokers quote bond prices...rather, everything is out of 100. So, a bond trading "at 99 point 2" is actually likely a thousand dollar bond selling for 992 dollars.
That 99.2 is "below par" and if a bond were "above par", it'd be trading at some value over the quoted 100 or some figure above $1,000.
Why do bonds move above and below par? Lots of reasons. The biggest is perceived risk that the bond won't actually pay off its borrowed principal. That's individual bond risk.
But the overall market can change as well. So, the government perceives inflation to be a strong force on the horizon so the Fed quickly raises prevailing interest rates. And if they do, bond prices fall across the board. So, a bond with a 6% coupon that used to be trading above par (which is to say, above a grand), in this scenario, could drop below par if prevailing rates suddenly go up.
At-the-Close Order
Definition
Stocks and other securities go up and down in price all day long. If you happen to order yours at the close of the market (at the end of business hours), you have an at-the-close order, and you'll generally be paying the closing price for the day (this can be bad news or good news, depending on what the closing price was).
It may be easier to think of it in terms of fast food: If Big Mac prices changed every minute, and you ordered one at the close (midnight at your local McDonalds), the burger flippers' clerk would scream your name at 11:59PM. Whatever the price for Big Macs was at that moment would be the price you'd be charged.
At-the-Money
Definition
Is sounds like something contestants shout during Wheel of Fortune ("Big Money! Atta Money! At-the-Money!"), but at-the-money means that stock prices match the strike price of the stock options that an investor has bought. So if you have the right to buy a share at $50 and then the share actually is at $50 when you go to buy, the share is at-the-money.
Example
Joe Shmoe has paid 3 bucks for the right to buy a share of KO (Coke) for $80. That option expires in a week and the stock is at $76 a share today. If the stock climbs to $80 a share (the bid), then it is said to be "at-the-money" or at the strike price. If it climbs above $80, then it's "in-the-money"; below $80, it's "out-of-the-money" honey. Note that KO could be $82.50 and the call option buyer has still lost money on the trade (she paid $3 for the call and KO ended up only $2.50 in the money so she lost half a buck).
At-the-Opening Order
Definition
What are At-the-Close Order and At-the-Opening Orders? Simply put, they’re a way of buying and selling stocks and bonds. They’re really a hybrid form of limit order...only instead of limiting the order of 100 shares of Mickey D’s at $45 or better, the ""limit"" is time based. That is, it is placed a minute or less from the close of the market...like 3:59 pm New York time, or the open of the market at 9:31 am New York time.
So...why would someone do this kind of limit order? Well, if a company the day before had printed what looked like a really good quarter, but upon deep inspection the investor who owned the shares thought otherwise, then they would want to take advantage of a high opening print, and just sell at whatever the price was a couple minutes after the open, making the bet that the stock would trade down after bigger, smarter, better analysis was published on the stock itself.
Auction Market
Definition
The New York Stock Exchange is an auction market. This designation means that prices on that exchange are determined by a bidding process. Buyers and sellers buy and sell at the same time, so in essence, two transactions are happening at once. The opposite of this sort of market is the over-the-counter (OTC) market, where dealers are the ones holding the cards and ultimately determining price.
Auction Market Preferred Stock (AMPS)
Definition
In AMPS, an auctioneer resets a preferred stock's dividend about every 7 weeks, after a dutch auction. (It has nothing to do with Tulips or cheese; a dutch auction happens when the lowest price needed to sell a whole bunch of securities becomes the price at which all the securities are sold.) AMPS are useful for large investors.
Authorized Stock
Definition
When a company goes public and gets incorporated, they change legal status. Part of it means having lots of meetings and signing more paperwork than most of us see in a lifetime. One of those pieces of paperwork is a charter, which outlines a bunch of rules—including the total number of shares a company can issue. This number of shares is called authorized stock, 'cause it's the total number of shares the company is authorized by its charter to issue.
Example
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.
Automated Client Account Transfer (ACAT)
Definition
After you make your first billion or so, you’ll probably have lots of different types of assets (stocks, bonds, hedge funds, weird exotic pets), and you’ll work with different banks and brokerage firms as you juggle all that stuff.
Each time you want to transfer an asset from one bank or brokerage company to another, there’s lots of paperwork to fill out (ah, the problems of the rich). To help you with that, the National Securities Clearing Corporation (NSCC) created ACAT, a system that allows for easier transfer of assets between accounts and financial institutions, so you have more time to actually spend all that dough or go lunching in Bora Bora.
Automatic Reinvestment
Definition
Your mutual fund or other investment makes you money on the regular. What do you do with it? Well, you could go out there and spend it like a don. Or, you could set up automatic reinvestment, which means the money your investments make is put right back into your investment or fund to make you even more cash. Many mutual funds include this nifty feature, and the fine print might even tell you that don't have to pay commission when your cash is re-invested.
Average Cost Basis
Definition
It's a tax issue. The IRS is really interested in how many gains or losses you make on your mutual funds, stock purchases and other investments because they want to be sure to tax you on your gains. The average cost basis is one way to arrive at an answer.
Basically, you tally up everything and divide by the number of shares to get the number. Example: You liked AT&T at $40 a share. You bought 500 shares. You liked it even more at $35 and bought 1,000 shares. You loved it at $30 and bought 2,000 shares. You adored it at $25 and bought 5,000 shares. Add up the total shares you purchased and figure out the total you paid for everything. Then divide the amount you paid by the shares you have. That gives you an average cost basis is $28.24 (forget commissions).
The stock then went to $50 and you sold half your holdings, or 4,250 shares. How much gain was there? Well, you take the average cost in for half of your shares, and you match it with the average cost out. In this case, you are realizing gains per share of $50 - $28.24 or $21.76 x 4,250 shares or $92,480.
Away From Market
Definition
You want to buy a share of whatever.com for 19 bucks or cheaper. At this moment, it's trading at $19.46 a share. The $19 bid you'd make is "away from the market." And it works the other way when you're trying to sell at, say $20 a share with the stock in mid 19s. Basically this term is a kind of whiny limit order.
B-Shares
Definition
See A-Shares.
Currently, there are a few flavors of shares out there, including A, B, and C shares (yeah, the person naming these could have used a few pointers). The basic idea behind B-shares is that they are a class of mutual fund. What makes them different? If you buy 'em, you only have to pay fees when you sell the mutual fund. On the one hand, you're paying fees on a bigger amount because you've been socking money away in your fund and your fund has been growing (we hope). But on the plus side, you've had a chance to grow your fund without paying those pesky fees all the time.
The technical jargon around this name is "contingent deferred sales charge."
Back End Load
Definition
We'll skip the inappropriate jokes and just say that back end load refers to mutual fund b-shares, where you pay fees and commissions when selling your fund, not when you buy or when you hold (see b-shares). Here, "load" is commission and "back end" means that it's paid at the end of the holding period (when you sell).
Backdating
Definition
Ooh. This is bad. Scandals. Jail. Silicon Valley soap opera.
When an important employee is hired by a young company, they might get a generous option plan for company stock and a more modest salary and bonuses. Why? Because young companies don't have a lot of cash now but want to attract good workers, and they're betting on the fact that employees will be tempted by the possibilities of those options.
There are usually some limits with the options. For example, the employee might have to stay in good standing at the company for 4 years and must sell their options within 10 years or so of them being granted. So far so good, but these options must also come with a strike price, which is the price at which the employee can buy the stock. That's where things can get sticky. How is this strike price created? Usually by looking at the average closing price over the last 120 days of trading or something like that.
Some shady companies (and employees) realized that they could backdate their options, which means slapping on a price from a date a few days, a few weeks, or a few months earlier (when prices were lower). Getting that lower price by fudging a few dates means bigger potential profits for the employees who will eventually sell the stock.
Just one tiny problem: backdating is illegal.
In 2008 and 2009, though, it didn't prevent some big backdating scandals in Silicon Valley. Since then, laws about backdating have gotten stricter.
Example
XYZ stock was at $80 a share 20 weeks ago; now it's at $200. In 4, years it might be at $400. The employee getting the $80 strike price on 100,000 shares will have appreciated $320 per share times 100,000 shares or... $32 million. But if the employee had received as their strike price the average of $200 and $80, assuming an arithmetic set of closing price gains, the strike on their options would have been $140. The gain would then only be an appreciation of $260 or $26 million.
Backing Away
Definition
What you do when talking with someone who has wicked halitosis.
In the financial world, backing away means making an offer and then changing your mind. It violates a bunch of rules and gives the market maker a bad name so others don't want to do business with them any more.
Example
A market maker offers to buy 100,000 shares of MSFT from you at $26.12... and then changes their mind.
Balance Sheet
Definition
It’s a snapshot. A financial reckoning of what you own, and what you owe, at a given moment in time.
A balance sheet is divided into columns. On the left are, uh...good things. Things you own. On the right side are things you owe, like debts or obligations you have to pay off.
Think through the balance sheet of Little Brother, Inc. You have total assets of $142, with Current Assets of $100. Eighty bucks of that Current Asset set is Cash and $20 is an IOU from the tooth fairy, i.e. Dad, who woke you up last night replacing the tooth, and since you’re old enough, you just winked, and he said ""yeah, I’ll get you a 20 from my wallet in the morning."" Note that, if he’d said ""I’ll get it for you a year and change from now,"" it wouldn’t be a current asset, it would just be a long-term asset, because current means that a promise or a product or a whatever, turns into cash within the year.
You mowed the lawn for the summer for Mrs. Gardenbottom, and billed her $500. She paid you $490 and still owes you $10. That money lives on your accounts receivable line.
You have 497 little blue marbles as your only asset, which your friend Billy has offered you tons of times to buy for $24…so you can hold that amount as inventory, since you deal in marbles regularly.
And you paid $10 for 10-year rights to enter your sister Jeanie’s room any time you want. You still have 8 years to go on that paper, so you depreciate its value at a dollar a year. It’s worth $8 today.
Total everything up and you have that $142 in assets on your own personal balance sheet. OK...so what about your liabilities?
Well, you have total liabilities of $100. You owe Joe LunchBully 30 bucks to learn why you’ll stop hitting yourself. Or rather, to stop doing so. You owe him 30 bucks tomorrow. And you know you’ll owe him 60 bucks a year from now. Maybe more in the future, and maybe not, if you grow.
But you are conservative financially, so you reserve that 60 bucks as if it’s a certain long-term debt. You borrowed 10 bucks from your boo Amy the Auditor for lunch. She actually submitted to you an invoice, albeit romantically.
So you have 10 bucks on that line of your balance statement. You have $142 in total assets and $100 in total liabilities.
Wait. They don’t balance. Oh no. What shall we do?
Well, a balance sheet accounts for this. It’s called ALE and stands for Assets minus Liabilities equals Equity. You have assets of $142, which you can subtract from your liabilities of $100, and you have net equity value to your, uh...life...of 42 bucks.
Looks like Little Brother, Inc. doesn’t have to worry about filing for bankruptcy any time in the near future. Which is good, because with Joe Lunchbully in the picture, life is hard enough as it is.
Balanced Fund
Definition
It's a type of mutual fund that is...balanced. No, not for life stresses, so that 1.3 hours a day is allocated for hot yoga. Rather, "balanced" means that there is some quasi-set ratio of stocks and bonds...higher risk, lesser risk...more cash throw, less cash throw...in some logical mix that answers the needs of that financial product for the customer. When it works, and you can retire in peace, let's hope you're doing cool yoga up on High rather than the hot version. No sympathy for an unbalanced fund or the Devil.
Balloon Loan
Definition
What happens when your sister gives you her balloon to hold at the fair.
Also, a loan where you make a steady stream of payments and a then a big, final payment. It's easy to remember this one: think of the long period of payments as the string on a balloon and the final payment as the big round balloon.
Balloon Maturity
Definition
When a balloon loan comes due. At this point, you have to make your big final payment (balloon loans let you pay a little bit at a time and then a bigger lump sum at the end).
Basis Point
Definition
One hundredth of one percent. It's the measure bankers use to talk about mortgages: they talk about mortgage rates going up or down a certain number of basis points.
Example
If mortgage rates are quoted today at 6.274% and next week at 6.284%, they have gone up one basis point. If they move two weeks later to 6.074%, they've gone down 20 basis points from the original quote.
Basis Quote
Definition
The basis quote is used with futures contracts (those are contracts that promise to deliver a commodity or bond or currency by a specific date at a specific price). A basis quote makes it easy to read futures quotes by referring to the price of another futures contract.
Example
The October futures contracts for widgets is quoted at $20, and the November contract is at $30. A basis quote for the November contract would be "October + $10."
Bear Market
Definition
Unfortunately, not the place where the three bears got their porridge.
Sometimes there are conditions in the stock market where things aren't always looking up. Companies aren't making as much money, prices are falling and investors begin to get worried about their securities. A bear market is one in which it feels like the economy is spinning out of control and the sky is falling. The beginning of a bear market is when share prices show a decline of 20% or more that lasts for two months or more.
We all remember learning about the Wall Street Crash in 1929; that was a bear market. As bearish as it gets. A bear market can affect Joe and Jill Shmo, not just the big wigs in Wall Street.
Oh, and by the way...while a bear market is a prolonged period of falling stock prices accompanied by general investor pessimism, if it's a short period of declines followed by price increases, it's called a correction. What's "prolonged"? It's in the eye of the beholder. Or, to be more specific, it's how the talking heads on CNBC define it.
Bear Spread
Definition
Sounds like something scandalous at Yosemite, but really, it refers to a situation where an options trader buys and sells options in the same class at the same time. The trader thinks that the underlying security prices will drop. By buying options on different dates, losses can be kept to a minimum.
Bearer Bonds
Definition
You know that saying "possession is nine-tenths of the law"? That's how bearer bonds work. If you have the paper issuing the bond in your hot little hands, you own the bond (whether you stole it or bought it): there is no record of who bought or sold the bond.
Bearer bonds aren't common today, in part because investors don't like the idea that they can be stolen.
Best Bid
Definition
If you were to peek over a professional trader's shoulder to look at their computer screen, you'd see a line with numbers above and below the line. These are buy and sell offers. When the trader gets a message from a client, he or she has to look at all those numbers and find the "best bid" or best price for that client.
Example:
A client wants to buy a million shares of GOOG on a "best execution" basis. The trader looks at the offers to sell GOOG, which are all over the place: $582.34, $582.12, $582.23, etc. He is obligated to take the best price for his client (the cheapest price). But sometimes the cheapest price is only good for 100 shares. In that case, the trader takes the smaller chunks in pieces, starting from best bid, until he can fulfill the million-share order.
Best Execution
Definition
Possibly Marie Antoinette. Or William Wallace.
Oh, we're not talking about town square executions?
On Wall Street, best execution is when a broker giving the client the best price and service possible. That might mean choosing the lowest prices on offers if the client is buying stocks. Or it might mean doing some fancy footwork (financially) to make a trade move smoothly and quickly.
Example:
Let's say a client wants a million shares. You can offer 100,000 at $23.13, but there's an offer to sell a million at the higher price of $23.18. If those million are sold to someone else and suddenly there's no supply in the market, the stock likely pops—so the client has 100,000 shares at $23.13, but now the best offer is $23.40.
Was that best execution? No. A million shares at the $23.18 was the way to go.
Beta
Definition
Beta is a measure used to describe volatility or risk of a portfolio or share. Usually, Wall Street types use the market as a whole to measure how risky or volatile something is.
Bid
Definition
The price at which a buyer is willing to buy a security. See ask for the other hemisphere.
Bid-Ask Spread
Definition
The bid-ask spread is a quote security dealers give to potential customers when referring to a specific security.
The quote has two prices or numbers: the price at which the dealer will buy a specific security (the "bid") and the price at which the dealer will sell (the "ask"). The ask price will be higher; the difference between the two prices represents the dealer's profit for the transaction.
Example
A dealer gives a potential client a bid-ask spread of "20.00–20.50." The dealer is saying that he will buy at $20 and sell at $20.50.
Black Scholes
Definition
It sounds like something to do with shoe fashion ("Black Scholes are just all the rage in Paris this year!") but it's actually a math formula and a system for coming up with the price for the value of stock options. Developed in the 1970s, it involves a lot of complex equations... that you don't need to know.
Block Trade
Definition
When a company or a group of investors wants to buy a big bunch of bonds, stocks, or other securities, the deal is called a block trade. It often involves arranging a price beforehand and usually means that the trade happens outside of the open markets (because big trades like that could cause some investors to panic or could affect the markets too much).
Example
Fidelity wants to sell 100 million shares of their Cisco holdings in one shot. They don't want to wait for the quarter to be announced and are nervous about the whole market. They call their friendly broker and ask for help in finding a buyer or three. The broker makes a bunch of gentle inquiries to buyers with whom he regularly does business and who he knows have pockets deep enough to pay Fidelity the couple billion dollars they'll want in return for the shares. When buyers have been found and a price agreed to, the trade happens in one big fat block.
Blue Chip Stocks
Definition
High-falutin' and high quality stocks. Think: Disney, American Express, Coke. Basically anything Warren Buffett owns. These stocks are usually from large companies that have a track record of making profits and making money for investors.
Blue-Sky Laws
Definition
There are thousands of rules about selling and marketing securities. These laws are there to protect you, but... they're confusing.
For one thing, each state has its own separate laws and there are federal rules to follow, too. Blue-Sky laws are the collective state regulations involving the marketing and sale of securities in a specific state. If you want to make new issues and secondary offerings available in, say, Idaho, you have to register according to the relevant Idaho laws. Some states' regulations are stricter than others.
Bond
Definition
No longer the hippest spy in the world (Matt Damon took that spot), the word bond comes from Latin, meaning just "an agreement."
Financially, a bond is an obligation to pay back money. In return for renting that money for some period of time and for the risk of that borrower not being able to pay back the money, bonds charge rent or interest.
Bonds have levels of seniority and other features which can make them "feel like" stocks or other kinds of investments. For example, it is not uncommon in large public companies to have 8 or 9 layers of bonds with fancy names like preferred, senior, junior, convertible, subordinated, or debenture.
Each of these flavors of bonds has a slightly different taste with the one common protein that they are all different forms of debt obligation.
You would likely have been raised in a barn and gotten your transportation to your soccer games in a horse and covered wagon if bonds or debt didn't exist. Almost nobody buys a home without debt. Most people buy cars with debt. Most students pay for their college education with debt. And that plastic in your wallet? Yeah, it's debt. The one unifying string that has woven the financial fabric of this country has been financial trust.
Because our laws around financial obligations are so strict, for hundreds of years, this country has developed a deep sense of trust in another party's promise to repay. That promise is taken seriously by everyone and anyone with whom you will do business in your future as you try to buy toys, shelter, and self-actualization (a convertible Porsche).
Bond Anticipation Notes
Definition
When a new James Bond movie is about to come out, we all quiver with anticipation. When a municipality or company wants to fund a project but can't wait to issue a larger number of bonds, they can issue bond anticipation notes. These are short-term, smaller bonds issued before a larger funding project. When the company or municipality makes a larger bond issue later, they can use the money from that issue to pay for the bond anticipation notes.
Bond At A Discount
Definition
A bond that is selling for less than its stated value. Summer sale for investors.
Bond At Par
Definition
Par value is the stated value of a bond when it's issued. When a bond trades at par, it trades at its face value, and you get what the coupon says. In reality, bonds almost never trade at par because interest rates go up and down all the time, meaning that investors are willing to pay more or less for a bond based on that.
Example
A company might seek to raise $10 million. It issues bonds at an 8% compound rate which it is obligated to pay, effectively renting the $10 million for the price of $800,000 per year. After a year, interest rates drop to 5%, and now investors are willing to pay more than face value for the bond because the bonds being issued now have only 5% interest, meaning investors get less for their money. The bond is trading above par. Another year rolls by and interest rates climb to 10%. Now that 8% looks paltry, and if you want to sell your bond, you'll sell below market value (below par). If interest rates hit exactly 8%, you can trade at par, but... don't hold your breath.
Bond At Premium
Definition
A bond that is selling for more than its stated value.
Why would it sell for more than its value? Investors might be certain the bond will pay off, or its credit rating may have been upgraded since the bond had been issued. Or it's possible that interest rates have dropped and that bond looks more appealing than the ones being issued now.
Bond Components
Definition
These are the parts of a bond, or what's under the hood. You'll want to look at all these components when deciding whether a bond is worth your time and money. Most bonds have four basic components:
- Interest Rate/Coupon Rate: This is the interest rate you'll be paid for investing in the bond.
- The Borrower: Companies don't issue bonds out of the goodness of their hearts. They issue them because they need to raise money, and they need you to lend them cash. The quality of the borrower is important. If the company goes bankrupt and you're left holding their bond, you might never get paid for your investment.
- Maturity Date: This is the date at which the bond comes due. Every year you have your bond, you'll earn a bunch of cash for lending the issuer money. When you reach the maturity date, you'll get back the money you invested, too.
- Principal/Par Value: This is the amount the bond issuer borrows from you and the amount you lend. Bought a bond from an issuer for $1,000? $1,000 is the par value.
Bond Duration
Definition
Duration refers to the length of time from when a loan is made to when it is paid off. It can also refer to the length of time until a bond matures. Some bonds are very high duration (Disney has issued 100-year bonds) while most others are much, much shorter in duration.
Loans with a long duration will reflect prices that are much more volatile than bonds that come due in a few years. Over a 100-year period, you'd imagine that bond prices would be affected greatly by inflation, credit risk worries, and individual corporate issues, all of which make prices in bond swings volatile for high duration bonds.
Bond Fund
Definition
A mutual fund that invests in—yep, you guessed it—bonds. Bond funds can be diversified (meaning that they invest in many different types of bonds), or they can be more specific, investing in, say, only in municipal bonds or other specific types of bonds.
Bond funds are considered more stable than funds that invest heavily in stocks, since bonds are less volatile. However, bonds also have a smaller potential for growth. Check out our section on investing for more on all that.
Bond Point
Definition
The bond point measures the price of a bond relative to its par, or face value. The point is usually a percentage of the par value (about 1% per $100 of par value).
Example
A bond that has a face value of $100 and is currently trading at $90 is said to have a bond point of 90% of face.
Bond Rating
Definition
S&P, Moody's, and Fitch are all rating agencies that gather up information about bonds and the companies that issue them. They release ratings about the relative strengths of individual bonds so that investors can make better decisions.
Rating agencies look at things like the financials of a bond issuer, debt loads, and indicators. If a bond is ranked high, there is a low chance of default, meaning that the company or issuer will probably pay you what they're supposed to and you won't lose your money. Lower ratings mean bigger risks.
In the S&P world, BBB is the highest rating for an "investment grade" bond. Anything lower than BBB is considered a junk bond.
Caveat emptor. (That's Latin for "read the fine print.")
Bond Ratio
Definition
The percentage of a company's capital that is represented by debt. The higher the bond ratio, the more the company is leveraged and in debt. That's not necessarily a bad thing (are they using the debt to make more money or to pay for hot tubs for executives?), but it's something to be aware of. In most cases, if a company has a bond ratio of more than 30%, it is highly leveraged. In some industries, though, being in debt up to your eyeballs and issuing lots of bonds is the norm. We're looking at you, airlines.
Example
If a company has total capital (debt plus equity) of $100, and $30 of that consists of bonds, then the bond ratio is 30%.
Bond Yield
Definition
The amount of money that a bond will get you for your investment. The yield is the money the bond issuer pays the investor for lending them money.
Bonds: Major Classes
Definition
So many flavors to choose from:
- Senior obligation bonds aren't cranky or grey. They are the first type of bonds that a company would have to pay if they went bankrupt. These are often considered the most secure types of bonds for that reason.
- Junior obligation bonds are slightly less secure than senior bonds. If a company declares bankruptcy, the juniors are paid after seniors.
- Asset backed bonds are backed by the assets a company has. For example, an airline might guarantee its bonds via its airplanes.
- Debentures are backed only by the credit of a company, so basically the company is just handing you an IOU and promising to pay you back ("trust us"). And if they mess up and can't pay you back? Too bad, cupcake. The only comfort you would have in that situation is that the company's credit would be wrecked if they couldn't pay their debentures or other forms of bonds. That might be cold comfort to you, though (especially if your investments are wiped out and you can't pay your utility bill).
- Convertible bonds, like their name suggests, can be converted—usually into common stock. You can make a tidy profit converting bonds into stocks if a company suddenly starts to do well and stock prices increase.
- Zero coupon bonds don't pay you anything until the very end. Once they reach maturity, the pay back what you invested plus all the interest that has built up in one chunk. The problem is that some companies have a hard time paying back all these payments at once. Some set up special funds so that they have enough money once their bonds reach maturity.
Book Entry
Definition
You might think that "book entry" would have to do with writing stuff down in an actual book... but... the opposite is true. Book entry is the way that securities get registered today in an electronic form. No physical paper is used and no actual bond certificates or stock certificates are issued in most cases.
Book Value
Definition
A balance sheet term. It's what things are worth at liquidation. If you own a company with stuff like machines, equipment, and inventory (stuff you sell), you'll figure out what things are worth now and how much they decline in value each year. Book value helps you understand how much everything is worth right now if you suddenly need to liquidate (or are just applying for a business loan).
Example
Caterpillar Tractor bought a smelting stove to melt iron at high temperatures. They paid $10 million for it. It should last 20 years and then they can sell it for scrap for $2 million. Using advanced calculus, we can ascertain that it will have depreciated $8 million in the 20 years that they use it. Using arithmetic depreciation, it will have declined in value $8 million / 20 = $400,000 per year in value. By year 10 of having owned the smelting stove, it will have depreciated $4 million. The book value of that stove will be held on the balance sheet of CAT as $6 million.
Borrow
Definition
When you borrow, someone fronts you something (cash, a book, a good shirt for your date on Friday night). "The borrow" is the cost of borrowing shares if an investor has to borrow the shares from the brokerage (it's called short selling a stock). The borrow is usually expensive because of the high interest rates charged.
Bought Deal
Definition
When an underwriter buys shares directly from the issuer first and then files the prospectus and the IPO. These are usually big deals, so the company ends up selling all of their shares. The underwriter, since they are buying up all the shares, can usually negotiate a sweet deal. Because of that, they can turn around and sell them at a good price (attracting more investors) while still making a profit.
Bowie Bond
Definition
Yep. It's about David Bowie. In 1997, David Bowie—the rock star legend—created a new kind of bond to buy older recordings of his music. These bonds are backed by the revenues from Bowie's music. So if you owe Bowie bonds and your Uncle Harry is a big fan who's still buying CDs, more power to ya. The bonds were only for $55 million (that's not much by celeb standards)...but it's David Bowie. He wore those pants in Labyrinth, married Iman, and issued bonds.
Is there anything this man can't do?
Brand Equity
Definition
Brand equity is the value your brand has. It's usually linked to a few things, like
- How many people have heard of your brand. (If no one has heard of your brand, you might not have a brand.)
- How much people respect and like your brand. (If people hate your brand, you might have negative brand equity. For example, Al Qaeda Brand Aspirin probably wouldn't do so well in America.)
- Your brand reputation. ("High brand equity" is a name you recognize easily and like or trust. That might be BMW, Disney, or the like.)
- How readily your brand is recognized. (Shmoop, anyone?)
Break Out
Definition
It can refer to that thing that ruins your Saturday night date and makes you wish for darkness and Oxy 10. But it also refers to a stock which has "broken out" of its expected trading pattern. If a stock suddenly jumps up in price (or tanks) after chugging along steadily, it's a breakout.
Example
A stock traded in a very flat U shaped pattern for the last 10 months between $17 and $19; then, suddenly with their recent earnings announcement, the stock's first print at 9:30AM is $26. The new pattern created from that $26 is a break out.
Breakpoints
Definition
Waltz into a store willing to buy a lot, and you can usually expect a discount or a freebie. The more you spend, the more discounts stores are usually willing to pile on to keep you buying. It works the same way with mutual funds. Buyers of mutual funds can get discounts once they get past breakpoints (the minimum levels where certain discounts are activated). Go past a certain breakpoint, and the commission on the buy might be slashed by 1%. Go above another breakpoint, and the commission will go even lower or disappear entirely.
Example
Buying shares of One Eyed Man Mutual Fund Company's flagship fund might cost 5.5% commission if you buy less than $25,000 worth. If you buy $500,000 worth of the fund, the commission might just be 1%. Over a million bucks, the commission might be free—the broker will be paid out of the management fee of the company, i.e. One Eyed.
Broker Call Rate
Definition
Brokers offer loans to customers buying on margin (that's when you put in a certain amount of money and the brokerage lets you invest for even more). To pay for all that, brokers get loans from banks. The interest that brokers pay on the loans the banks give them is the broker call rate.
Broker Loan Rate
Definition
Also known as a broker's call, this isn't the sound of brokers howling in the night. Instead, it's the price that brokers pay to banks so that they can borrow money.
Why bottom? So that they can let investors borrow on margin (when a broker or brokerage fronts an investor some cash so that they can invest).
Brokerage Account
Definition
Brokerage accounts are where you buy and sell stocks and other liquid securities. Setting up a brokerage account is easy, and for an investment amount of usually less than $2,500, anyone can trade stocks like a tie-wearing Wall Street dude. If you have the extra money to be able to invest, then... can we borrow a tie?
Brokerage Fee
Definition
Your broker makes sales happen by pairing sellers and buyers of securities. He or she doesn't do it for fun; brokers pay for designer clothes, fancy cars, and liquid lunches. One way they pay for all this is by getting fees, commissions, and other types of payments whenever a transaction is made. In other words, you pay for your broker's fancy shmancy life.
Bull Market
Definition
A securities market that goes up for a sustained period of time.
Most investors love bull markets, when the general trend is upwards and investments like mutual funds tend to earn great returns.
Bull Spread
Definition
If a security is expected to rise in price, investors can buy different options with the same expiry date but different strike prices. It's called a bull spread, and the basic idea is to make money when the security increases in price while also limiting risk.
Butterfly Spread
Definition
No actual butterflies are harmed in the making of a butterfly spread.
A butterfly spread trade is basically a combo deal between a bull spread and a bear spread (the one time a bull and bear can make a butterfly). This spread involves buying four options with three different strike prices but similar expiration. The idea is that the market is volatile and this spread covers all your bases. It is relatively low risk but also comes with few chances to make bigger bucks. It's named after the idea that this strategy, like the butterfly, will "land soft" (you won't lose a ton or gain a ton).
Buy And Hold
Definition
Buy and Hold is a style of investing. Basically, you buy stocks and then hold them. Convoluted idea, we know.
Warren Buffett, the Big Cheese in the investing business, is a big believer in buy and hold. Stockbrokers are less excited about this strategy, because they make their money when people trade, sell, and buy stocks. If everyone held onto stocks, stockbrokers might make less and might have to wear last year's Tom Ford designs. Tragic.
To be successful at the buy and hold strategy, you will generally focus on putting just a few companies in your investment portfolio—fewer than 12 for most people. Then you avoid selling or trading those shares. To make money, though, you need to choose the "right" shares, and this is where things get tricky. What sort of business is around and profitable forever? Google and Apple might seem like sure bets now, but what happens 30 years (or more) down the line? Warren Buffet and others have found success by investing in things that people "always" buy—like Coca Cola.
One of the big advantages of the buy and hold strategy is that it gives stocks lots of time to grow in value. Another big plus is that you don't realize gains, which means you don't have to pay capital gains taxes to the IRS. The big drawback is that your stock portfolio is going to go through lots of ups and downs, which will seem extra scary because you only have a limited number of stocks. When it all tanks, you won't be selling. You'll just be sweating it out, hoping that prices head back up. If you need the money in the short term and your portfolio doesn't recover in time, you might panic. This is really a strategy for the young or youngish who are thinking about stashing money away for retirement or even their kids.
Buy Limit Order
Definition
You want to buy a stock or other security but you're on a budget. You don't want to get fleeced. So you put in a buy limit order. This means that your broker or trader will only buy your stock at or below a certain price. You won't overspend and have to put off that vacation to Maui.
Example
You want to buy MSFT at $24 or better. The stock is currently trading at $24.12. So you wait. And wait. And you wonder, "will this trade ever happen?" (It may not.) But then there's a big market down-draft day and the stock kisses $23.99 for 20 seconds. If your broker is good, he'll pass along that extra penny to you, i.e., buy the shares for a total cost of $23.99 to you, not $24. But at worst, you'd pay $24.
Buy Side
Definition
The "sell-side" of Wall Street includes stock brokers, people who sell companies, investment bankers, capital markets makers, and other such folks. These people are all about making money, wearing ties, and driving fancy cars. If you've seen Wolf of Wall Street, you know who we're talking about.
The "buy-side" of Wall Street includes people like mutual fund managers, hedge fund managers, and pension fund managers. These are people who are responsible for the money and have an obligation to their clients. They have to report to shareholders and have to justify how much risk they took to make money. If they lost money, they have some 'splainin' to do.
Buy Stop Order
Definition
An order to buy a stock or security at a specific price above the current market price. This sort of order can help you avoid losses if a stock goes up a lot after a short sale.
Example
You shorted MSFT at $24. If it goes up a lot, you don't want to be crushed. So you put a buy stop at $27 so that the most you can lose (forgetting the cost of the borrow and commissions) is $3 a share.
Buy-in
Definition
If a seller promises but doesn't deliver securities, you have a buy-in. The buyer will generally need to go elsewhere to buy the securities—and possibly at a different price. The seller is on the hook for any difference in price between what they agreed to and what the buyer actually ended up spending.
C-Shares
Definition
These mutual funds have no front loads (get your minds out of the gutter...that just means they don't have commissions charged when you get them). But they do have small back-end loads of about 1%. (Sheesh, we give up. Giggle about "back-end loads" if you must.) If you hold the fund for at least a year, that number may disappear altogether.
Calendar Spread
Definition
With a calendar spread, you buy one option at the same time you sell another option that has the same strike price but an earlier expiration. This spread lets you play around with due dates so that you can take advantage of different prices when options come due.
Call Loan
Definition
Call loans are super short-term loans that banks give to brokers or brokerage firms. Brokers use the money to offer margins, which give investors the ability to borrow money to play the market.
Let's say you set up an account with a broker to buy $100,000 in shares and they offer a 50% margin. You pay $100,000, and the brokerage uses call loans to let you invest another $50,000. The call loan is backed up by the securities in the account, so the loan is pretty low risk (which means low interest rates). Brokers have strict rules about how much of a margin they give clients, so even if the value of your investments falls, they still have enough dough to pay off the loans and make some bucks.
Call Option
Definition
A type of option that gives the buyer the right to purchase something for a set price for a predetermined, finite period. A call represents a bet that the underlying asset (the thing you have the right to buy) will see its price increase.
So say you like shares of Hopefully Going Up Co., which are currently trading at $20 per share. You might buy a call option with a strike price of $25 per share and an expiration one month from now. If a month from now, the stock has risen to $30 per share, you can exercise your option, buy shares at $25 per share, immediately sell them at the going rate of $30 per share and pocket the $5 per-share profit (minus whatever it cost you to purchase the call in the first place).
If shares of Hopefully Going Up Co. sink to $18 per share, you can just let your call option expire. You aren't required to buy the stock. Using call options lets traders make bets without forcing them to buy the underlying asset outright. This lowers the expense of placing the bet, and thus lowers the risk.
The opposite of a call option is a put option. A put gives the right to sell an asset at a certain price during a set period of time. It's a bet that the price of the underlying asset will go down, a way to short the asset.
Call Premium
Definition
When you buy a call option, you are paying for the right to sell a share at a certain price, which protects you in case the price suddenly starts to tank. The money you pay for this option is the call premium.
So say you are holding a stock at $15 per share. You buy a call option to sell at $13 a share, with an expiration date 30 days from now. You now have the right, but not the obligation, to sell the stock at $13 if you want to by the expiration date.
If the stock stays above $13, you're not going to exercise the option. You'll just let it expire. But if it turns out the CEO was making up most of the company's clients and the stock falls to $5 a share, you have protection in place. You can exercise your option and sell at $13. Say you paid $2 for that option. That $2 is the call premium.
Call Protection
Definition
No, this doesn't prevent your ex from calling you at 3 AM. It has to do with bond purchases.
Some bonds include a provision that makes them "callable." This clause allows the issuer to buy them back on certain pre-specified dates before the maturity date. Issuers put this in place as a protection against falling interest rates. Nobody wants to get stuck paying out a 7% bond when the prevailing rate has fallen to 4%. In this scenario, a callable bond could be repurchased by the issuer and then new bonds sold at the lower rate.
For purchasers, callable bonds are less valuable because you don't know you'll get the full interest rate you've been promised. They could get called in. Usually this means that the interest rate on these bonds has to be a little higher than the going rate, in order to compensate investors for the added call risk.
There's also call protection.
Call protection lives the fine print in the paperwork. When you buy a bond, this language protects the buyer from having the bond called in...for a period of time. A typical call protection bars issuers from calling in a bond during a time period soon after purchase. For instance, the issuer might have to wait at least five years before calling its bonds and issuing cheaper bonds.
Call Provision
Definition
See Call Protection. The call provision is just the details and fine print that tell you whether the issuer can call a bond early (and how they can do that).
Call Risk
Definition
A call risk is the risk that the issuer of your bond will redeem it (a process known as "calling") before its maturity. If this happens, you could lose out because you didn't get all the interest you had expected.
You were supposed to get an 8% coupon for 10 years. But after two years, the bond is called. You lose eight years of profits from the bond. Meanwhile, you could have sold the bond if interest rates went down, making your 8% more attractive to other investors. If a bond is called, you lose out on the chance to sell that bond at a profit.
The call risk measures the possibility that the issuer might go through this process. It takes into account a) whether the bond is callable, b) the process needed to call it (what restrictions the issuer has), and c) the relationship between prevailing interest rates and the interest rates you are getting on the bond. So if a bond is callable and there are very few restrictions on the issuers ability to call it and the interest rates you are getting on the bond are much higher than the current prevailing rates (so it would be in the issuer's interest to call the bond and issue a new set at a lower rate), then the call risk is very high.
Callable
Definition
For bonds, callable means that a bond can be called early and for less.
You might buy a bond that promises to pay 9% for 30 years, but the fine print makes the bond callable in 3 years at 102 cents on the dollar. This means the company could pay you off sooner and for less than you'd thought. This protects the company issuing the bonds in case interest rates drop a lot.
Callable Preferred
Definition
Just see callable. Preferred stock certificates also have fine print that means companies can call their shares at specific times.
Capital Appreciation
Definition
Yes, we all appreciate having capital. But this term applies when the value of capital goes up or, well, appreciates. Important note: you don't have to do anything for capital to go up in value. Let's say you buy a stock for $20, and after a year its value is $25. It has appreciated $5 a share. You didn't have to do anything, and you don't have to sell, trade, or do anything now. You can just sit back and appreciate the appreciation.
Capital Asset Pricing Model (CAPM)
Definition
A Capital Asset Pricing Model (or CAPM) is a model that prices securities in terms of the relative risk and return offered. You can do complex equations to figure the CAPM value for something (if you're into that sort of thing). The important thing to remember: CAPM recognizes that investors need to be rewarded for risk and for the value of their money in terms of time.
Capital Gains
Definition
If you schlep to work each day, you have to pay income tax. If you invest money, make money through investments, you have to pay capital gains taxes. The rate on capital gains taxes is typically lower than income taxes. In theory, that's because the IRS wants to reward you for investing rather than spending. Call us skeptical...it still looks like more taxes to us.
Capital Gains Distribution
Definition
The fund manager in charge of your mutual fund may sell or buy some of the stocks and bonds in the fund. If he or she sells and makes a profit, the profit might be distributed to the fund holder (you). If this happens, you will have to pay taxes on the capital gains distribution.
Capital Markets People
Definition
The people who have their hot little mitts involved in the world-wide trading activities of certain sectors (like tech, healthcare, or real estate).
Capital Stock
Definition
The total common and preferred stock that a company can issue. The limit is set according to the company's charter, the paperwork the company had to file when it became public.
Capital Surplus
Definition
See Paid-In Surplus.
On a balance sheet, a company is supposed to list all its stock and capital. But what happens when the company issues or sells stock at above face value? The extra they are paid is not an earning or a capital stock. So it goes on its separate line as paid-in surplus or capital surplus.
Capping
Definition
Capping is when selling pressure is placed on a stock (or another asset) to either lower the price or keep the price low.
Capping is a strategy to game the market when someone has written a call option on an asset they are otherwise long on. Say you hold a lot of a stock (that's what it means to "be long"). You write a call option on that stock, meaning someone else pays you for the right to buy the stock at a pre-arranged price. The call option has an expiration date, so if the stock stays below the call's strike price by the expiration date, the option will end up worthless.
In capping, the person who wrote the option will sell a sizable amount of the stock they own in order to create downward pressure on the stock. They are thus capping its price. If it works out, the option will expire without getting exercised.
Cash Dividends
Definition
Dividends are a way for companies to give some of their profits to their shareholders. Startups and fast-growing companies spend most of their earnings (if they have any) on fueling further growth. When a business matures, and there is less opportunity for growth, a company needs a different way to encourage people to own its stock. Dividends are that way.
Companies pay a certain amount per share to shareholders. Usually, the dividends are paid in cash (AKA cash dividends)...the company sends a check to the shareholders based on the number of shares they hold. Another option is to pay a dividend in more stock (AKA stock dividends).
Cash Equivalent
Definition
You know, like cigarettes in prison. On the outside, it's a term used for a particular item on a balance sheet. Cash equivalents are cash and anything that can be sold and converted into cash quickly (within 30 days or so). These things can include things like money market funds or T-Bills. Stuff like intellectual property and patents, although valuable, don't count because they aren't easily sold and made into cash.
Cash Flow
Definition
Cash is like water, always moving. It's flowing and ebbing, sometimes just trickling, its way around. Cash flow just refers to the process of money moving in and out of a business. It involves cash inflows, or money flowing into your business from customers and sales. There's also (unfortunately) cash outflows, like the cash you have to pony up to fix that radiator again. (Also, salaries, utilities, raw materials, etc.)
Cash Settlement
Definition
Let’s say you buy a lemonade from the kid down the street. You trade your two bucks for a lukewarm glass of what tastes like battery acid. Pretty simple trade, right? Not so if you want to trade futures or options. In that case, there’s lots of paperwork to be signed and papers to file. Information about risks and commissions must be shared. This is called “settling” a trade. When you settle a trade, it clears.
And there are two ways for trades to clear: the regular way and cash settlement. The regular way, not surprisingly, is the most common way. With a cash settlement, what happens is that, at the end of the contract, you will just be debited the difference between the final settlement and entry price.
CBOE (Chicago Board Of Options Exchange)
Definition
The Chicago Board of Options Exchange. Want to buy options? No need to go to the Windy City. The CBOE is an exchange that lets you buy and sell options. They sell more than a million contracts a day, since they are pretty much the biggest options exchange around. All the options sold there are the basic calls and puts and all are American-style (which means you don’t have to wait until the day of expiration to exercise your option). Created in 1973, the CBOE is also busy creating e-trading and other financial tech products.
CBOT (Chicago Board Of Trade)
Definition
CBOT stands for the Chicago Board (Bored) of Trade (or Tirade, on angry days). It's an exchange where you can buy or sell futures and options. It is also the oldest options and futures exchange on the planet that's still trucking along. The CBOT was created back in 1848, and back then it mostly dealt with agricultural stuff like corn and wheat. It has since expanded into energy, gold, and other stuff.
Certificate Of Deposit (COD)
Definition
A secured-by-the-bank promissory "IOU" note, usually with a fixed maturity date and fixed interest rate.
CDs are generally shorter term "paper," and most volume in CDs mature within the next three years or less.
Chief Financial Officer - CFO
Definition
Chief Financial Officer; also, more rarely: Chief Fun Officer. If there were CFO scratch-and-sniff stickers, they'd probably smell like money. That's what CFOs take care of. (Stickers for CMOs would smell like snake oil and those for Board Chairs would smell like liniment).
Companies basically hire CFOs to count the money. These pros collect and share information about historical and current financial data, make decisions about what to do with a company's money now (including where to invest it), and make projections about what's likely to happen to a company's finances in the future. The Wall Street Journal tells us they're not just bean counters.
Chinese Wall
Definition
This concept was named after the Great Wall because it was thought to be impenetrable. The Chinese Wall refers to the divisions between the financial guys at a company and other departments at that same company. The idea is that the sides are divided up so that information can't leak through enough to allow insider trading.
In reality, the Chinese Wall is more like Swiss cheese: insider trading and information sharing between departments and companies happens all the time (even when it shouldn't).
Churning
Definition
Back in colonial times, before America was the good old U.S.A., colonists would churn cream into butter. Back then, churning involved moving a plunger in a wood bucket over and over and over again. Not exciting, but that's what happens when there's no better technology.
Today, churning is something illegal that brokers do. Churning in the financial sense means making tons of trades in a client's account to get more commissions. It's illegal but sometimes it can be difficult to detect or stop. If you fall prey to a broker who's involved in churning, you'll end up overpaying in commissions, and you might even have to pay extra taxes because of all those trades.
Clearinghouse
Definition
Futures and options exchanges have separate agencies or companies called clearinghouses. The clearinghouses take care of regulations, settling trades, and reporting information.
Closed Indenture
Definition
A loan that has maxed out or is up to the maximum amount of funds that can be borrowed. The bank is closed, folks; you'll need to find another way to pay for your dentures.
Closed-End Fund
Definition
See mutual fund. While a mutual fund is sometimes known as an open-end fund, a closed-end fund is more like a stock. A closed-end fund releases a specific number of shares during an IPO. Those shares can then be traded on an exchange; how much you make from this type of fund will depend on how the market does (just like with stocks).
CMO (Chief Marketing Officer)
Definition
CMO stands for Chief Marketing Officer. This is the person at a company responsible for advertising, marketing, market research, and everything else that goes into making sure people buy, buy, buy.
COGS (Cost Of Goods Sold)
Definition
COGS refers to the "Cost of Goods Sold," which are all the expenses a company needs to pay to get their products out the door. So the company that makes your shoes might have to pay for material to make the shoes, the process of making the shoes, the price tags and boxes for the shoes, delivery, and everything else that it takes to get the shoes to the store or to your doorstep. Those costs, all together, are the COGS of your Nikes.
Coincident Indicator
Definition
When stuff happens that is generally aligned with other stuff that happens at the same time.
Helpful, we know.
Here's an example: when the weather turns cold, people buy more gas—they are coincident.
Collateral
Definition
Stuff that you offer to the person lending you money so that if you miss a payment and default on your debt obligations, the lender has something that can be sold to satisfy the debt.
Example
You forget your wallet when you go to McDonald's. You leave your cell phone there while you drive home to get your wallet. That cell phone is collateral; McDonald's is holding on to it to be sure you don't run off without paying. (We're guessing that phone is worth more than your Big Mac.)
Collateral Trust Bonds
Definition
When a company takes shares they own of another company, tosses them in an escrow account, and uses those stocks as collateral for raising money.
Example
Let's say you own a company that makes hair-removal products and you stumble across a formula guaranteed to get rid of knuckle hair forever. (Just think of all those hairy dudes and grannies you could help!) Only one little hiccup: you need cash to make and market the product.
Your company owns Apple stock. So you throw the Apple stock into an escrow account and go to the bank. The bank uses the stock as collateral to give you a loan. Now you have the cash for your new product. Ta-da!
Collateralized Mortgage Obligation
Definition
A bunch of mortgages that are packaged together. When banks and investors package mortgages together, they can treat them like investments because these groups of mortgages pay interest (the interest comes from people who pay their mortgages).
So what happens when people don't pay? Well, then you have a bunch of investments not making money. The subprime meltdown of 2008–2009 was caused in part by these puppies, so you want to tread very carefully if you decide to invest in 'em.
Collection Ratio
Definition
You'd think after the IRS snagged Al Capone and however many other master criminals in the name of "tax evasion," people would realize that dodging the tax man is futile. Unfortunately this isn't always the case.
The IRS has lots of tools to catch the bad guys. One of them is the collection ratio, which measures the amount of taxes a city or government is supposed to take in versus the money they actually collect. If there's a difference between those two numbers, you can bet some guys in suits are going to be doing some audits and asking some questions.
Commingle
Definition
If you mingle at a party, you’re schmoozing with a bunch of different people. In finance, commingling means schmoozing with a bunch of different accounts, a.k.a. combining different accounts together.
For example, a broker might combine securities owned by the brokerage with ones owned by clients or might combine a whole bunch of individual customer accounts into one fund that works like a mutual fund.
Commissions
Definition
You didn't think that stockbrokers worked out of the goodness of their hearts, did you?
Yachts and fancy cars don't pay for themselves, you know.
Rather than being paid a salary like any Joe Schmo, stockbrokers are paid commissions, which means they are paid a small percentage of every trade they make. It can really add up, especially if someone uses unethical or illegal activities to trade more.
Commissions are really the lifeblood of stockbrokers. What gets commissions and how it gets commissions is an R-rated story (see wrap account; churning; sell-side analyst). But one key theme is that commission rates have come down. There's a lot more shares trade today versus 30 years ago, but commission rates are a fraction (we're talking 0.5–3%) of what they were in 1980.
Commodities
Definition
Note the prefix - commo - as in "common."
Commodities are goods or services that are more or less the same wherever you buy them, and in whatever form you receive them.
Coconuts, gasoline, water, and sugar are all strictly commodities. Ferrari race cars, rare Italian espresso machines, a Mona Lisa painting, and an intelligent, mature congressman are all non-commodities, which are rightly prized. Or at least should be.
Common Stock
Definition
Common stock is a share of ownership in a company that gives you voting rights, but does not guarantee you’ll be paid a dividend.
If the company goes belly up, common stock is paid after preferred stock, which means there might not be much left in the tank for you after everyone else has been paid.
Common Vs. Preferred Shares
Definition
The names give them away.
When something is common, it has the stench of bricklayers, plumbers, and people who actually work for a living, i.e., the commoners. They live at the bottom of the food chain, but they are the most powerful force in structuring society. Common shareholders function the same way. They are the last to receive payment if a company defaults, but if a company does extremely well, it is the common shareholders that make the fortune. If you own common stock, you are not guaranteed a dividend (that's the money companies pay to stockholders) but you do get voting rights on major company decisions. That can be a heady rush of power. And if the company does do really well, you will, too.
Preferred stocks occupy a higher position on the corporate food chain. Preferred shareholders stand in line before the commoners in a liquidation, so if a company goes belly-up or can only afford to pay dividends to some shareholders, preferred shareholders are closer to the front of the line. Most preferred shares have a fixed dividend which are pretty much guaranteed. In practice, preferred stock is almost always convertible into common stock at a given price; so while preferred stock looks somewhat like a bond in that there is an obligation for the corporation to pay a fixed dividend on that stock, in non-convertible preferred, those pieces of paper are really more like debt in sheep's clothing.
Competitive Bid
Definition
When a company decides to go public and launch an IPO, they need someone to sell their stock; these sellers are underwriters. But how can a company choose the right underwriters for their IPO? Sometimes, through a competitive bid. Different underwriters submit closed bids and details of the terms they are offering, and the company compares the bids to find the cheapest or best underwriters.
Competitive Underwriting
Definition
See negotiated underwriting. Basically, a way for underwriters to duke it out when an issuer wants to sell stocks and needs an underwriter. The underwriters submit bids to the issuer and the issuer selects the best of the bunch.
Conduit Theory
Definition
If you try really, really hard, you conduit.
Sorry, we couldn't resist.
Conduit theory relates to the tax treatment of an investment company. The basic idea is that if the company passes 90% or more of its net income, gains, and so on to its shareholders, then it won't be taxed on the income. Instead, the income (and losses, if any) will be passed to the investors and those shareholders will be taxed. It's the opposite of what happens at many corporations, where taxes are paid twice—once on the earnings and again after earnings have been passed on to shareholders.
Constant Dollar Plan
Definition
Imagine you buy a mutual fund and inject money into it every so often: your money would grow a lot faster than if you just bought the mutual fund and walked away, right?
A constant dollar plan is just that: a way of investing in mutual funds where you add a constant sum of cash each month (or each quarter) to buy more shares of the fund.
Consumer Price Index
Definition
An index that measures prices based on the value of certain good and services in an attempt to meter and measure inflation rates
Contingent Deferred Sales Charge
Definition
When you buy any flavor of mutual funds, you're paying fees that go to your broker. How you pay these fees (which are called "loads") depends on the type of mutual fund you have. A-shares have a front-end load, meaning you pay your fees (around 8%) to the selling broker when you buy—it's very thoughtfully added to the price right then.
B-shares are marketed with the lure that there's potentially no load, but if you sell early, the sales charge applies then (on the "back end," as the finance types like to say). B-shares basically require you to hold onto the shares for a minimum period or you get dinged with a fee. This extra fee is called the contingent deferred sales charge. How much is it exactly? It depends on when you sell. The earlier you sell, the more you pay.
The SEC has really clamped down on contingent deferred sales charges in recent years because most mutual fund investors hold shares for a period less than the CDSC (minimum) period and the regulators thought that to be unfair and abusive. After the CDSC period has passed, B-shares just convert to being A-Shares—"no load," but there's no further sales charge.
Conversion Privilege
Definition
If you have health insurance (and... it's illegal not to, so you do), there's a point at which that policy expires. The conversion privilege lets you "convert" your policy into a similar policy that continues on for a few more years. Conversion privilege is a big deal for people with dicey health issues because it means the policy can't be cancelled for health reasons (and premiums generally stay the same).
Conversion Ratio
Definition
This one has nothing to do with how many heads the minister dips in the river.
The term refers to the number of shares a bond is "convertible into." If you have a convertible bond, this ratio tells you how many shares of common stock you will get if you decide to convert the bond into stocks.
Example
Let's say a $1,000 bond converts into 100 shares. At ten bucks a share, the conversion is break-even-ish. If it's more than ten bucks a share, you're sitting pretty.
Conversion Rights
Definition
The rights to convert. It's usually something people talk about when talking about a bond converting into common stock.
Convertible Bonds
Definition
A bond that can be converted into a set number of (usually) common stock shares.
Example: A $1,000 par bond is convertible into 20 shares of common stock. What is the base conversion price? $50 a share. That's 20 shares times 50 bucks to convert. But at exactly that number, the risk/reward may not be favorable, because equities can (and do) go down a lot all the time. Whereas the bond at a grand a unit is likely pretty steady and safe. So the actual conversion price, in practice, is probably a bit higher than the 50 bucks minimum.
Convertible Stock
Definition
A type of preferred stock that can be converted into shares of common stock. What's the point of converting? If common stock takes off in value, making the switch could mean that you end up with a more valuable investment.
Example
Let's say you have $25,000 in a preferred stock. It converts into 1,000 shares of common. So if the common is selling above about 25 bucks, you'd want to convert. Hal E. Lujah.
COO (Chief Operating Officer)
Definition
What you do when you see a widdle, itty-bitty, baby beagle puppy. Cooooooooo.
Oh, also, Chief Operating Officer. In a business, the COO is the executive who's second in command (behind the CEO). Usually, the COO and CEO work together and the COO's job is to make sure that the company is doing what it's supposed to be doing. If the CEO says "jump," the COO needs to figure out how to make things jump—and how high.
Cooling
Definition
If you're a big spender, you want a cooling off period before you spend big bux. Lack of a cooling period may be why you've made some impulse buys in the past (like the leopard print pantsuit or that trip to Vegas you swore you'd never talk about). When a company publishes an offering memorandum outlining its plans to sell bonds or stock, there is a cooling off period required by law; it prevents investors from rushing in to buy without thinking.
Cooling-Off Period
Definition
Hot buyers need chillin' time. If you decide to buy that Ferrari, for example, you might want to cool off a little, big spender, before you fork over the $200,000.
If you're a company and you file with the SEC to sell bonds or stocks, there is a legal 20 day cooling off period. During this time, your company can't advertise and you have to behave yourself. When the 20 days have passed, the SEC will issue a "release" so that the securities can be sold to the public.
Corporate Bonds
Definition
Companies put cash in their bank accounts in a few basic ways. 1) They sell equity or ownership or shares of themselves like in an IPO. 2) They can make money from selling their product; that is, a single shingle sells for $19.95 and they keep $4.82 in profits from it. Times ten million...is a lot of cash. And 3) they sell bonds. Or rather, debt. That is, they pay rent for borrowing money just as governments do.
What do Microsoft, Coke, and your deadbeat uncle all have in common? They all have debt outstanding.
Most companies (like...well over 99% of them) boringly pay off their interest…and when the bonds come due however many years or decades later, they pay the principal and they’re done.They’ve presumably used the money wisely. But the more interesting bond stories revolve around the times when companies' best-laid plans go awry, and they snuggle up real close next to bankruptcy.
Example time.
If our roofing company, We've Got Shingles, has 90 million bucks in pre-tax profits, they might have 1.6 billion dollars of bonds with an interest rate of 5%. The interest costs are 80 million a year, so the company is only making 10 million dollars...juuuust enough to cover the interest.
Should profits fall, the company would go into default, miss an interest payment...and then, in theory, the bondholders could repossess the company. The bondholders could take control of it, sell off assets to pay themselves back and, well…the company usually then dies. So...that’s not good.
And that’s why the bonds are called junk. Or, in more proper parlance, “high yield.”
They live waaaaay to the right on the risk spectrum, because that whole snuggling up right next to bankruptcy is not something Wall Street people like doing. Childhood intimacy issues, probably.
So, while a very safe U.S. Government 10-year bond might pay 3%, a similar but very junky corporate bond might pay 12% or more to adjust for the vastly higher degree of risk.
Corporation
Definition
A form of business organization in which the business acquires a legal status separate from its owners; this limits the liability or risks of the owners by placing their other assets beyond the reach of court action and creditors. Corporations divide ownership into units represented by shares of stock that can be transferred or exchanged. Corporations are also generally characterized by the separation of ownership from management; thus, shareholders often play very little role in the practical management of the corporation.
Bottom line: if you sue a corporation, you can’t go after Richie McRich who owns the corporation, too.
Definition
A form of business organization in which the business acquires a legal status separate from its owners; this limits the liability or risks of the owners by placing their other assets beyond the reach of court action and creditors. Corporations divide ownership into units represented by shares of stock that can be transferred or exchanged. Corporations are also generally characterized by the separation of ownership from management; thus shareholders often play very little role in the practical management of the corporation.
Bottom line: if you sue a corporation, you can’t go after Richie McRich who owns the corporation, too.
Cost Basis
Definition
What did it cost ya? The cost basis is the full price you paid for an investment that later made you moolah.
Who cares as long as you made money, right? Not so. It matters because of the taxman who cometh.
Example
You bought 1,000 shares of IBM at $100 ($100,000 in total) and sold it 2 years later at $140 net of commissions ($140,000 total). Great job. You made 40 grand. You get taxed on said 40 grand. But you wouldn't know it's 40 grand if you didn't know your cost basis of 100 grand. You laid out $100/share for 1,000 shares. Even without the fancy calculus, that works out to a cost basis of $100,000.
Coterminous Debt
Definition
Coterminous debt is a municipal debt that was incurred in connection with some asset that benefits more than one municipality's citizens. In a coterminous debt, the obligation for the debt belongs to more than one municipality.
Example
A public park has a border between two cities and is used by citizens of both cities. If the cities issued debt to pay for upkeep in the park, the debt would be coterminous because it would be owed by the citizens of both cities.
Coupon
Definition
They're on the back of cereal boxes and at coupons.com en masse.
Oh, coupons also apply to bonds. If you have a bond, the coupon is the money you make from the interest on that bond. A normal vanilla bond pays its interest twice a year, which means that twice a year—for as long as you have the bond (until it expires)—you get cash.
Example
You have a $500,000, 8% coupon bond. Twice a year, you get $20,000 for your investment. Not bad.
Coupon Bond
Definition
A bond which pays a coupon or interest at regular intervals as long as you hold onto the bond. See zero coupon, too, which pays no coupon until the very end.
Covenants
Definition
See Exodus.
In finance, a covenant is just a promise—usually a security is backed by a series of covenants or guarantees from the issuer.
Covered Call
Definition
See covered put. "Call" here refers to the famous call option land. Covered calls relate to selling a call option. That is, you are selling to someone the right to buy a stock from you at a given price by a certain deadline (also known as shorting a call.. .because nothing is better than having lots of terms for the same thing).
The point? You'd have to sell the stock for whatever you agreed to—even if the stock was now worth a lot more. You can imagine that if you had sold a call on some hot internet stock and it then skyrocketed... yeah. Not good.
Example
Yahoo! came public at $22. For $3 a share you sold someone the right to buy the stock at $30 at some point in the next 8 months. The stock then goes to $200 five months later. They stretch out their open sweaty palm and say, "Okay, deliver unto me said shares." You then have to go out and buy them for $200. Each. Ouch.
Covered Options
Definition
Selling options when you have enough of that stock or security to protect (or cover) your butt if the price on the stock changes a lot.
If you sell call options and actually have the stock, you aren't going to be happy if the stock rises because you'll lose the stock, which is more valuable now. But at least you won't have to "cover" the stock in the market at a higher price.
Covered Party
Definition
At Angelina and Brad's wedding, it rained. There was a big tent....
The term also refers to liability. It means that if one person is considered an insiderand is banned from insider trading, there may be other people in their life who are also covered by the same laws. If your twin is the CEO of a company, you can't just use her insider information for your own insider trading.
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 also applied to him... and to them collectively. So they both lose everything, and they can cool their heels in prison for 5–10 with time off for good behavior.
Covered Put Writer
Definition
"Writing" is another common term for "selling." They mean the same thing. Writing a put is selling a put. The best way to visualize this is that, for every buyer of a put option, there has to be another party that sells that put.
Let's walk through a transaction, but we'll start with a covered call, because it is easier to understand. In a covered call trade, the trader buys shares, believing they will go up, 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 upward 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. 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 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 trader here at $110 a share.
So if IBM tanks amid fraudulent accounting rumors and goes to $80 a share, our trader makes $20 a share from the decline from $130 to $110. And then she pockets another $4 from the put premium she sold. At $80, her IBM shares will be put to her, but she will be "covered," because she has the shares that she shorted in the first place. That is, the risk is less. And the reward is less, too. If she'd just shorted IBM and played golf, she would have made $50 from IBM's decline from $130 to $80 in that time period.
Crash Of 1929
Definition
In the 1920s, the stock market was booming, and people were using their stock investments to buy houses and the like. Then, in October 1929, it tanked. People's investments were wiped out, and... hello, Great Depression.
Credit Agreement
Definition
The legal handshake that happens between the borrower and the lender. It's usually a long contract in legalese that outlines all the details of a loan, including the terms, interest rates, and all other super fun details.
Crossed Market
Definition
A situation where the bid price is higher than the ask price. In other words, somebody is willing to pay more for a stock than the price at which the seller is willing to part with it. Crossed markets are almost always caused by misunderstandings and mistakes (like typos), but they can create some excitement until the error is resolved.
CTS (Consolidated Tape System)
Definition
Consolidated Tape System.
This is the electronic system that provides real-time information about stock trades. Seen all those numbers scrolling by from stock exchanges? Thank the CTS.
Cumulative Preferred Stock
Definition
The dividend on the preferred stock must be paid before the company can pay the common shareholders a cent.
If it's not paid, then it just builds and builds (a.k.a. accumulates). Usually, dividends are not paid if the company runs into trouble. Once the company gets over the hump and starts paying dividends again, it has to pay up all the missed dividends owed to the preferred stockholders (that amount is the cumulative preferred stock) before paying the common stock folks.
In theory, the company could stiff the preferred holders forever, but that never happens because the common shareholders would revolt and throw those jerks out of their cushy jobs.
Cumulative Voting
Definition
It's about how companies' boards of directors are voted in or out. In cumulative voting, shareholders get one vote for each director, but they can accumulate all of them and pool all of the votes behind just one director if they want.
Example
You have 500 shares of XYZ Corp., and there are 5 directors up for election. That means you have 2,500 votes (500 shares x 5 directors) to allocate, and you can put them all behind your cousin Billy.
Current Asset
Definition
An asset that will be used (or converted to cash) within one year.
Current Liability
Definition
Debt owed within one year. Nothing to do with risky raisins.
Current Ratio
Definition
Current ratio is just a measure of what we got against what we owe, based on current (short-term) assets and liabilities (ones we only have to worry about for the next year).
We have to worry about two things here: the ratio itself and how big the numbers are.
If we have a really small business and our liabilities are larger than our assets, we might be scrambling to pay what we owe and we could get into a lot of trouble. If we're handling big moolah (assets of $10 million or more), we've got more pressure if we have lots of debt... even if we have more assets. If sales dip or a lot of our sales are on credit, we could have a hard time paying what we owe.
Example
Say current assets are $10,000,000 and current liabilities are $3,000,000. We like to see 3-1 or better for this ratio. It just means we’re paying our bills faster than we’re collecting them and it says a lot about our cash liquidity.
Current Yield
Definition
Think of it as "market yield": You can figure out the current yield by dividing the amount you make from an investment by the current market price. It gives you a sense of what sort of money you'd be making if you bought a bond or investment and held onto it for a year.
Example
The subordinated debentures for Cablevision have a coupon of 7%. That is, when Cablevision sold $100M of those bonds, they were on the hook for $7M a year in interest. Cablevision couldn't help that Wall Street didn't like their new programming deals, which didn't include C-SPAN, and the bonds sold off heavily—down to 90 cents on the dollar. Anyone who now buys a bond unit (usually solid in increments of $1,000) for $900 still receives the 7% coupon from the good people at Cablevision. It's just that now that $70 in interest is paid out over the initial cost of $900 instead of $1,000. 70/1000 = 7%; 70/900 = 7.8%
CUSIP Number
Definition
It's like the bar code on a security.
Many stocks and bonds have multiple flavors, some that are very, very similar. Trying to keep things straight can be confusing, and tacking on CUSIP numbers helps to clear things up a bit. Having a unique CUSIP allows for the securities to be individually identified so when you think you were buying a cow, you actually get a cow... and not a bunch of magic beans.
Custodial Account
Definition
Richie Rich can't place his own trades but his custodian can. If Richie is either a minor or mentally incapable of doing the deed, a custodian has to give the green light to execute.
Customer Statement
Definition
"I love my broker!"...said no one ever.
Technically, a customer statement is a piece of paper (electronic or dead tree) that simply outlines what the customer did during the month: the trades they made, what their account is now worth, what they currently own, etc. You get 'em from your bank accounts, credit card accounts, and investment accounts. The SEC requires quarterly statements for investment accounts, but most brokerages send customer statements monthly—sort of a marketing thing.
D&A (Depreciation & Amortization)
Definition
Depreciation and Amortization (D&A). It's a method of valuing assets—usually ones that are declining in value.
Dated Date
Definition
What a term.
In finance, it's the date on which interest begins to accrue (grow) on a fixed-income security (like a fixed-rate government bond, for example). Investors who buy a fixed-income security between interest payment dates must also pay the seller or issuer any interest that has accrued from the dated date to the purchase date, or settlement date, in addition to the face value.
If you have your eye on a $1,000 fixed-rate government bond for January–June and you buy the bond in March, you're going to pay for the bond and you're going to pay the interest that would have been due between January and March.
Day Order
Definition
The order is what you give your broker, telling them to buy or sell specific securities on your behalf. A day order is good for only the day in which it was placed. If it's not filled for some reason, it's no good the next day.
Dead Cat Bounce
Definition
Sounds like a dance move from the Old West, but it actually refers to a terrible situation when the market plummets, rebounds very slightly, and then plummets again. The idea comes from the notion of dropping a cat off of a high building. It hits the cement—dead—and bounces a bit before a wet thud.
PETA: No cats were harmed in the production of this definition.
Example
The market has fallen from 5,000 to 1,200. Now it's at 1,400 and you think it's headed to below 1,000. That uplift of 200 points from 1,200 to 1,400 is the "dead cat bounce."
Dead Money
Definition
Dead men tale no tales—but dead money might. Dead money is just an expression for funds that aren't earning interest or investments that aren't likely to gain in value. In other words, it's an investment that's doing nothing at all.
Debenture
Definition
Nothing to do with your grandpappy's dentures, a debenture is a bond-like loan certificate that's backed only by the promise the issuer makes that it will pay back the dough.
Like other investments, it pays interest, but it's risky because there's nothing backing it up.
If the company lied about paying you back? Not much you can do about it.
Debt Per Capita
Definition
Dept per capita is a ratio that describes the amount of debt per person in a specific country.
Usually, the higher the number, the more debt a country has and the shakier its economy. For example, Greece has a high one; Dubai has a low one.
Debt Service
Definition
Debt service refers to the interest you pay on a debt in a year.
Why do you need to know this stuff? Well, for the IRS. The IRS may give you a tax break on the interest you pay on a business loan, so you may need to tally up the interest you've paid in a tax year. Banks might be interested in your debt service if you apply for a loan and the bank needs to figure out whether you have too much debt already.
Debt Service Ratio
Definition
This ratio compares cash flow (money coming in) to the total interest payments owed on debts. A company could be bringing in tons of cash, but if it's leveraged up to its eyeballs, it won't have a lot of wiggle room.
Debt-to-EBITDA
Definition
Debt-to-EBITDA is a ratio that compares what a company owes in debts to the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
This number is used by bankers and investors to see how leveraged a company is. The higher the number, the more likely it is that a company will struggle to pay up its debt. Debt of more than 3 or 4 times cash flow is considered very high on most planets.
Debt-to-Equity Ratio
Definition
A very closely-watched metric by analysts.
The percentage is calculated by dividing a company's debt by the equity of stockholders and other owners. In general, a high D/E ratio is considered dangerous because it means the company has borrowed a lot. Lots of borrowing increases the chances of default and ultimate bankruptcy.
Deferred Annuity
Definition
You want to wait until you collect your money? Really? Okay, well, then this is the annuity for you.
You store your money in the piggy bank, deferring (delaying) 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.
This might be a good option for anyone who still has Halloween candy left over well into November.
Deferred Interest
Definition
Deferred interest refers to a bond where interest payments are deferred (delayed) for some period of time.
The deferred interest earns its own interest, so the net payments to the bondholders will be the same. Start-ups commonly offer these as a way to conserve cash; by the time they have to pay up, hopefully they've started earning some dough.
Deferred Load
Definition
When mutual funds began selling, the managers paid commission to fund brokers in the form of a load, which customers paid up front when they bought the fund. That is, they might invest $2,000 and would have paid a 5% commission, so that after day one, they had lost $100 on their investment, which now showed up as $1,900 on the books. There was an additional effect here in that they had a smaller base that earned interest.
To reduce the weight of this load and to make funds more attractive to customers, funds began to let customers defer the commissions. For some funds, customers paid the commission when they redeemed the fund. For others it was after some set period of time or when assets had reached a certain level.
The key idea is that the commission in a deferred load mutual fund transaction is paid "later." Mañana. Procrastination. You get the idea.
Defined Benefit Plans
Definition
A retirement plan in which the employer guarantees some form of retirement plan.
The worker does not control investments, so the employer has all responsibility if the pension assets don't perform well.
Defined Contribution Plans
Definition
Retirement plans that are funded through employee salary deferrals. The employee (also called the "participant") is offered a choice of investments, usually in the form of mutual funds. The employee is responsible for the performance of the account—the employer has no responsibility for the investment choices or how well they do. So if the employee ends up with nada because of poor investment choices, the employer has nothing to do with it.
Deflation
Definition
The opposite of inflation. Shmoop out.
Okay, fine: when your purchasing power is increasing, the currency is deflating. That means you can buy more stuff with less money. Deflation is less common than inflation; prices usually go up and up, not down.
Delisting
Definition
Taking your company public is commonly referred to as "listing it." It gets placed on the long list of already public companies, and stocks can be bought and sold.
Un-doing that is delisting. That is, the company is no longer public—either because it went bankrupt, violated some rules for staying listed, or got bought.
Delivery Vs. Payment
Definition
DVP is a settlement in which the seller of stock doesn't release it to the buyer until the buyer has paid for it. Payment and delivery occur at the same time, pretty much.
Depletion Allowance
Definition
In the oil and mining industries, a depletion allowance is a tax break that lets the mining companies treat whatever is being mined (oil, minerals) as capital equipment for tax purposes. They get to deduct some of the money generated from mining.
Depreciate
Definition
To lose value.
For example, when you drive that new Bugatti off the lot at your dealership, that car starts depreciating about as fast as you drive. Because it's no longer new, it’s automatically worth less than it was an hour ago—even if it still has the new car smell. Cars aren't the only things affected, by the way. Business equipment, computers, and other stuff can depreciate, too, and businesses need to keep track of depreciation to understand what their stuff is worth. If you owe $100,000 in loans for factory equipment, for example, and that equipment is now worth only $50,000 thanks to the amazing powers of depreciation, that’s something you're going to want to keep an eye on.
For people keeping the books at a company, it's the process of assigning the decline in value of a license or product over time. Say you buy a computer for $3,600. The law says that you must depreciate it $100 a month for 36 months until, on your books, it's valued at zero. The thinking is that, at the end of the period, you "know" you have to buy another computer. Many computers last more than 3 years, though, so the numbers get all messed up.
Depression
Definition
Usually, what happens right around April 15th each year.
From a macro perspective, a depression is defined differently by different groups, but most agree that it's a more severe and prolonged version of a recession, with GDP in sustained decline and unemployment at high rates.
When it happens, everyone has less money to spend and things become a cycle—since people aren’t spending money, businesses don’t need to make as much stuff and they lose revenues so some of them shut down, which means fewer jobs and even less spending. During a depression, the government might step in with programs that are meant to provide jobs and get people spending again.
Diagonal Spread
Definition
A strategy for buying stock options where you both buy and sell stock options for the same stock at the same time—but the options you’re buying have a different expiration date and a different strike price than the options you’re selling.
Example
You buy $50 August Call option for $1, and Sell a $60 June Call option for $2. You’ve just created a diagonal spread.
Dilution
Definition
If you pour a bunch of cream into black coffee, you dilute the coffee—it's tastier, yes, but it's not just coffee anymore.
Same deal with stocks. The more shares a company has outstanding, the more the company is owned by other people and the more diluted it is—which means that each person with stock owns a tinier chunk of the pie.
Short version: dilution is the reduction in relative ownership levels or percentages caused by the creation of new shares.
Example
If a company has 50 million shares outstanding and grants 10 million options with a low strike price, it has diluted itself about 20% because the options will be exercised and—presto!—the company now has 60 million shares outstanding. Early stage start-up companies usually have stock option plans so most "suffer" dilution because they're trying to raise cash for growing the company.
Direct Participation Program (DPP)
Definition
See: Limited Partnership.
When you directly participate in an investment as a collective or group, it's likely that the corporate structure of your investment vehicle is that of a DPP, or Direct Participation Program.
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 - DPO
Definition
First see: IPO. That's the kissin' cousin here. Initial Public Offering. Like in that magical moment in the back seat of a car late on a Saturday night when a company passes ownership of its company from being private to being...public. That public offering usually comes with the company raising some amount of money in selling a percentage of itself to public investors (with like a zillion additional regulations that follow as well.)
So what's a DPO? Well, basically, it's an alternative to an underwritten issue, where the company sells its shares directly to its own customers, suppliers, employees, and others who are closely affiliated with the company. These are less expensive than underwritten offerings, but tend to be used only by large, established companies. They're rare and dicey. Like...how would you like to have to regularly negotiate deal terms with the people who actually own you? Yep. The process can lead to a very bad breakup.
Discount Bond
Definition
A bond that trades or sells for less than its par value, usually because the company behind the bond is having some credit problems.
Example
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's 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 Rate
Definition
Investments always carry risk. How much risk they carry is where the discount rate comes in; when fancy numbers are run on discounted cash flow, it lets money types figure out present value.
Basically, you get a higher discount rate for riskier investments.
Discounted Cash Flow
Definition
A dollar today is worth more than a dollar tomorrow. So... money in the future carries a discounted value from what money is worth today. How much it's discounted is called the discount rate, and DCF in particular refers to the way many companies are valued on Wall Street.
Basically, you can decide how much an investment might be worth to you by trying to figure out how much cash flow a business might experience in the future. Finance types use lots of equations and numbers for discount cash flow analysis to figure out exactly how much more (or less) cash flow a company might experience in the future.
It's a science, not an art.
Example
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. Of course, there's 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.
Discretion
Definition
If you have clients, the presumption is that you know how to keep your mouth shut. You don't talk about how much money they have at Sheila's wedding. You don't blog your client list. You don't feather your own cap.
Loose lips sink ships and all that.
Discretion also means that your client has given you the right to decide for him what to buy and sell—and at what price. It's a big responsibility. Clients do sue if you're wrong: they claim their losses were caused by your abuse of discretion.
"Sometimes it works."
Discretionary Account
Definition
An account where the manager of that account can do whatever she wants with it.
Well, within reason.
The manager can't just withdraw everything and go "find themselves" in the Amazon. What it does mean, though, is that they get to call the shots. An amazing once-in-a-lifetime opportunity crops up, but your broker can't get in touch with you? Too bad, so sad—unless you have a discretionary account. In that case, the broker can buy that amazing opportunity for you without your say-so.
Disintermediation
Definition
The sort of word SAT tutors drool over. Despite all those syllables, it means something really simple: cutting out the middleman.
Example
You launch a business making custom candy bar covers for people who'll buy literally anything. You sell them to stores in your area. Then you decide to cut out the middleman and sell directly to the customer.
Diversification
Definition
Investment in a range of stocks in order to mitigate volatility and risk
Diversified Mutual Fund
Definition
Mutual funds are a group of stocks and bonds, usually.
A diversified mutual fund usually includes both stocks and bonds—and usually in combos that help you balance risk and reward. If you always look twice before you cross the street and are considering earthquake insurance even though you live in Chicago, you might want a mutual fund that has more bonds than stocks.
The balance between bonds and stocks isn't the only diversity your mutual fund can have. A diversified mutual fund is also usually spread out across different industries. Maybe a fund has some stocks in the tech industry and some stocks in the construction industry, as well as some bonds from companies and some bonds from governments. Even if the real estate market tanks (again), the government bonds and tech industry stocks may keep the mutual fund from being too much of a disappointment.
Dividend
Definition
The distribution of cash profits a company voluntarily makes to common shareholders at regular periods, usually quarterly in the U.S.
Dividend Payout
Definition
The dividend payout is the total amount a company is handing out in dividends to its stockholders. To do that, it will usually have to tally up the payout ratio to decide whether there's enough cash to pay for the dividends. The ratio can be calculated with one handy formula:
payout ratio = dividend payout/earnings
Example
A company has $100 million in profits. It pays dividends of $65 million. Its payout is $65 million. Its payout ratio is 65%.
Do Not Reduce
Definition
Normally a limit order to a broker 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 pushed down for dividends.
Dollar-Cost Averaging (DCA)
Definition
A strategy for mutual fund investing.
You invest a fixed dollar amount each month in the fund. The theory behind this discipline runs 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. But if you believe that, over time, markets go up, then adding more of something when it's "cheap" is usually a good idea.
See: Average Down.
Domestic Equity Funds
Definition
Domestic Equity Funds are index funds, mutual funds, or other types of funds which invest only in U.S. domestic stocks (and not bonds).
So a portfolio for a domestic equity fund might have a million shares of Dow Chemical, 2 million shares of eBay, 500,000 shares of Ford, and so on.
All Americana, all the time.
Don't Know (DK) Notice
Definition
A DK Notice is basically a note sent by a clearinghouse to the broker to say "hold up, something went wrong." It's sent when a broker makes a buy but the clearinghouse can't find the sale that matches up. It can happen due to typos or inaccurate trade symbols or other mistakes.
Oops?
Double Barreled
Definition
The kind of gun Daddy shows off to your date on prom might.
It's is also a municipal bond term. A double-barreled muni bond is backed both by specific revenues (like bridge tolls) as well as by the credit and good faith (and taxes) of the municipality.
Dow Theory
Definition
Dow Theory views the transportation industry as a leading indicator for where the rest of the market is going. The belief is that the market, on both the up and the down side, plays hopscotch with the transportation index, such that in understanding Dow Theory, investors get a guided tour of the crystal ball of the future of where the stock market is heading.
Due Diligence
Definition
Sure, you could buy stocks, start up a company, or make all kinds of money decisions without actually looking into anything.
But when you don't do your homework, you're more likely to end up a whole pile of crappy investments. Due diligence just means hitting the books (or Google) to make sure that a company or business is all that it seems.
Dutch Auction
Definition
Uh, an auction held in Amsterdam? Well, maybe.
But in the land of money, it's a public offering where the offering price is decided by asking for bids. The bids are mulled over to find the price at which securities will be sold.
Example
The Fabulous Fabulous Company is a start-up. You're not sure what they do, but you know it's something fabulous. The company is making a public offering via dutch auction. You submit a bid of $100 for 1,000 shares. Your sister submits her bid ($90 for 1,000 shares) and your dad submits his ($85 for 1,000 shares). The bids are all arranged in order from highest to lowest. The last successful bid is the one that wins. So if that bid is your dad, you (and your dad and your sister) will be able to buy 1,000 shares for $85.
DVP (Delivery V. Payment)
Definition
It stands for "Delivery v. Payment."
To understand it, you have to understand the awkwardness of selling stock. The buyer doesn't want to pay cash until they have the stock. The seller doesn't want to let go of the stock until they have the cold, hard cash. The obvious answer is to make sure that the handing over of the stock and the cash happen at the same time.
That's DVP... but how does that happen? In this situation, a clearing agent makes things a little less tense by being the middleman. He or she ensures that the buyer gets the stock and the seller gets their cash.
Crisis averted.
Earned Income
Definition
Earned income refers to what you earn from employment (including tips and commissions).
The Tax Man is really interested in it, since this is the money that you'll be paying income tax on.
Earnings Per Share (EPS)
Definition
Imagine a lemonade stand. 20 grand in sales and 16 grand in gross profits. And yeah, we’ll spare you the “gross” jokes. The customer asked the lemonade-ista what the fly was doing in his lemonade, and yes, of course she said "the backstroke."
After gross profits on the income statement, there are operating expenses...and then operating profits. Then there are taxes. Yeah, there are always taxes. And then finally net income, a.k.a. earnings. But then, below earnings, you’ll see that there are a hundred shares in this little company.
The founder owns 60 of them. Mom owns 10. The new step-dad owns 20. He was guilted into it by the divorce lawyer. And Enrique the gardener, who has cleverly weaseled his way into the family’s hearts and minds, owns the last 10. It’s annual report time, and the investors want to know what their earnings per share were...so that they can all compare relative performance on their investments.
So...the total earnings of the company was $5,250. Which means that the earnings per share were that 5,250 figure divided by 100...or $52.50. That’s what each share earned if you divvied the company into 100 little pie slices, or parts. So yeah…earnings per share equals earnings per slice o’ pie.
Wait—“lemonade pie”…has that been done yet? Hm…time for a new business venture…
Eastern Accounts
Definition
Eastern and Western Accounts are two different team methods in which underwriters or stock brokers or investment bankers sell securities to their constituency. And that’s a $5 word for…mutual funds…hedge funds…and just generally wealthy people. "Team" is only a notional thing on Wall Street…and the line between the two types of teams gets drawn clearly in a Western v. Eastern style of selling.
Think: the Mississippi River. A Western account is a divided account. What does that mean? Well, like the Old West, this style agreement is, more or less, "every man, woman or other for him-her-or-itself"... and since, in most deals, there are multiple syndicate partners, “who is responsible to sell” is what really matters.
So in any given deal, when the partners sign up to bid for the business to take whatever.com public...it is those partners in a Western style account who are each on the hook to sell whatever amount of shares or dollar volumes they have committed to sell. In other words...you break it, you bought it. Or rather, you bid for it, you own it.
In a Western account, the allegory is the cowboy who has his own set of 28 cows he feeds, clothes, manages, and provides a social life for, all on his own. At the other end of the country...lives the Eastern style of account arrangement. Not sure what it is about East Coasters; maybe it’s the history of unions there, but they all seem to want to work together. Go figure.
Eastern account syndicates oblige members to sell not only their own allotment, but also the amount that is not sold by other syndicate members. That is, each individual member is not only on the hook to sell the shares they have committed to sell, but they are also responsible for selling the shares of the other players in their syndicate.
You can imagine that, for a company nervous about getting all of their shares placed properly, they would lean hard on the investment bank to adopt an Eastern style team sales approach instead of a Western one. Regardless of Eastern or Western style deals…the most important element in an offering getting properly placed is that the bankers get paid.
As long as the contract is set up so that the banker only makes money if a successful deal happens, usually everyone selling securities is kept fat and happy. The same may not necessarily be said for the people who bought them...
EBITDA
Definition
Earnings Before Interest, Taxes, Depreciation, and Amortization.
Seems like a five-eyeballed purple fish out of a nuclear plant river. Why on earth would anyone track this arcane piece of financial data?
Well, in theory, EBITDA strips out noise—noise that isn't germane to the business being analyzed. The idea is that EBITDA takes out information about financing and accounting differences, so it's easier to compare companies. Investors use this number to figure out whether a company is a good investing bet or not. EBITDA can be useful, but it can also be fudged—just like any other financial data.
The notion was popularized by high cap ex industries (like the cable industry) which generated very high unit margins but never had any capital available to give back to shareholders because the industry was busy buying content and itself (i.e. consolidating). Many investors liken EBITDA to "cash flow" as a proxy for the unfettered operational cash earning power of the entity itself.
The dotcom meltdown of the early 2000s happened in part because the EBITDA numbers for dotcom companies were great... even though that didn't stop those companies from flopping. EBITDA can make companies with a lot of debt look far more promising than they are, so always check more than EBITDA when deciding what to invest in, kay?
ECN (Electronic Communication Network)
Definition
The Electronic Communication Network (ECN) is a platform for securities trading. It matches brokerages and investors of securities "off market"—that is, not as part of the registered group trading on the New York Stock Exchange.
Each transaction comes with a fee.
Efficient Markets Theory
Definition
There should just be a big picture of Warren Buffett here. It should be “The Man” explaining the efficient markets theory…which states that it’s impossible to beat the market over a sustained period. It should be Buffett who explains that all relevant information comes public, in public stocks, and that the market more or less immediately incorporates that information in its pricing. Hence, nobody can ever beat the market.
So…why should Buffett be giving this little definition? Because the efficient markets theory is wrong.
Buffett has beaten the market...for decades in a row now, in every way, shape and form. So…you have a really memorable, huge figure in finance...and then pipsqueak professors who are kind of a laughingstock whenever the wealthy power crowds gather in Omaha for their national convention.
The, uh...Woodstock of Finance, if you will. Fortunately, most people keep their clothes on for this one…
Emerging Market
Definition
China was once seen as an emerging market. Now that it owns a huge chunk of our debt, we can all agree that it has emerged.
An emerging market is one that carries political and economic risk—but great potential because its economy is growing fast. Some people like investing in emerging markets because there is the potential for huge growth if the country's economy takes off.
Employee Stock Options
Definition
Your employer might want to sweeten your benefits package by offering you stock options—it's a way of enticing you to work for below-market levels of cash salary. If your company makes it big, it can pay off. Otherwise, it's basically just fake money.
Your employee stock options (ESOs) give you the right to buy your company stock for a specific price by a specific date. It’s similar to a regular ol' stock option, but with two big differences:
- ESOs can't usually be traded on public exchanges like other options.
- You will usually need to be an employee for a specific period of time before you can exercise your options.
Enterprise Value
Definition
When you ask the question "What would it take to replace this thing right now?" you get the enterprise value. The number is used when deciding the total value of a business, usually. Insurance companies also consider it when deciding how much coverage a business needs.
Example
Let's say you set up a food truck selling anchovy sandwiches. The truck and everything in it set you back $100,000. You put down $50,000, and a bank gave you a business loan of $50,000. The equity value of the business is $50,000 because you've got debt, but the enterprise value is $100,000—that's what it would cost to replace everything and keep truckin' with the 'chovies.
Entity
Definition
Thing. That's what it means. Really.
So what does it have to do with finances? Well, it gets used in contracts a lot—basically anytime legalese makes an appearance. For example, "business entity" is used when describing what kind of business a person is setting up (corporation? non-profit?). It can also be used when describing a separate part of a business (a division or department).
So yeah, it's a weird entity.
Equipment Trust Certificate
Definition
Well, it’s basically an asset-backed bond…i.e. a bond that is backed by the equipment or machinery that a company owns.
When you buy this sort of bond, the idea is that, in case the company can't pay back the bond...the equipment or machinery they own can be sold to pay for it—that way, the lender doesn’t lose money.
Probably.
Think of the equipment as collateral itself. Wanna buy a turbo-charged driving lawnmower that mows dozens of acres of land into a finely landscaped golf course...because you’re bored and like to cut grass?
You can buy it for six grand down and a $14k loan against that lawnmower, such that if you ever stop making payments, Caterpillar can repossess it and sell it on eBay. Although, if they do, they, uh...probably won’t be invited to play on your course.
Equity
Definition
Equity can refer to two things:
- The amount of value you have in assets minus any debts. If you have a $200,000 house and owe $100,000 on your mortgage, you have $100,000 in equity. It's an important number if you’re trying to borrow against that amount.
- Ownership (of stock). If you own 3 shares of Acme Corporation, you have equity in the company that made the Road Runner famous. Equity means owning a sliver of the big fat pie called Corporate America.
Equity Capitalization
Definition
Equity cap refers to the total value of an equity market. You add up the market capitalization of all the companies in a market and—ta-da!—you have the equity capitalization.
And what can you do with this big number? Well, if you like numbers, you can stare at it and enjoy it that way. Most likely, you're going to compare it to the past equity capitalization rates for the market to see how the market's doing. Or maybe you'll compare it to other markets (like the real estate market) because you're considering where to make your investment.
Basically, equity cap usually refers what investors are paying for a company's earnings power; i.e., "ignore the cash on the balance sheet" calculation.
Equity Funds
Definition
Equity funds are mutual funds or index funds that are made up mostly of stocks.
Equity funds come in a range of flavors, depending on the investment themes they display. So there are "income equity funds," "growth equity funds," "fun equity funds," and so on.
An income equity fund would be made up mostly of stocks from companies that have a good history of paying out dividends (so they give you an income—get it?).
A growth equity fund would be made up of stocks from companies that are growing (duh?) and are probably not paying out dividends because they are reinvesting their profits to grow faster.
You get the idea.
Equity Income Fund
Definition
See equity funds. It's is a type of index or mutual fund that is made up mostly of stocks. But not just any stocks: You're investing in companies that are usually fairly established and are pretty good about creating income for investing by paying our dividends regularly.
Example
A typical equity income fund holding might be Heinz or AT&T or Pfizer, which are all well-developed companies growing at relatively slow rates but which have lots of "excess" cash to give back to investors.
Equity Market
Definition
It's just a market where equities are traded like marbles (or kidneys on eBay). If you want to buy or sell stocks or ownership in companies, you're going to be headed to the equity market.
Example
NASDAQ is an equity market. So is the New York Stock Exchange. Nothin' fancy.
Equity Options
Definition
See options. "Equity options" refers to options where the security in question is a stock (rather than a bond).
Example
You buy a $5 option to buy shares of your Uncle's favorite hot dog company in one month for the price of $100 per share. Congrats—you've bought an equity option.
ERISA
Definition
Employee Retirement Income Security Act.
It's a federal law that protects you if you have an employee retirement account. It doesn't mean that your boss has to provide you with an employee retirement account and it doesn't set minimums for how much you can make or invest. But if your boss does offer an employee retirement account, this law sets some ground rules.
Thanks to ERISA, your boss must provide you with some basic information about your investments and must be reasonable when making up your retirement fund. These rules also establish how long you must work before you get any benefits. Basically, the law means your boss can't legally take your money into a retirement account and then drain the cash to take off to Fiji with the hot guy from the mail room.
Escrow
Definition
Something (usually money) held by an independent third party for the buyer and seller in a transaction until the transaction goes through.
Think of it a little like a standoff in the Old West: The Big Bad comes in with Suzie Mae, who was kidnapped a week ago. The hero comes in with the cash to pay the ransom. Nobody wants to make a first move, so the sheriff takes both Suzie Mae and the cash for a minute and hands both Big Bad and the hero what they got in the exchange. No guns drawn, and a tumbleweed rolls by.
Escrow is like that... but a lot less tense.
Securities and cash are often held in escrow until they get the green light from the escrow agent (the guy who's holding this stuff) saying that both sides have fulfilled their obligations; the agent then releases the assets to the respective parties.
ETF (Exchange Traded Fund)
Definition
ETFs (exchange-traded funds) are a bunch of stocks in one investment that are linked to an index (like the Dow or the S&P 500).
When an ETF is set up, someone buys up stocks in the companies listed in a specific index in the same amount as the index itself. Your ETF is based on the FUN* index that's made up of stocks in ten candy and video game companies? Great, your ETF will have stocks in those ten companies. Here's where things get interesting: the thing about an ETF is that no changes are made to the fund as the index changes. Over time, some companies might fold or might be replaced on the index. Some companies might tank. No matter. Your ETF will remain pretty much true to the index on the day your fund was created—no big changes.
By the way, ETFs may look like mutual funds (they are a collection of stocks, after all) but they trade like stocks on the markets.
Index Funds vs. ETFs
One key elemental thing worth understanding is the difference between index funds and exchange traded funds.
Index funds are NAV beasts; that is, each day, an uber-bean-counter adds up the stocks and/or bonds in a fund and calculates its value. Periodically (monthly-ish), the fund manager rebalances the fund. Let's say that a company in the S&P 500 is acquired by another or goes bankrupt. Well, it has to be replaced in the index. Or let's say a stock has a monster run and gets huge—should Apple still be 16% of the QQQQ index? It depends on the original documentation of the fund and the fund manager's job is to rebalance" over time.
ETFs do pretty much the opposite. No uber bean-counter, no rebalancing. Like your uncle Dennis's comb-over, the style stays the same.
*not a real index; sorry, dudes
European Style
Definition
Slow dinners. Fancy shoes. Disgust over the acoustics of the room.
In the finance world, European style refers to a type of stock option. American style options let you exercise your stock options (i.e., buy or sell your stocks at the strike price) any time up to the expiration date. European style options can only be exercised on the expiration date—not before, not after. No matter where the company is based and whether or not your broker has a snazzy European British accent, your stock options can be European or American style.
Read the fine print.
Ex-Date
Definition
Sort of like JDate, only with exes as the entire dating population.
Oh, ex-date also refers to the deadline for when an investor has to buy a stock to get the dividend. You have to own the stock by a certain date, which the company declares in advance, to get the dividend. But when you buy a stock, you don't buy it instantly. There's a settlement process before you take ownership of the stock—and in the U.S., settlement occurs two days after the trade. If you buy after the ex-dividend date, you won't receive the dividend; the seller will.
Example
If the record date is October 15, you have to actually buy the stock on or before October 13. If you don't, you won't "own" the stock on October 15—which is known as the "ex-dividend" date.
Ex-Rights
Definition
Without rights.
Warranties and rights are often added to bonds to lure in investors. But these rights are detachable. You can separate the rights from the bond and sell them on their own.
A bond trading "ex-rights" means that if you buy it, you don't get the warranties. They may have expired, the seller might be keeping them, or they may have already been sold to someone else. Anyway, they're gone.
It's a little like buying bonds "no batteries included."
Exercise Price
Definition
It's not about how much you pay to get in to your gym. It's the strike price of the stock option you own. So if you buy an option to buy a stock at a specific price, that specific price is the exercise price (a.k.a. the strike price).
Example
Let's say you joined GerbilDating.com in its infancy. You were granted 100,000 options at a $2 strike price. It's now publicly traded on NASDAQ. The stock just hit $40. You can exercise your options, paying $2 to GerbilDating.com to buy out that share of stock, and then sell it for $40 through your broker to net $38 in gain per share. The $2 you pay to buy the stock as you exercise the option is the exercise price.
Exercise Settlement Date
Definition
ESD refers to the date when an option is converted into a stock or share. It's also the date when a trade officially goes through.
It's important to keep this date in mind because the date when you buy a stock and the date it is officially in your hot little hands can be different. In some cases, you officially own your stock a day after a transaction, and in other cases, it can take up to three business days.
If you're getting dividends for your stock, the slight difference in dates can make a big difference.
Example
You buy an option to buy 100 shares of a new social media startup called mylifesucks.com at $5 a share. The stock goes up to $10 a share and you decide to buy on October 3. On October 6, you get word that the stocks are officially yours. Awesome.
One little detail: the cut-off date for dividend payouts was October 4. That means you don't get the dividend cash because you didn't officially own the stock until October 6. That does suck.
Expense Ratio
Definition
The expense ratio of a fund is a fraction that helps you understand how much you're being charged for your investments.
The numerator (top number) is the fee charged to you by the bank or whoever buys investments for you, and the denominator (bottom number) is the total assets or total amount of your investment.
If the numerator is big compared to the denominator, you're being charged a lot for your investments. If that's the case, we hope they're growing like weeds.
Expiration Dates
Definition
If you buy stock options, the expiration date is the last day you have to exercise your options (i.e., either buy or sell the stocks at the strike price).
If you wait past the expiration date, your options expire and become worthless: you can’t sell it or trade it or use it to buy or sell stocks, and whatever money you’ve paid for the stock option has now gone up in smoke.
That’s why it’s as important to pay attention to option expiration dates as it is to pay attention to the expiration dates of stuff in your fridge. Usually, the expiration date for stocks in the U.S. is the third Friday of the month.
Extended Trading
Definition
When the world was older and slower, trading during "normal hours" went from 9:30AM until 4:00PM New York time. Any trading done after this time was "extended trading."
Today, the world's markets drink lots of Red Bull. "Extended hours" means, in theory, 24/7, especially with electronic trades. Most after-hours trading still dries up around 8:00PM, though, and most pre-market trading begins around 5:30 A.M.
Money never sleeps.
Face Value
Definition
What's your face worth?
Guess it depends on your face.
Face value also refers to the numbers on the front of a bond, other debt-like certificate, or stock. It's also known as par value. As the actual value of the bond or stock goes up and down, you can compare it to the face value for kicks (and to figure out how the investment's doing).
FACs
Definition
Bonds for sale! Get your fresh, hot bonds here!
FACs are a guarantee a company gives to pay whatever is written on the face of the bond. It's a way to lure in investors.
Catchy.
Family Offices
Definition
The super wealthy set up their own family office to manage their money. It can handle stuff like investments, money management, estate management, taxes, and loads of other stuff. It basically lets these folks deduct a wider range of expenses and have other tax and control benefits.
Fast Market Rule
Definition
This rule applies mostly to the UK and the London Stock Exchange. When the London Stock Exchange plunges into chaos and there are tons of trades going on while prices are all over the price, things get hectic. People run around, tea gets spilled. When that happens, the fast market rule can apply: it lets brokers relax some of the trading rules.
The big one? They don't have to stick to the ranges of quotes when making trades; they can trade outside of firm quotes.
Fast Tape
Definition
When prices are moving fast in heavy trading, the ticker (that's the tape) might not be able to keep up. When that happens, a range of prices usually shows up on the ticker with the word "fast" in front of it. That's the fast tape—and it usually happens in futures markets.
Feasibility Study
Definition
A report that tries to answer how possible or practical a plan is.
Can our city convert all the neighborhoods into one giant fun house? Can we create a giant machine that will shoot burgers into the air? Can we build the highway through this forest?
Feasibility studies are important to cities and companies trying to create a business plan.
Federal Funds Rate
Definition
To understand federal funds rates, you need to understand how banks work. (Fun!)
Your bank takes money from people depositing cash at the bank and lends money to borrowers (like the guy applying for a loan to buy a Maserati). So there's money coming in and money going out. The bank needs to keep a reserve, or a certain amount of money on hand, so that when a bunch of people come in for their cash, the bank can't say "sorry, we gave it all to the nice man wanting to buy a sports car." That kind of thing leads to panic and disaster.
What happens when a bank has less money than it legally needs to have as a reserve? It borrows money in a short-term, overnight loan from either the Federal Reserve Bank or from other banks that keep their own reserves at the Federal Reserve. Now, we all know that borrowing money is not free. If a bank borrows overnight from other banks, it is charged an interest rate at the current federal funds rate. The Federal Reserve influences the federal funds rate.
Why should you care how much interest banks charge each other? The federal funds rate has a big impact on the interest you are charged if you need to borrow money. When the Federal Reserve nudges the federal funds rate lower to stimulate the economy, you'll pay less for loans. When the federal funds rate goes up, borrowing gets more expensive for you.
Federal Reserve Board
Definition
The Federal Reserve board is the seven people who basically govern the entire Federal Reserve System.
Want a seat on the board? You need to get elected by the President of the U.S. and approved by the Senate. Once you do get to the board, though, you wield a lot of power. The board makes big economic decisions that affect us all. For example, they decide how much banks need to keep in reserve (that's the amount banks need to keep in cash at the federal bank to make sure they don't run out). They also decide the interest rate the Federal Reserve charges when loaning money to banks.
These kinds of decisions affect the interest rates you pay and how well the economy overall is doing.
P.S. It was created with three mandates: control inflation, enable full employment, and promote stability within the banking system.
Federal Reserve System
Definition
The Federal Reserve is the central bank of the U.S. You can’t just waltz in and open an account at The Fed, though—this bank is only for the federal government and for other banks.
The Fed has a big impact on the economy because it decides what interest rates will be and controls how much money is out there in the economy. The Federal Reserve also sets up all sorts of rules for other banks. It's like the granddaddy of all banks, and other banks have to follow its lead.
FFBC (First Financial BanCorp)
Definition
First Financial BanCorp (FFBC) is a bank holding company, which means they control a bunch of smaller banks.
FHLMC (Federal Home Loan Mortgage Corporation)
Definition
Federal Home Loan Mortgage Corporation, a.k.a., Freddie Mac.
Freddie Mac is a group created by Congress whose job it is to buy mortgages, bundle them together, and sell them as investments.
Fiduciary
Definition
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)
Definition
It sounds like Great Aunt Elmo's pet poodle, but FIFO actually means "First in First Out." It's an accounting term which refers to the method of accounting for inventory. With this method, if you have a bunch of inventory you're selling off, you'd recognize the older inventory first (or the cost of that inventory).
Example
Let's say you live in a high inflation time and you have stocked yacht bolts (they last forever) in your warehouse. The 1,000 bolts you made 10 years ago cost $2 each; the 500 bolts you made last year cost $5. FIFO accounting would have you recognize the $2 bolts first until you had sold all of them out of your warehouse, and then you'd start accounting for the cost as $5 each instead of $2. That's even if you can't tell the $5 and $2 bolts apart.
Financial Planner
Definition
A financial planner is someone who advises individuals about their overall financial situation. They help with stuff like estate planning, tax plans, investments, and more.
Since money stuff can be confusing (duh), these guys and gals basically help you make money decisions that hopefully don't suck.
Planners can work in a few different ways: they might charge you an hourly or monthly fee to just give you general advice or manage your holdings; or they might recommend (and manage) specific stocks, bonds, or mutual funds (oh my!) and get paid a percentage of the assets they manage for you.
FINRA (Financial Industry Regulatory Authority)
Definition
The Financial Industry Regulatory Authority (FINRA) is a private agency that regulates exchange markets and brokerage firms that are members of... it.
They test and license people and firms in the industry and work to protect investors from shady financial dealings.
If you're in the investment business, you probably want to know these guys.
Firm Commitment
Definition
When the underwriters involved in an IPO make a firm commitment, they're saying that they are responsible for any unsold shares.
They can't just say "Oops, we missed a few." Well, they can, but it's illegal.
Firm Quote
Definition
The firm quote is the price a firm or dealer commits to—up to a certain number of shares. Unlike nominal quotes, there isn't much wiggle room or room for negotiation with a firm quote.
Note that firm prices are only for 1 round lot of 100 shares. Larger transactions usually involve some haggling.
Example
A dealer is asked for a price upon which she will transact to trade 100 shares of XYZ, makers of zipper examiners for the masses. The dealer will give a price at which it will buy ($5 per share), and a slightly higher price ($6 per share) at which it will sell. This is the "firm price," so if the other party says "I buy," then the dealer has to sell at the quoted price.
Fixed Annuity
Definition
An annuity where the earnings on the investment are at a fixed rate. Very similar to the interest on a bond or a savings account.
If you have a retirement fund and then take the money and set up an annuity so that you have a yearly or monthly income from that money, a fixed annuity will give you no surprises: you'll get the same rate and earnings on your investment.
Fixed Assets
Definition
"Fixed assets" refers to assets that are "hard items"—like property and equipment. That is, these are assets that the company paid for in cash (99.99% of the time) and are going to be used for a good long while. They carry an asset value on the company's balance sheet, and they're considered "non-current" assets, since they aren't going to be sold for cash easily or any time soon (probably).
Fixed Dividend
Definition
A dividend paid out on a stock that stays fixed (i.e., the same) each year. Even if the company suddenly hires a reality TV star as CEO and starts tanking, your dividend stays the same. Preferred stocks often have fixed dividends.
Floor
Definition
The lowest limit that parties in a particular transaction are willing to accept.
For example, if you set a rock-bottom interest rate or stock price on a transaction, that's the floor.
Floor Trader
Definition
A floor trader is someone who generally lives on the floor of the NYSE (yes, there are other exchanges, but the New York holds the most floor traders) and places buy and sell orders on behalf of clients.
If you see pictures of the NYSE dudes with all sorts of intense expressions looking at tickers and laughing (or crying), you're looking at floor traders. If you decide to buy or sell a stock, there's probably a floor trader madly typing into a computer somewhere to make the trade happen.
These people are paid a commission on each trade.
A "two-dollar" broker is an independent floor trader.
FNMA (Federal National Mortgage Association)
Definition
The Federal National Mortgage Association, a.k.a. Fannie Mae.
It's jointly owned by the government and the public, with the goal of encouraging banks to offer more mortgages. Like Freddie Mac, Fannie Mae buys mortgages, bundles them up, and sells them as investments. Fannie Mae, though, buys its mortgages mostly from commercial banks (Freddie Mac deals with the smaller fry).
So how does this make mortgages more affordable for you? It keeps cash flowing through the housing and mortgage market and reduces the risk of default (in theory) so banks are more likely to lend money to you when you want to buy a house.
FOK (Fill Or Kill)
Definition
FOK isn't quite as vulgar as it sounds—it stands for "Fill or Kill." If you're putting in an order to buy or sell stocks or other securities, FOK is a type of order you can place. In this type of order, the broker/dealer has to fill the whole order... or kill it (not literally... they just walk away, rather than trying to fill part of the order).
Example
JoeBob places an order for a thinly traded, illiquid stock: GumboNation (GBN). GBN only trades 300,000 shares a day and the order is for half a million. The broker has to buy all 500,000 shares for JoeBob, or he's got no order to fill. He tries to fill and not get FOK'd.
FOK usually comes with a time element: FOK by noon today.
Forward Pricing
Definition
This is an SEC rule that requires open-end mutual fund companies to price their fund's shares according to the next Net Asset Value (NAV)—they can't use a previous NAV as the price. If the company sells shares on Tuesday morning, they cannot use Monday's closing NAV; they have to wait until the NAV is calculated for Tuesday; the sale would then transact at that price.
Forward Split
Definition
A forward split 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. If you owned 100 shares before the split, after the split, you will own 200 (each share will become two).
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.
Why would a company want to forward split shares if the price isn't going to be affected? If the stock prices are high, a stock split can mean that each individual share is less expensive, so more people can afford to buy. The more people buy, the better for the company. With more people buying, there's more interest in the stock, which means more trading and a better stock price.
Win win.
Fourth Market Instinet
Definition
If you're Joe Average and want to buy stocks or other securities, you need to muck about with brokers and exchanges to buy a piddly amount,
If you're a huge corporation or international institution buying huge amounts of stocks or other securities, you can buy on the fourth market. The fourth market lets big buyers buy directly without paying those brokerage fees. The company that handles these transactions electronically is called Instinet. Clever, with the whole "instant" riff, too.
Free Cash Flow
Definition
Free cash flow is the money coming in and out of a company that's not all tied up in costs related to fixed assets (like machinery and land). Basically, the cash coming in and out of a business only tells part of the story. The money that's not tied up in fixed costs is important because it shows how much of your earnings are tied up in costs. If you're earning tons but spending all of it on overhead costs, you're not coming out ahead, are you?
Example
You may be generating $100 million in earnings each month at your business, but you may be paying $10 million for leasing a factory, buying a new office, and paying for licenses for your products. The free cash flow is $90 million (your earnings minus your capital costs or expenditures).
Free Trade
Definition
Trade in which the government doesn't stick its nose. Adam Smith was a big believer in it.
Basically, it means that the markets decide on trade and prices, not the government. There are no taxes or other incentives out there to affect things.
Freeriding
Definition
What happened when your cousin Melvin hot-wired that BMW last summer.
In the finance world, freeriding is also a big no-no. It refers to buying stocks or other securities and then selling them—without paying for them in the first place. Freeriding also happens when an underwriter in a syndicate holds back some newly issued stocks and sells them later for a higher price.
Both activities are illegal. They'll land you in even more trouble than Melvin.
Front End Load
Definition
See A-shares and deferred load. The term applies to mutual funds: if you buy a front-end load mutual fund, you're paying commissions up front, so the load or weight on the investment return happens at the beginning.
Initially, you're making less on your investment because part of your cash is going towards the pesky commissions, but since they're out of the way, once your investment takes off, you don't have to pay.
Front Running
Definition
Front running happens when a broker acts on information they've gotten that no one else has yet. It's illegal, of course, but it's such a lucrative practice that people just can't help themselves.
Example
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 small blocks of shares so as not to affect the price of the stock (Giant Broker Y knows, after all, that when huge orders of stocks are filled, it can affect the stock price).
But what if Giant Broker Y has its own funds, which it manages for itself on behalf of the partners of its firm? And what if Giant Broker Y could make $2 a share on 50 million shares by using options in a transaction which it executes ahead of Giant Mutual Fund X's order?
As with many things in life, the problem is the money. If "all they took" was a commission for being an agent on behalf of Giant Mutual Fund X, they might make 5 cents a share or $2.5 million. Hmm... $100 million vs. $2.5 million... How much is a trader's soul worth?
Full Faith And Credit
Definition
Full faith and credit is the United States' guarantee to pay all interest and principal on every bond that the government issues.
The U.S. can make this guarantee because it can tax its people more or crank up the printing presses to Warp Factor 8 and literally print money to pay everybody back. Note that there's no guarantee that the money would actually be worth anything; you're only assured that you'll get pieces of paper in full payment of the obligation.
Full-Service Broker
Definition
A full-service broker handles "everything," including trades in currency, bonds, and options. They are the opposite of brokers that specialize in specific bonds or trades or brokers that just fill orders.
Full-service brokers are paid by commission, and in addition to handling trades, they offer advice and sympathy if your investments tank. They might even offer a cup of tea or a shoulder to cry on... only for their best clients, of course.
Fully Bought Deal/Bought Deal
Definition
When an investment bank takes a company public in a bought deal or fully bought deal, they promise to buy all the shares of that IPO. (A nanosecond later, they will generally turn around and re-sell them at a mark-up to cardiologists in the mid-west who all want to buy 100 shares of whatever.com is hot.)
Fully Registered Bonds
Definition
Fully registered bonds are ones that have been sold and registered so that there is a paper trail about who bought the bond, where, and when.
There wasn't always a paper trail that linked you to a bond. Back in the day, 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 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. They could buy bonds and make money from them for all kinds of bad-guy plots and plans.
So things changed, and the U.S. government wanted to know who was buying bonds and profiting from them. Sure, the record-keeping is a bit of a pain, and if you like to wear a tin foil hat, the registration process might seem like more proof that "they" are watching... but those are the rules of buying bonds today.
Funded Debt
Definition
Long-term debt, pretty much. Funded debt is a company's debt—like bonds or notes payable—that won't come due for a while (5 years or more, in some cases).
General Obligation Bond - GO
Definition
A municipal bond backed by the full faith and credit of the municipality that issued the bond.
"Full faith and credit" means that a municipality will pay you the principal plus interest on the bond, because they can collect taxes and raise money. That is, the city pledges to pay "no matter what," double pinky swear...and that "what" can mean that the city itself goes bankrupt. And, in fact, that bizarroland phenomenon is starting to happen more and more around the country.
General Obligation Bonds are usually used for...general things. Like sewage treatment plants, infrastructure maintenance, cops, firemen, and the like. The main thread linking these is that they're activities that don't themselves generate revenue. And the city pays off the bonds from its general flow of revenues, like fishing licenses, parking tickets, income and property taxes, medicinal marijuana franchise license fees, and so on.
Since GO bonds are backed by the full faith and credit, those responsible for the full faith in such credit must approve their issuance. And who might those be? The citizens of the locality that is issuing them (that would be you).
Most GO bonds get paid out of property taxes, the $5 word for which is ad valorem. So see: Ad Valorem.
General Partner
Definition
In a DPP (Direct Participation Program) or limited partnership, a general partner makes all the operating decisions. Not because she necessarily wants to (although it's likely he does), but because it's legally required that she 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.
So if the limited partnership or DPP is sued, the limited partners can only be sued for a limited amount while the general partner can in theory be taken to the cleaners. Don't worry too much, though; there are plenty of extra legal protections they can put in place (and insurance they can buy) to protect them from lawsuits. The rich men and women will be just fine.
Gift Tax
Definition
Awww, those IRS people. They ruin everyone’s fun.
You can’t even give things away anymore without it being taxed. Anyone have some tea we can spill into a harbor? Boston gift tax party anyone? No? Oh, well.
So, overly simply, as of 2019, you’re allowed to gift 15 grand a year with the expectation that this number will rise a bit year after year...and on that 15 grand or less, there is no tax owed.You have to declare to the IRS people that you gifted but you don't have to write them an incremental check.
And all kinds of little tweaks to the definitions of givers and receivers have made estate transfer easier in this country. For example, a family can gift in multiple directions from multiple sources. Like, each year, Mama Bear can gift 15k to Baby Bear, then 15k to sulky Teenager Bear, then another 15k to the Elder Bear, for a total of 45k gifted from Mama Bear.
Then Daddy Bear can do the same for each kid...such that they can gift, in one year, 90 thousand dollars total in gifts with no tax. And there are other twists. Like...they aren’t limited to gifting cash. They can gift art, jewelry, mountain-vats of honey or porridge...or private stock.
So hmm, you may reasonably wonder, "How would they determine the value of private stock, or really any of the above non-actively-traded-and-valued things?" There isn’t a daily market for shares in private companies...so how does the IRS assess value?
Well, usually value is taken at whatever the last round was invested at, even if it was 5 years ago and the company has gone up a ton in value. But if it has, it’s likely the company will have been required to get a new 409a valuation, which is basically just a few high-priced lawyers assessing what the company is worth based on other, similar companies that were sold or funded recently. That is, it's the best guess of lawyers and accountants.
And the same applies to appraisals of jewelry and art and the like. So you can imagine that, if a family wanted to transfer as much as they possibly could to their kids, the impetus could involve a whole lot of downward pressure on valuations, such that the 15k that was tax-free gift-able...might really be worth something more like 20k, 30k, 50k even...were it to sell that day.
That said, private valuations carry all kinds of risk to the giftees as well. They can (and often do) die, leaving the recipient with a whole lot of Kleenex to wipe away the tears of relative poverty. Maybe discounting private things makes sense. The key is that it’s 15k of value that can be transferred.
So what happens if Mama Bear gives Baby Bear 20k in cash one year, for a top-of-the-line, Dr. Brown’s Porridge Warmer? Well, either Baby Bear can just pay income tax on the 5 grand difference and, in fact, it’s Mama Bear who would technically be legally responsible for paying that tax, but Baby Bear can do it if she wants, or she can write Mama Bear a check for 5k back. It’s the net number that the IRS cares about.
And if they find that it balances out…well, then everything is juuuuuust right.
GNMA (Government National Mortgage Association)
Definition
Government National Mortgage Association, a.k.a., Ginne Mae.
Like Freddie Mac and Fannie Mae, Ginnie Mae is a government-owned agency that's linked to the mortgage industry. Where it's different is that Ginnie Mae focuses on making housing more affordable. The agency backs bonds that are backed by mortgages and ensures that investors who have bought these bonds continue to make money—even if some folks stop making their mortgage payments.
Ginnie Mae-backed bonds are another way you can invest.
Good Delivery
Definition
In the financial world, good delivery has nothing to do with pepperoni; instead, it refers to a trade that can go through because it meets all the requirements. If you buy a stock on an exchange and the trade meets all the rules so the stock is transferred from the seller to you, then the transfer to you is of good delivery.
Pretty straightforward name, eh?
Greenshoe Option
Definition
Has nothing to do with Louboutin or Manolo Blahnik. It's all about underwriters and selling stocks.
It all starts with a company making a public offering, where the business offer shares of the company to the public to raise money. To handle the public offering, the company hires underwriters. Paperwork is signed, lots of meetings take place.
Some of the paperwork can include a Greenshoe option, which is a provision that basically says "if lots of people want to buy the shares, the underwriters can sell up to X% of shares more than we originally agreed to." X usually = 15.
A Greenshoe option is a way of making sure that if more people demand shares than expected, the company can take advantage of all the interest and sell more shares (and make more money).
Gross Domestic Product - GDP
Definition
How do you triangulate just how great your country is? You can measure how many missiles you have, or the number of Olympic medals you win, or the number of Starbucks locations you have...or you can measure the strength of your economy
How do you do that?
Economists use two main measures. One is called Gross Domestic Product...and the other is called Gross National Product. Now Gross Domestic Product might sound like what happens when you flush a baby alligator down the toilet and three years later, it crawls back out looking for its mommy. But in actuality, it represents the total value of all the stuff you make in your country, along with all the services you and your fellow citizens provide.
You live on the sovereign island nation of Squishquad Skerry, located just offshore of Norway.
You are one of twelve inhabitants, and all of you fish herring all day long. Each of you catches an average of 10 pounds of herring a day. Herring sells for about $10 per pound. Everyone works 200 days a year. So, multiply that all up...you get 12 people working 200 days each, each catching 10 pounds each day with each pound selling for $10 per pound. The GDP of Squishquad Skerry is $240,000...that's the value of all the stuff your country made in a year. Not bad for a rocky island in the middle of a Norwegian Fjord.
Meanwhile, elsewhere in the world, the numbers get a bit higher. For instance, the GDP of the U.S. was about $18.6 trillion in 2016. So that's...a little bit more.
But of course, the U.S. has 325 million people (instead of the 12 Squidquadians) and its GDP includes things like airplane manufacturing and high-value financial transactions (instead of just herring fishing). So it makes sense that the U.S. economy would be much, much bigger.
To look at how an economy is doing, people usually watch how it changes over time. Say one of your fellow Squishquadians starts fishing with dynamite. With the new technique, output goes from 10 pounds a day to 12 pounds. Next year, with the new output, your GDP goes up to $288,000. That's 20% GDP growth. Big, complex economies like the U.S. pretty much never see growth rates like that. Economists usually consider a growth rate of 2% to 3% for the U.S. to be healthy.
Smaller countries and developing countries can have bigger growth rates. Take China. It's a big country: biggest population in the world, with more than 1 billion people. But it still racks up relatively high GDP growth rates because of the rapid expansion of its manufacturing base. As recently as 2010, China posted an annual GDP growth rate of 10.6%. It hit double digits five consecutive years between 2003 and 2007.
GDP doesn't always go up. The year after discovering dynamite fishing, Squishquad suffers a series of significant storms. The number of workdays go down from 200 to 190. Everything else stays the same. GDP falls to $273,600 from the $288,000 seen in the first dynamite year.
That's a decline of 5%. Economists call that decline a contraction. If a contraction happens for two or more quarters in a row (two three-month periods in a row), the country is considered in a recession. If the contractions are deep enough and last long enough, that's a depression. And not the kind you can take drugs for.
Both GDP and GNP measure the economic output of a country. The difference?
Gross Domestic product consists of all the products and services made in a given year inside of the country. So...made within the borders of the country. Made domestically.
Gross National Product measures the stuff made by people or companies from a country, regardless of where it's actually made. So GDP tracks where it was made. GNP tracks who made it.
If an American knits a toilet cozy while sitting in his living room in Des Moines, it gets included in both GDP and GNP. However, if an American goes on vacation to Cameroon and knits a toilet cozy in his hotel room there, it's included in GNP but not in GDP. It was made by an American, but not in America.
Meanwhile, if the American comes back home to Des Moines and a Scottish friend of his comes over and knits a toilet cozy for him, that would count in GDP but not GNP. The toilet cozy was made in the U.S., but not by an American.
In the old days, like before the 1990s, GNP was typically used to track national economic growth. However, with the dramatic rise of globalization around that time, GDP became much easier to track. Eventually, it became the go-to measure of growth. To review, both GNP and GDP track national economic output. They both look at the amount of goods and services produced by the country, though they have different working definitions about what that means.
The size of GDP and GNP are impacted by the size of a country and the level of economic and technical sophistication. Big, complex economies like the U.S. usually aspire to modest growth, somewhere between 2% and 3%. Smaller countries and developing economies can post much higher growth rates, with percentages in the double digits not being all that uncommon.
GDP measures the value of stuff produced within a country, regardless of who makes it. GNP measures the value of stuff made by citizens of a country, regardless of where it is made. So if a Squidquad citizen were to float a raft into Norwegian waters and catch some herring there, it would count in GNP but not GDP.
Meanwhile, if he invited a Norwegian friend over for a day of fishing, anything the Norwegian caught would count in Squidquadian GDP, but not in Squidquadian GNP. If the Squidquadians were to launch a surprise attack on Norway, though...well, then all bets would be off.
Gross Margin
Definition
The gross margin for a business can be calculated using this handy equation:
(Revenue – Cost of Goods Sold) ÷ Revenue
Why would you want to figure out the gross margin—and is it really that gross?
The "ew" factor probably depends on how much you like math. As for why we need to figure out the gross margin, it's a handy tool for trying to decide how much of your revenues are tied up in the costs of making the product or service you're selling. If the margin is really high, it means that the costs of making the stuff you're selling are cutting into your revenues.
Gross Profit Ratio
Definition
You can figure out the Gross Profit Ratio with this handy equation:
(Revenue – COGs) ÷ Revenue
Why would we want to figure out the Gross Profit Ratio? Well, it's not as gross as the name suggests. It can also tell you how financially healthy your business is. It shows how much money you have left over to pay your bills once your costs are accounted for.
It can also show how stable your business is. Usually, if your gross profit ratio is all over the place month to month, that might be a sign. A bad one...
Growth And Income Fund
Definition
Funds can make you money and they can grow in value, but why settle for one or the other?
You can get basket of growth funds that grow in value reliably (Coca Cola, Disney, Harley Davidson) mixed with a bunch of bonds that pay out pretty steadily (like AT&T, Pfizer, Heinz Ketchup).
You get growth. You get income. "You get the best of both worlds." – Hannah Montana, 2008.
Growth Company
Definition
A growth company... grows.
Now, most companies want to grow, but some are better at it than others. If Mary Ellen creates a business selling accessories for old rotary phones, her business might not grow all that fast. It's more likely to fall flat on its face, yeah?
Growth companies don't just get into the right industries; they also take money from profits and reinvest it back in the company to create new products, open new offices, buy new companies, and basically pay for all the stuff that makes a company grow into a huge business.
What these companies don't do is pay lots of dividends—they're too wrapped up in expanding the company. When you invest in growth companies, you may not get money every year from the stock, but you may see the value of the stock go up really fast.
Or, at least, that's what you hope will happen.
Growth Fund
Definition
A Growth Fund is just a bunch of growth stocks... or at least what the manager who put the fund together perceived as being growth stocks.
Of course, when you invest, you want your fund to grow and not shrink. But some funds balance the possibility for growth with stability. That is, they may gather up some bonds as well as stocks so that the drops in value won't be too scary. Growth funds are "full steam ahead" in choosing companies that are all about expanding.
Of course, if they tank instead, your fund's going to be up Shmoop's creek without a paddle.
GTC
Definition
Good (Un)Til Cancelled. You have a broker who buys and sells stocks for you, and you get to tell them what stocks you want to buy and sell. A GTC is one type of instruction you can give your broker; it basically tells the broker to keep trying to make a trade until the trade goes through or until you call them up to cancel.
Example
You call your broker and tell them to buy 1,000 shares of stocks in a banana company because—you've decided to go vegan. If you've indicated that the order is GTC, the broker keeps trying to buy those 1,000 shares until they make the buy or until you call and tell them "Cancel that banana order. I've gone Paleo instead."
High Octane Stock
Definition
Have you seen those silly car commercials where an actor with a super-deep voice talks about octane and horsepower? High octane stocks follow the same idea—lots of power and speed.
These are volatile stocks that people think have lots of chance for fast growth.
Vroom vroom.
High Yield
Definition
High yield bonds pay high interest—usually because they have to. These bonds are considered risky because the company linked to them isn't doing so great. They might be in huge debt or have a history of not paying up.
To attract any investors, they have to offer a better interest rate. Sometimes called "junk" bonds, high yield bonds might seem like a good deal—look at those high interest rates!—but remember that if you buy the bond and the company goes under, you lose all your cash and get nothin'.
Not such a great deal, then, eh?
Example
In a prevailing interest rate world where T-Bills are yielding around 3%, grade B bonds might yield 5% and "junk" or high yield bonds might yield 8% and much, much more... and often carry ratings of CCC or worse.
Holder
Definition
The person who owns stock options is the holder of them. It's easier to just say "owner," but finance types thought a special word was needed. As always.
Holding Period
Definition
The tax man is interested in how long you have your stocks and other securities before you trade because you get taxed differently depending on whether you keep 'em for a short term or hold onto 'em for a longer time.
The time you keep your stock before selling is known as the holding period. If you keep them for at least a year (and a day, weirdly) you get taxed a lot less. If you have them for less than a year, the money you make is treated like income and you pay a lot more. So you might want to show your stocks a little love and keep 'em around for a while.
Hurdle Rate
Definition
When trying to make decisions about investments, people come up with all kinds of rules. For example, they might want to make a certain amount in returns or they might want to keep risk low.
One rule that companies use when deciding whether to pony up cash for an opportunity is the hurdle rate. It just means the minimum percent return on investment that the opportunity must surpass in order to get funded. If an investment or opportunity is expected to create returns above the hurdle rate, the company comes up with money for the project. If not, it's scrapped.
Example
A company thinks about building a condo building. One lady person in a suit says: "We think this building will cost $100 million all in, and in 7 years we'll sell it for $200 million. Our cost of capital is 5% and our hurdle rate is 7%; in this case, the investment would return 10% so it passes our hurdle rate." The CEO says: "Let's do it, baby."
Hypothecate
Definition
Let's say you want to start investing but don't have the cash for it.
Your broker lets you borrow money to invest—as long as you have collateral. Hypothecate means that the lender has an interest in the stocks or securities you've purchased with the borrowed money but doesn't actually take your collateral.
Hypothecation Agreement
Definition
Pretty much a margin agreement.
Someone (we're not naming names) wants to start investing but doesn't have enough cash for all the investments they want to scoop up. So, they use the stocks or securities they buy as collateral to borrow money to invest.
If the investments make money and the investor can pay back the cash, all is well and good. If the investor can't make good on the loan for some reason, the lender can grab up those stocks or securities.
Immediate Annuity
Definition
Immediate annuity is a fast-acting annuity that's also a twisted version of a life insurance policy.
In a typical term life insurance plan, you pay, say, $75 a month "forever," and when you die, your wife and the dude she later marries get a check. Hopefully, you've lived and paid long enough that it's a pretty big check—maybe a million or more. That'll buy a lot of margaritas in Honolulu. Your wife and new guy can annuitize the money and get a certain amount every month to live on.
An immediate annuity is kind of the opposite.
You write a big check for a lot of money to the insurer up front, and the insurer then pays you in set payments every month or year while you're alive. You (not husband #2) can then use that money as income.
Immediate Or Cancel Order - IOC
Definition
A type of securities trade order you send to a broker or brokerage when trading securities. You're basically telling them "now or never."
If the broker can't buy a million shares of Google or whatever it is right this hot minute, you don't want them to bother trying later. Good if you have zero patience or want to take advantage of the current market prices.
In Street Name
Definition
When you purchase stocks or securities, there are two options:
- You can have them registered in your name.
- You can have them registered in the name of your broker's institution (for example, Goldman Sachs)
If you choose Door #2, your stocks are held in account for you, but are formally registered to Merrill-Lynch or wherever your broker works.
Why would you want your securities in someone else's name? Well, it's how a lot of brokers do business. It lets them lend your stock to people who what to sell it short.
It also cuts down on the paperwork that would interfere with your broker's golf game...
Check the fine print on your brokerage agreements to see whether your securities are in street name.
In-the-Money
Definition
See: Strike Price. See: Call Option. See: At-the-Money. See: Out-of-the-Money.
In-the-Money is a good thing when you're the one who owns the option. That is, when a typical option is sold. In this case, think about a call option that some guy at Goldman Sachs just brokered a deal to sell you, Bob Retailinvestor. You paid $2 for the right to buy a share of Whatever.com, trading today for $23.50; you have the right to pay $28 for Whatever.com any time between now and the third Friday of the month 2 months from now.
Well, bazoot, bazang, the company announces their quater and the stock zooms, trading now at $34 a share. Your strike price was $28, so now you're $6 in-the-money with 2 weeks left before that option expires.
Income Fund
Definition
See Equity Income Fund.
Income funds are funds that are made up of dividend-paying stocks and bonds. The goal here is not to grow in value but to create a steady income.
These funds are popular with old people, retired people, and people who are really, really scared of everything.
Income Statement
Definition
The infamous P&L or profit and loss statement.
This statement is supposed to show a company's revenues, expenses, and earnings. The idea is that it's supposed to be a clear-cut set of numbers that shows what's coming in and what's heading out. Is the company making money? Is it bleeding cash?
The reality is that accountants can do all kinds of fun accounting stuff to fudge the numbers and hide what's really going on, so those black-and-white numbers don't always tell the full story.
In cases like Enron, WorldCom, and other financial disasters, income statements are telling a mostly fictional story.
Indenture
Definition
An indenture is the paperwork behind a loan. It says that you are "indentured" (or bound and legally obligated) to pay off the loan or you lose the house or property you used as collateral for the loan.
Index
Definition
Let's start small.
Each stock is issued by one company. When you buy a stock, you own a little bit of that company. With a stock market, you have a bunch of stocks being traded together. But let's say you want to know how a specific type of stock is doing—maybe the biggest stocks in a specific region. To do that, you'd check out an index. Indexes, like the Dow, NASDAQ, and S&P 500 take a look at a sample of stocks and securities in a specific portion of the market.
And index can be very broad—like the Russell 3000—or it can be made up of, say, Sri Lankan agricultural producers.
Index Fund
Definition
See ETF vs. Index Fund.
An index fund is just a big fat basket of stocks or bonds geared to reflect a market "strategy" (i.e., whatever logic that consumers will buy). If you believed in sin doing well over time, you might try to find an index with tobacco, alcohol, gun sales, 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):
3M
American Express
Apple
Boeing
Caterpillar
Chevron
Cisco
Coca-Cola
Walt Disney
EI Du Pont
Exxon Mobil
General Electric
Goldman Sachs
Home Depot
IBM
Intel
Johnson & Johnson
JP Morgan
McDonald’s
Merck
Microsoft
Nike
Pfizer
Procter & Gamble
Travelers
United Technologies
United Health
Verizon
Visa
Wal-Mart
Index Funds: Why Buy?
Definition
Myth: People don't get rich in index funds... but they don't usually go broke.
Truth: They do get rich... and they do go broke.
As with everything, it depends on how long you hold and when you have to sell. The secret to getting rich is often compounding and as well as not doing stupid things.
If you have a reasonably long time horizon and you don't over-leverage yourself so that if things decline, your bank won't call and take all your money away, you can get very wealthy on index funds. Each year, your index fund on average grows 8%. If you reinvest that money, you can double roughly every 9 years.
Index funds tend to be more volatile than mutual funds, mainly because they do not hold cash. A typical mutual fund during any rocky climate will hold between 3 and 10% cash. In down markets, this cushions the downside (and funds have to hold cash because every day people fire them and people hire them as money gets wired in and out and they need the buffer and on many days when cash is wired in, the fund managers can't find anything to buy selling at prices they like). But over time, markets go up—so holding cash is a drag on performance.
Index Options
Definition
Options on an index fund.
You pay for these options so that you can buy or sell an index fund for a specific price by a specific date. You can use index options, just like stock options, as another way to invest money and make money on index funds.
Individual Account
Definition
An account owned by one, individual person.
If you're an introvert who likes to say "No touch, mine!" an individual account might be just right for you. It's also a great account for anyone who wants to be able to have cash in their account without worrying whether their bae has spent all the money on NFL tickets again.
Joint accounts and business accounts are not individual accounts.
Inflation
Definition
Something that old people love to talk about.
Whenever granny says "Back when I was young, a new Ford cost $1,000," she's talking about inflation, the gradual increase in prices over the years. Thanks to inflation, money drops in value, so the $20 you stow under your bed today will be worth less in five years. By the time you're old enough to complain about it, that $20 won't buy much.
But, hey, at least you'll be able to complain about it.
Initial Margin
Definition
The initial margin is is the amount that your broker will lend you so that you can buy stocks and securities. The minimum margin percentage is 50% (required by regulation), but brokers can choose higher margins.
Brokers offer margins to lure in investors (sort of "buy one and pay later for the rest" kind of deal). If you default or your stock goes down in value, though, the broker might be left holding the bag, which is one reason why some brokers impose higher margins.
Example
If your broker has a 60% margin policy, that means that you have to put up 60% of the purchase price; the broker will lend the rest. If you decide to invest $100,000, that means you have to pony up $60,000 and the broker will lend you $40,000 so that you can invest the $100,000.
Initial Public Offering
Definition
An IPO (Initial Public Offering) is the first time—or cleverly named "initial" time—when a company sells its stock to the public.
Why is this such a big deal when companies sell shares to private investors all the time, raising various funding rounds for growth?Because the legal strictures in selling shares to the public require massive paperwork, disclosure, and legal and accounting conformance in documentation. Why all the paperwork when selling to the public? Answer: because Ma and Pa Kettle bought the Brooklyn Bridge 14,000 times before regulators created disclosure laws and grew any kind of teeth in the manner in which they policed bad actors. And we don't just mean Keanu Reeves.
The process revolves around a middle man, known as an underwriter, who stands behind the accuracy of the reporting of the company's numbers and then remains responsible for marketing those shares to mutual funds, hedge funds, and other places where wealthy people buy public stocks with risk.
Take a look at the 11 Greatest IPOs of All Time.
Inside Information
Definition
Inside information is knowledge you have that lets you invest with an unfair advantage over everyone else.
You might get this information because you work for a specific company or know someone who works for a company (thanks, Mom!). Or you might overhear something that gives you an investment advantage. In any case, using that insider information is illegal and if you're caught, you face jail time.
Example
You happen to be at Verizon having lunch with a buddy who did something bad in a former life and now works in the business development office. While he whines, you leave to take a whiz. While you're standing there streaming broadband, you see the CEO of Verizon (you recognize him from the distinctive comb-over) stand and stream next to you in stereo. He has one hand on the steering wheel and the other is holding his iPhone (white). Its volume is turned up loudly. Nobody else is in the men's room there and you can hear the voice on the other end say, "Okay, it's confirmed. Goldman is committed now to helping you raise $20 billion to buy RIMM/Blackberry." The Verizon CEO says, "I'm very excited. Let's get this process started tomorrow."
Okay, that is inside information. You heard something you shouldn't have heard. You can't short VZ and you can't buy RIMM—at least without landing yourself in the slammer. Neither can any of the people you work with or friends or family. See covered party.
What do you do? You immediately finish the streaming, zip up, wash using soap, and then phone your compliance lawyer and tell him to stop trading in either stock until you can come in and explain all of the facts and details to your compliance lawyers. Inside Information is not illegal to have; it's only illegal to use it as a basis to trade.
Insider Trading And Securities Fraud Enforcement Act Of 1988
Definition
The Securities and Exchange Act of 1934 (the '34 Act) made it illegal to use inside information to trade stocks. Since people could make a lot of money with insider information and thought they wouldn't get caught (who's going to know I overhead the CEO of Big Company talking about a merger in a Denny's washroom?), some folks pretty much ignored the law.
The 1988 law was basically Congress saying, "We're really serious about this." The 1988 legislation added some hefty penalties if you get caught.
People still trade on insider information though, so... yeah.
Interest Coverage
Definition
If a company borrows money, how easily can it pay the interest on the loans?
To answer that question, you have to figure out the interest coverage, which means using this handy equation:
Earnings Before Interest Taxes / Annual Interest Expense
If you're investing in a company, you want the number to be high, which would mean the company can handle its interest payments easily.
Interest Rate Options
Definition
You can go to one of the exchanges in the U.S. and buy interest rate options. Offered on T-notes, T-bonds, and other interest rate instruments, these options let you make money if interest rates go up or down.
Internal Revenue Code
Definition
The Internal Revenue Code is the whole mass of laws that affect excise taxes, income taxes, and transfer taxes in the U.S.
If you're wondering why you have to pay so much on your taxes or why you get stressed out every April, you can go ahead and blame the Internal Revenue Code.
Internal Revenue Service
Definition
IRS might be the three scariest letters in the alphabet.
The IRS is the Tax Man: they're the guys you file taxes with and the guys who audit you or ask questions if they think you're fudging your tax returns. The IRS is also the part of the Treasury Department in charge of the federal tax system.
Intrinsic Value (of An Option)
Definition
Intrinsic value of an option is the difference between the strike price and the value of the stock involved. So if you have a call option for Google stock with a strike price of $200 but Google is trading at $250, the intrinsic value is $50.
Introducing Broker
Definition
Sort of a schmoozing broker.
Most brokers are handling client accounts. They answer phone calls from clients who want to buy or sell, or who know why their investments are not making them money.
An introducing broker doesn't do all the dirty work. Instead, they know lots of rich investors. For a commission or a flat fee, they send them to brokers who need more clients.
Inventory Turnover
Definition
This number show how often a business replaces and sells its inventory over a specific period of time (a month, a year).
The number can be found with this handy-dandy formula:
sales / inventory
A high number means that lots of stuff is selling. That's good (especially if you're selling something that rots), but it also means you need to pay attention so that you don't run out of stuff to sell. A low number means you're not selling much. Maybe it's time to get your business on a reality TV show.
Inverse Head-and-Shoulder-Chart
Definition
A chart that looks like shoulders and a head upside down... if you squint really hard or have had too many martinis at the company lunch.
When the chart is showing sales, company earnings, or stock market prices, a chart of this shape shows that a downward trend has reversed:
The first upside down shoulder shows a drop, then prices or sales go up. Then there's a huge drop followed by an increase (that's the head) and then a smaller drop followed by an increase (that's the second shoulder).
The idea is that this is the time to breathe a sigh of relief that the downturn is getting better.
Investment Bankers
Definition
Investment bankers help companies raise money, sell used companies, and offer money and merger advice to companies. These peeps have cushy, well-paid jobs... in case you were looking for career advice.
Investment Company Act Of 1940
Definition
This law sets the rules for companies that make and sell mutual funds to the public. If you own a mutual fund, the people who sold you that fund have to obey this legislation, which is enforced by the SEC.
Investment Grade
Definition
Ratings agencies like Moody's think teachers shouldn't have all the fun—so they grade bonds. The higher the grade, the better the bond is doing and the more likely you are to make money.
According to the S&P system, bonds with grades of BBB or higher are investment grade, which means your investments might make you money. Anything below that means the bonds haven't done their homework and are maybe playing hooky.
Investment Objective
Definition
Well, we all wanna make money, right? Duh.
That's everyone's overall investment objective, but scratch a little further, and you'll find that everyone's investment goal or objective is a little different. Some people want to make lots of money fast because retirement is right around the corner. Some people want to make money slow because they don't feel comfortable with risk. Some folks want to make money, sure, but want to invest only in ethical companies.
It's a registered adviser's job to figure out how much someone wants to make and how they want to make money with investments. Knowing this stuff helps the adviser choose the right options for their client.
Investment Policy Statement
Definition
When a pro tries to sell you investments, they want to know a bunch of stuff. How much can you invest? What are your goals? How comfortable are you with risk? It's not all small talk.
All the questions are to create an investment strategy or a game plan for your investments. The investment policy statement is just the written road map that shows what you've talked about. It makes sure that you aren't lost in bond land when you really wanted to be investing in growing stocks.
Investment Style
Definition
You've got style that would make Kanye West weep—but what's your investment style?
It depends on your personality, your investment ideas, and what your goals are.
- Your style might be aggressive (you go after stocks you think will rise and rise fast, baby) or passive (you're not going to try to outperform the market, duh; you're into long-term growth).
- Your style might be focused on buying shares in big companies and holding on for a long time or buying smaller, growing companies and hoping they take off.
- You might be all about value (buying stocks when you think they're undervalued) or growth (buying stocks now and hoping they grow).
IRA (Individual Retirement Account)
Definition
Individual Retirement Accounts (IRAs) are accounts you can pay into now so that your money can grow. By the time you’re having senior moments, this money is supposed to be there for you so that you can pay for stuff.
There are two types of IRAs: Roth IRAs and traditional accounts. The big difference is how you pay taxes on your money.
- With a traditional IRA, you don’t have to pay taxes on the money you put in now, but you are taxed later on when you withdraw money from the account.
- The Roth IRA means you don’t get tax breaks now, but when you’re old and grey and need the money, you won’t generally have to pay taxes on the money you withdraw.
The IRS gets a chunk of your cash either way, but you get to decide when you pay up.
Irrational Exuberance
Definition
A well-publicized pithy maxim about the stock market in the late 1990s. Alan Greenspan was Chairman of the Fed in those heady days, and he couldn't figure out why stocks traded at such high multiples relative to their earnings. Or maybe he was just torqued because his buddies were making the sick money and he wasn't.
Anyway&, he testified before Congress and uttered his deathless opinion that valuations were "irrational" as the exuberance of the market had pushed the S&P 500 to trade at all time high multiples of about 27x earnings. For a few days, the markets collapsed, but then exuberance again took hold and the markets continued their rise.
Issued Shares
Definition
The shares outstanding or the stocks that all shareholders have in their hot little hands.
This number changes all the time, and lots of people use it when trying to figure out how much financing a company has. If you want to buy stock, this number will tell you how much of the company you're going to own.
Issuer
Definition
The company behind the stock or bond. Also, the company that gets the money by selling its stock or shares.
Example
IBM wants to raise debt to buy a competitor. It issues bonds—and it is the issuer who is on the hook to pay it back. Facebook wants to raise money to further suck away the time of middle-aged people everywhere? Facebook sells shares of its stock: it is the issuer of that stock.
Joint Account
Definition
A bank account or credit card account owned by two or more people.
Example
Mary Kate and Ashley are sisters with a joint checking account. They each put in $500 each month. They are both responsible for the account. If in March, Ashley doesn’t put in $500 and writes a check for $1,000 on the account when the account only has $900, Mary Kate is equally responsible for the charges of the bounced check. If Ashley skips town, the bank will make Mary Kate pay up.
Joint Tenants With Right Of Survivorship
Definition
The JTWROS account is a brokerage account where the other account holder automatically gets everything in the account when the other account-holder dies.
Here's a hint: If you married someone significantly more attractive than you and twenty years younger, don't get this brokerage account.
Junk Bond
Definition
See high yield bond. A junk bond comes from a company that has a bad rating from Moody's or another rating agency. The idea is that you might lose your money because the company that issued the bond has lousy credit. On the plus side, junk bonds are usually cheap. You get what you pay for.
Keogh Plan
Definition
If you have a traditional 9-to-5 job, your boss might offer a retirement plan so that, once you've stopped working, you still have cash to pay for stuff like rent and food.
But what happens if you decide to go freelance and be your own boss? One option is a Keogh Plan, which is a tax-deferred retirement for self-employed folks.
Kickbacks
Definition
It's a dark wharf at midnight. Suddenly, a car squeals up by the water's edge. A man in a suit gets out and hands over a briefcase full of cash. The man? He's an executive with a big company.
The next day, he benefits from a deal that's harmful to another company. The guy representing the other company? He looks an awful lot like the guy who left at midnight with a case full of moolah.
Bad guy #2 basically accepted money under the table to make a deal go a certain way. It's completely illegal in corporate America... but it still happens.
Know Your Client
Definition
Brokers and investment advisers are legally obligated to know their client.
That doesn't mean they know how a client takes their coffee or what they really think of Magic Mike. It means that they understand the client's goals, financial situation, and comfort levels when it comes to risk. Knowing this stuff lets the pros make good investment decisions on behalf of the client and lets them offer the right advice.
Large Cap
Definition
Large cap = "large market capitalization companies." Nope, they don't wear oversize Stetsons. They are usually big companies with lots of shares and lots of dollars per share.
If you want to figure out a company's market capitalization, multiply the number of shares a company has outstanding by the stock price per share.
Most mutual funds these days define large cap stocks as those with market caps over $15 billion.
Law Of Supply And Demand
Definition
This fundamental economic principle states that as prices rise, supply will increase (in part because people who make the stuff will be excited to sell whatever it is for more money). And as prices fall, supply will decrease (some suppliers will go out of business or choose to make something that is worth more).
Example
Ryan Gosling declares his love of pretzels and suddenly everyone wants to buy pretzels to be just as cool. The price of pretzels goes up until each one costs $6. A bunch of people who are sitting around wondering what to do with their lives suddenly say "I know! I'll start making pretzels! I can make a bunch of cash because fools are buying them for $6 each."
Maybe before the Ryan Gosling announcement, there were 100 million pretzels made in the U.S. each year. With the great Pretzel Craze, there's now 200 million pretzels being made because the price went up.
But then, Ryan Gosling announces he hates pretzels now. Prices drop to a more reasonable $3 per pretzel. Everyone with a pretzel Pinterest board and blog stops talking pretzels and some of those people making soft dough start making other stuff, instead. It's no fun making pretzels when you're making half as much money for them.
In the next year, the U.S. is back to making 100 million pretzels a year.
Lead Manager
Definition
The lead underwriter in an IPO. If a company wants to start selling stocks to the public, it needs underwriters to handle all the details. Sometimes, a bunch of underwriters work together in what is known as a syndicate. The head honcho of a syndicate or group of underwriters is the lead manager.
Usually, the lead manager is a bank or underwriting firm rather than one person.
LEAPS
Definition
LEAPs are "long-dated options."
We're talking about any call or put options that last for many months (or even years) rather than having an exercise date that comes up in a month or two.
Hint: if you see an option with a date that is at least nine months away, you're dealing with a LEAP.
Just like any option, you can trade this option, and if the value of the underlying stock goes up or down, you can make money from the option. LEAPs are often used by people who own stocks and who want to make money without selling the stocks themselves. LEAPs can also be a way to start investing if you want to trade in options without buying stocks.
Example
Weird Uncle Fester always had a thing for light bulbs. Then he died and left you his fortune, which amounts to 10 million shares of GE. You are very happy being worth a few hundred million dollars and just don't want to lose that money. But if you sell the shares, you will pay a tax because the IRS views that process as a "constructive sale." But you would likely be able to construct a LEAP which hedges your position and allows you to play golf all day and quit the burger flipping gig you used to have.
Legal List
Definition
A list of "allowed" investments.
Fiduciaries or folks who manage investments for others may have legal lists so that they can make investment decisions on behalf of their beneficiaries. If the legal list says it's okay to buy Disney stock and Disney stock suddenly seem like a smart move, the manager of the trust or investment can go ahead and buy without having to get the green light specifically.
Letter Of Intent - LOI
Definition
Also called an LOI, a letter of intent is a paper signed by an investor who's buying shares in a front-loaded mutual fund. The LOI gives the investor a chance to get a lower sales charge (see sales load) immediately, even if the investor hasn't bought enough shares to qualify for the lower sales charge.
The LOI is basically the investor saying, "I'm going to buy more shares in the future, so I'd like to pay the smaller sales charge now, as though I had already bought the extra shares." If the investor doesn't end up buying more, the mutual fund company is potentially losing money. So what they usually do is hold some shares of the fund in escrow.
If the investor does buy more shares, those shares in escrow go to the investor. If not, the mutual fund company sells the shares and gets the money they wanted to get from the investor in the first place.
LIBOR
Definition
London Interbank Borrowing. LIBOR is the "best" interest rate in Britain. It's the interest rate that the safest customers get when they borrow money from British banks. And the rest of the world's banks peg their rates (with lube) after the Brits' LIBOR rates.
And no, it’s not the result of a lion mating with a bore. Or any other semi-rodenty thing. Write this down: LIBOR stands for
London
Inter
Bank
Offering
Rate
It is basically just the British “Fed” rate, reflecting the absolute lowest interest rate at which the British banking system will loan money to its best, most well-heeled customers. Like Sainsbury’s, BP, Barclays, and the guy who plans Royal weddings. So LIBOR is the best or cheapest rate at which the British banking system will lend money.
Most loans come at some premium to LIBOR - i.e. riskier loans might come at something like LIBOR plus 50 basis points or something like that. So that if LIBOR is currently quoted at 2.25 percent, then the LIBOR plus 50 loan is loaned out at 2.75 percent.
And that’s basically it. No need for any wild animals to get...wild.
LIFO - Last In, First Out
Definition
See: FIFO, First In, First Out. Then multiply by negative one.
Limit Order
Definition
You want to sell 1,000 shares of Colonel Electric. It was demoted after they cut their dividends.
The shares have been trading wildly between $15 and $25 a share. You don’t want to feel like a moron for having sold them at $15, when six weeks later they kiss $25. With tongue.
So what do you do? You put in a limit order.
That is, you put a limit of a minimum price of $25/share for Colonel Electric, such that those shares will simply sit in your account, maybe forever, until somebody out in the wild blue yonder of Stockland is willing to pay $25 or more for the shares where you have put a minimum price limit of $25/share in your order.
So here’s to hoping they sell, and don’t get further demoted. Sergeant Electric is just a place you don’t want to go.
Limited Liability
Definition
Liability means that your butt is legally on the line in case of a lawsuit. If you own a business, creating a corporation from that business (also known as "incorporating") means that you become a limited liability company; your assets (and the assets of any company owners) are separate from the assets of the company.
If somebody sues the company, they can't gun for your house, retirement fund, or personal assets, in most cases.
Example
You own a spa business and run it out of your house. One day, blue-haired Mrs. Smith slips on freesia massage oil in the lobby and breaks her arm. Her son is a lawyer and sues your business. If you’re not a limited liability, the lawsuit can try to get your house, dog, retirement fund, car, and everything you're worth. If your business is a limited liability legal structure, sonny is out of luck: he and his mom can only go after your business assets and the insurance money used to insure your business.
Limited Partnership - LP
Definition
A limited partnership is not the qualitative assessment of Moe, Larry and or Curly. Woop. Woop. And yes, woop.
Rather, a limited partnership is an investment company run by a general partner with clear lines of demarcation as it relates to risk, fiduciary duty, and management responsibilities.
When you think Limited Partnership, think: things like a Venture Capital partnership. Like one where you have half a dozen experts who come together with long track records of identifying early stage growth companies usually deep in technology….
Together, they are the general partners of the partnership. The generals. They are responsible for the day to day management of the firm and in theory, have unlimited personal liability should something go terribly wrong
The limited partners are their investors. The people who give them money to make more money. General partners raise money for their funds by getting Limited Partners to invest in them. So what is limited about it? Well, the liability to the investors.
As long as those investing in the limited liability partnership don't operate the firm or manage it or deal with day to day issues that come up. Then those limited partners are fully shielded from any liability should uh, something go terribly terribly wrong, although if you're a limited partner in a company that's designed a nuclear-powered blender that spins just a little too fast, we're not sure how much that'll be worth in the grand scheme.
Line Of Credit
Definition
A type of open-ended credit that lets you withdraw and borrow money as often as you'd like—up to a certain limit. In some cases, people use their homes as collateral for lines of credit. Lines of credit usually have low interest rates and are very flexible. You could keep withdrawing money out of them as long as you still have money left in the line of credit.
Example
You finally paid off your house and now you have a $200,000 house, mortgage free. You decide to open a $20,000 line of credit so that you have money for a rainy day or for fixing up the house.
With your line of credit, you can take out $20, $200, or anything at all up to $20,000. If you pay it back, you can take out more money—again, up to $20,000. There is an interest amount that you pay, but only if you take out money.
Let's say that you take out $10,000 to fix your windows. The bank may tally up that you owe $200 in interest on that amount. They automatically take the $200 out of your account each month until you pay back the $10,000. Once you've got your house spruced up, you can focus on repaying the $10,000, or you can keep withdrawing money until you hit $20,000.
Liquid Market
Definition
A market where there are lots of buyers and sellers so investors can cash their investments in quickly.
Currency markets (especially the U.S. currency and Euro markets) are very liquid. If you have a pile of one currency, it's super easy and fast to convert it into a different currency. Fortune 500 company stocks would also be a liquid market because there are usually lots of buyers for that kind of stock. If you wanted to, you could sell your stocks quickly and have cash in hand.
Liquidity
Definition
Liquidity is the ability to convert an asset into cash.
Generally speaking, an enormous 30,000 square foot mansion in Idaho is not very liquid: there just aren’t that many buyers, so it might take years to sell. But a small home in Palo Alto is almost always liquid—at the right price—as there are always tons of buyers of a 2,800 square foot ranch home.
Liquidity applies to stocks as well: Microsoft shares trade in the tens of millions per day; other small caps have days where only a few thousand shares trade. So if you own 100,000 shares of that small cap and need to get out, you’ll pay a dear price as the stock craters on your volume trying to get liquid in a security that ain’t.
Listed Stocks
Definition
Stocks and securities that are listed on an exchange, like the New York Stock Exchange or the London Stock Exchange.
These securities can be bought and sold easily, and it means the company behind the stocks had to meet a bunch of rules and regulations to make the offering.
Load Fund
Definition
A mutual fund which charges a (usually up front) commission (also called a load). If you want to invest in the mutual fund, you have to pay up. Since you're paying up front, though, you might be able to enjoy lower fees over time than someone who didn't have to pay out of the gate.
Lockup Period
Definition
The length of time your BFF had to cool his heels in Vegas before you could come up with the bail money.
The lockup period also refers to a period of time when investors can't sell their shares. After an offering is made to the public, for example, venture investors might not be able to turn around and sell their stocks for 6 months, according to the fine print. These six months are the lockup period.
Lockup Provision
Definition
In most IPOs, there is a lockup provision for insiders. Insiders—like executives and early investors—cannot sell their stocks for a specific period of time (usually 6 months or so). This provision makes sure that insiders can't use their knowledge to make trades of stock.
For example, if the executives of a company know that the company is headed down fast, they can't just offload their shares immediately to the public (who might not know the company's in trouble).
Long
Definition
Being "long" a stock means that you own it, presumably believing that it will appreciate in value.
Long Gamma
Definition
A stock option trade that lets you make a profit when the price is volatile. Any time the price of the underlying stock moves, a long gamma position can mean profits. Usually, this sort of trading is left up to the experts.
Long-Term Capital Gain
Definition
Long-term capital gain is a type of tax on an investment that you've held onto for a year and a day (at least).
Long-term gains are usually taxed less than short-term gains; the goal is to encourage investors to be more patient and to hold their investments longer; the broader gain being, in theory, a more stable stock market.
See also short-term capital gain.
Maloney Act
Definition
This law was passed in 1935 and it allowed some self-regulatory organizations to help the SEC is regulating the big, bad financial world and OTC market. It's the law that gave FINRA its powers. Before this law, there was no self-policing allowed.
Management Company
Definition
A management company is the group of pros who work for a mutual fund distribution company. The management company handles and manages the money the distribution company has raised—for a fee, of course.
Management Fee
Definition
The fee that the investment manager charges for, yes, managing an investment.
These guys don't work for free, so you want to read the fine print to find out what the fee is like for you. Is it worth it? Probably depends on how well your investments are doing.
Margin
Definition
See margin debt. You're borrowing from your broker to invest money. The margin refers to the amount of money you have to pony up so that the broker pays up the rest.
Example
If Schwab is offering up to 50% margin and you opened an account with them for $100,000, you can buy up to $200,000 worth of securities. Your $100,000 would represent 50% of the purchase price of $200,000 in stock.
Margin Accounts
Definition
Brokerage accounts structured such that the owner of an account can pledge as collateral investments they hold in the account in order to borrow money "from themselves" for a modest fee, payable to the brokerage.
Margin Call
Definition
Not a call you want to get in the middle of the night.
A margin call happens when you've borrowed money from the broker to buy more investments and your stocks and securities are used as collateral. If your securities rise in value, everyone's happy. If they drop, you might suddenly not have enough in your account to cover the money your broker has lent you. In this case, the broker will issue a margin call; i.e., they'll contact you and ask you to put in more money into your account—or else.
Example
You put $100,000 in a margin account and it gets invested. Your broker lends you $50,000, borrowed against the $100,000 in the account. You now have $150,000 in investments, but $50,000 of that is with borrowed cash.
Then, the market crashes. Your investments are now worth $40,000. You still owe the broker $50,000, and he gets nervous because you owe more than you have.
Margin call time.
Your broker asks you to put in more than $10,000 or he will sell off some of your investments to get back his money.
Margin Debt
Definition
Margin debt usually refers to the notion of borrowing from yourself—or at least from your investments.
If you have a bunch of stocks, you can set them up at Schwab, E*TRADE, Scottrade, or any other brokerage. You pledge your $50,000 or whatever of stocks, and if the brokerage lets you margin up to 50%, you can borrow up to $25,000 from yourself. You can use that money to pay for something (like a car) or to pay for more investments.
You'll pay margin interest on the money you borrow, but it's cheaper than most types of financing if you want to buy a car or boat. If you use the cash to buy more investments, you're earning profit on a bigger bunch of money, so the idea is that your investments grow faster and you can get rich that much quicker.
As with any debt, there's a risk. The big risk here? That you're using your securities to borrow money. What happens if the prices of your securities drop? The brokerage will get really nervous, and you'll go through a margin call. That's when someone from the brokerage contacts you and tells you very nicely that you need to put more money in your account because you owe more than you have in stocks.
If you can't pony up the cash, you might have to sell some of your investments (which might mean paying taxes on the profits).
Margin Interest
Definition
When you open a margin account in a brokerage, you can borrow money against the stocks and securities in your account. Have $50,000 to invest? The brokerage may give you another $25,000 to invest so you can be making profits on $75,000.
Nice deal, but it doesn't come free. Like all borrowed money, there is a cost or interest rate involved. The cost of borrowing money through your brokerage is known as margin interest.
Market Capitalization
Definition
How much is a company worth? It's a big question. The IRS wants to know the answer so they know what to charge a company, and investors want to know so they know whether to sink their money into a specific business.
The market also places value on a company, which helps investors compare companies and securities. The market value of a company is known as market capitalization, and you can figure out this number by multiplying the number of shares outstanding by the stock price.
Market If Touched
Definition
A market if touched (MIT) order is something you give to your broker if you want to buy (or sell) stocks or securities at a certain price. If the price reaches (or touches) a specific number, the broker can go ahead and buy (or sell) at that market price.
Market Maker
Definition
Let's say you have a certain stock and you want to sell. You call your broker, but he's got some bad news: "No one's buying thiscomapnysucks.com right now. I don't know why. Sorry."
What do you do? You need a market maker. This institution or individual buys and sells shares of a certain company or industry in order to literally create a market for guys like you—people who want to buy and sell. He accepts a lot of risk, but since he's creating the market, he also gets to name his price. Market makers can also charge commissions.
Example
Some guy at the NYSE put up a few million dollars of his own money to buy and sell shares of GM. He has various rules he must follow, and as long as he is a good boy, he can offer GM at $34.12 (where he is a seller) and bid for GM at $34.02 where he is a buyer—and live off of the dime per share spread. He'll need a lot of dimes to pay his bills.
Market Manipulation
Definition
Manipulating a market is a nasty thing to do—and it's is illegal to boot in the United States.
There are a lot of different schemes. A popular one is to deflate the price of a stock by making lots of sales at below market value. That makes it look like lots of investors are getting rid of their stock, which might make some investors think the stock is about to tank. They sell their stock, pushing the value of the stock down for realsies.
Another common method of manipulating the market is to buy and sell lots of stock at matching prices. So sell a bunch of stock for $50 a share and then buy it for $50 a share. Repeat over and over. The idea is to make it look like lots of people are snapping up the stock and there's a lot of interest, which can push the price up.
Market Order
Definition
When you have a broker and are buying or trading shares, you get to order them around or give them instructions about what and when to buy (and sell).
There are different flavors of orders. A market order means you're asking your broker to buy a certain amount of a certain security at the current market price. The idea is that the broker is expected to buy or sell now, but the trick is that some securities will go up and down in price a lot, so the price you think you're selling for might not end up being the price the broker can get for you.
Example
Ellen calls her broker and says, "Gimme 1,000 shares of Coke at market." The broker looks at her screen and says, "Okay, KO is trading at $68.42." That's how much Ellen pays per share.
Market Risk
Definition
There are lots of risks when you invest money; two of the most common categories of risk are
- unsystematic risk
- systematic risk (also known as market risk)
Unsystematic risk refers to risks linked to a specific stock or security. So you buy stocks in your dad's ice cream company, and the company goes bankrupt (who knew pork rind ice cream would prove so unpopular?). That's unsystematic risk, and you can help reduce some of your risk by diversifying your investments and at least investing in some companies that are likely to do well.
Market risk affects a whole market, and it happens because of things like terrorist attacks, natural disasters, political upheaval, and zombie apocalypses. There's no real way to protect yourself against market risk.
Just take your vitamins and hope you don't get bitten by the walking dead, we guess.
Matching Orders
Definition
In this scheme, two different brokerage firms illegally try to manipulate a market. They trade stocks or other securities back and forth between each other without gaining or losing money or gaining any advantage.
All those trades catch the greedy eye of investors, who think that the stock seeing all the action is "hot"—and they want in. The price of the stock goes up thanks to all the trades, and the brokerages are sitting pretty on stock or securities that they can now sell for more.
It's all quite illegal, of course, so there's major fallout if they're caught.
Material Information
Definition
Material information is worth something. So if you want to trade stocks and have some information that only insiders know, you have to decide whether you have material information. If you do, you can't make the trade—it would be illegal. If the information you have is not material information, you can go ahead and make the deal.
Example
You're standing in a Manhattan elevator and you overhear the CEO's doorman say, "His chief competitor has been here every night the last 3 nights for poker. I bet they are merging. Both stocks should go up a ton." That's almost certainly not material; it's gossip. But if the CEO's wife is standing there with the doorman and nods slowly after he utters this hypothesis, then it's almost certainly material and you can't trade in either stock.
Maturity
Definition
What you gain with age (and something that seems to have eluded us here at Shmoop).
Also, the date when a debt becomes due for paying up.
Example
You buy a $1,000 bond with a maturity date of May 5. You’re basically buying a little bit of a company's debt. So what happens on May 5? That's the date you’ll get your 1G back—and you’ll have the interest you've earned on the bond, too.
Mergers And Acquisitions
Definition
Investment banking pros offer services that help companies buy and sell used companies. This buying and selling is called mergers and acquisitions.
Translation: companies are merging with each other and acquiring one another.
Minimum Maintenance
Definition
In margin transactions, you borrow money against your investments in order to buy other investments. The brokerage lends you the money, and the money you've already sunk into the account is the collateral. Stocks and securities go up and down in price, and this means you need to keep a certain amount of equity in the account.
For example, if you put $50,000 into your account and borrow another $25,000 to sink into investments, and the total value of your stocks drops to $20,000, you're going to have to put in more money. The minimum amount of equity the brokerage asks you to keep in the account is the minimum maintenance. The amount is based on the value of stocks and securities in your account.
Example
If the minimum maintenance percentage is 25% (most brokerages have a higher requirement), the value of an account is $20,000, and the equity (market value minus loan) is $4,000 (this means that the margin loan was $16,000); you first multiply the market value by the minimum required percentage, or $20,000 x 25%, which is $5,000.
Compare the equity ($4,000) to the required amount ($5,000).
If the equity is less than the required amount, the investor must either sell some of the securities or deposit enough money to bring the account equity back to the minimum requirement.
Modern Portfolio Theory - MPT
Definition
Back in the ancient 1950s, Harry Markowitz created this theory to create an investment portfolio or investment system for folks who were nervous about risk.
The highlights? Diversification is good. (And some risk is needed to reap the rewards.) Balancing risk with proper diversification and tracking the results is good stuff. See: Portfolio.
Key Concept: Diversification. Is. Good. Dig it.
That’s modern. Like when Unk and Nuh-uh invested from their cave, they just invested in good rocks or spears and really didn’t worry about much else. Math hadn’t really been invented yet, so…like who knew the diff?
Then, in 1952, along came Harry Markowitz, who tried to science and math the crap out of the stock market.
What he came up with was modern portfolio theory, which basically said that there was a smarter way to invest than just, uh...putting your life savings into Blockbuster because you...like the logo. Using all sorts of advanced metrics that we won’t torture you with here, the theory he devised was that rather than throwing your money against a wall to see what sticks you could use extensive, elaborate data to determine the best way to maximize your returns, depending on how much risk you were willing to, uh… risk.
In general, MPT skews toward less risky investments in general. But it all comes down to risk/reward in the end. If, for whatever reason, you feel supremely confident that Radio Shack is about to make a massive comeback you might be able to justify taking more risk.
But, to be clear: Radio Shack was just a bad example. So, don’t try this at home.
Money Laundering
Definition
It seems innocent enough: You toss your favorite jeans in the wash and don’t check the pockets. The $5 you had in there after lunch comes out clean and a little crumpled. No harm, no foul.
But that’s not the sort of money laundering the government is worried about. Money laundering means trying to hide money you make illegally by cooking the books, setting up fake businesses, and basically committing a bunch of fraud. The idea is that you create fake companies, fake accounts, or fake customers, so it looks like the money is coming from a legal business when it’s really coming from shady deals.
If you’ve seen Breaking Bad, you know that Walter White got into some seriously shady stuff—including money laundering. He created businesses and even hired an attorney (we're looking at you, Saul) to help him hide where the money was coming from. It's no meth cooking, but... not great.
Money Market
Definition
The money market is an odd name for short term bond paper. Many people want to park money for just a few months or so; as a result there is always huge demand for short term money which is relatively safe and highly liquid. It's called "money market" because it was sold as being the same as your checking account—money in the bank.
Money markets are insured by the FDIC (the Federal Deposit Insurance Corporation) and have low interest rates.
Moody's
Definition
One of the big three agencies that rates securities.
Want to buy Star Wars Corporation stock and are wondering whether it’s a good deal? The idea is that Moody’s has done all the boring research for you and lets you know whether the security is a high risk or a good risk.
The problem? Back in the 2000s, some people accused Moody’s and the other big agencies of giving everyone a passing grade. That led to the Credit Rating Agency Reform Act of 2006.
Moral Obligation Bond
Definition
One issuer of a bond decides to pay bondholders if the original issuer of the bond defaults. They don't legally have to do it; they do so because it's "right thing to do."
Example
San Diego issues a bond, and the state of California decides to pay the bondholders if San Diego defaults.
Most Active
Definition
Each day, there's a list made of the most actively traded securities that day. If you're an investor, you might want to listen up. If a stock suddenly starts trading like crazy, it could mean that the price is headed up. There's something good afoot at the company, maybe, that will make the stock more valuable. Time to go a little Sherlock Holmes and investigate.
Municipal Bond
Definition
A bond issued by a municipality.
That's it.
Cities use them to raise money for parking facilities, water treatment, streets, and so on. Muni bonds are often backed by the assets they are being used to fund. They're a nice little thing to invest in, especially since they're exempt from federal taxes.
Municipal Syndicate
Definition
The people who come together to sell muni bonds to the public. When a local or state government decides to issue bonds, they hire a bunch of underwriters or an underwriting firm (syndicate) to handle all the dirty work.
Mutual Funds
Definition
A mutual fund is a collection of stocks and/or bonds which are professionally managed for the benefit of investors in them.
Mutual funds exist because individual investors generally have neither enough money nor experience to properly diversify a portfolio. 12 shares of Coca Cola, 18 shares of Disney, 32 shares of GE, etc. are very expensive to buy individually. A professional money manager aggregates lots of small buyers into a big fat pot of money, which then effectively gets "volume discounts" for the purchases and sales of shares.
Mutual funds are usually sold with a "load," which is a fancy term for sales charge, along with a fee for managing the fund. There is a fabulous myth marketed aggressively to retail buyers that consumers get a great deal on "no load" funds. Traditionally, mutual funds were sold through brokers who charged between 1.5 and 7% commission, depending on the size of the purchase and the perceived "quality" or track record of the fund. Mutual funds were in the business of managing money, not selling it, so they were happy with their roles as buyers and sellers of stocks and bonds and they let brokers broker.
Then brokers got into the mutual fund business for a variety of reasons, mainly because they thought they could make money doing it. But there was a hole in the market because many mutual funds underperformed indexes—in theory, more than half anyway—and brokers felt they had leverage.
Mutual funds fought back. Think: Star Wars with finance 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.
And through another lens:
What are mutual funds? Half a century and change ago, a bunch of investors wanted to mutually pool their assets to make investments together. They mutually agreed to abide by a relatively simple set of rules and then gather funds to go invest.
Why would they do this? Scale. You’ve heard of the notion that you get a discount when you buy in volume or bulk, right? If not, check these guys out. 84 pounds of dog food for 5 bucks. Even Fido can appreciate a good deal when he sees it.
Dog food discounts we get but why would anyone need to buy in bulk when investing in stocks and bonds? Because back in The Day, the only way investors could invest in the stock market was to buy an individual stock directly. Same deal with a bond.
A typical stock might sell for 40 bucks a share. The problem was that if an investor didn’t buy a round “lot” of these shares, she was charged a massive commission - almost like a penalty for not being rich enough to buy a Costco-type portion of shares.
A round lot is any order that comes in blocks of 100 shares, i.e., 200 shares is a round lot; 500 shares is a round lot; 738 shares is not a round lot. Some high-level calculus there. A typical round lot commission might be 5 per cent, an odd lot commission might be 15 per cent, so it made it even harder for the small buyer to get invested in the markets.
Illustrative example time.On a purchase of 100 shares at $40, that’s 4 grand. That’s even a lot of money today. But think about what 4 grand bought you in 1952. More than a few hula hoops and poodle skirts. Inflation adjusted, it’s almost 40 grand today.
It bought a home. A super nice one.
And yes, this. So how is the Average Josefina able to plunk down 40 grand to buy just one stock? She’s not.
You know your grandma Goose’s catch phrase, right? Well the same applies to investing. 4 grand could be a life’s savings and if a simple ‘retail’ investor put all of her money in one stock and that stock tanked, then she was SOL, or sweetly out of luck.
So mutual funds allowed that little guy investor with very small amounts of money and for most it was a minimum of about $250, which still applies today, to pool his money with thousands of other investors and get exposure to a basket of stocks.
The fancy $5 word is ‘diversification’ and when assets are pooled, that 4 grand of mutual fund ownership might look something like this:
If a thousand investors each put 4 grand, on average, into an investment pot, that gives them 4 million dollars of buying power and allows them easy access or liquidity to have their 4 grand invested in a wide range of stocks and bonds, in whatever form they want. And with a larger pot of money to put to work, might they also get the ear of the company’s CEO for 15 minutes a quarter?
Would that make them invest the dough more readily? Well, maybe.
At the end of the year, let’s say that 4 million was invested well and it has a value of 4.4 million bucks.
When the 1000 partners formed the fund, they agreed that they would divide the fund into slices of pie in the same way that ownership of a company is divided into shares. Remember that Apple has over 5 billion shares outstanding. They trade at 250 bucks per share, give or take, and multiplying the 2 together gives them a total value today of over a tril.
Well, the mutual fund might have 200,000 shares outstanding, so that at $4 million of value, to get the net asset value per share, you’d divide that total pie value by the number of slices in it to get 4 million over 200,000... or $20 per share.
If the fund goes up 10 percent, the number of shares outstanding in this scenario hasn’t changed, so the net asset value per share would be $22 a share. A gain of 10 percent.
In real life, however, investors buy additional shares in a mutual fund and redeem them. Why?
Well, they buy because rich Uncle Larry died and left them a million bucks and they already have the cool man cave stereo.
And they might sell because the fund had lousy performance and they’re P.O.’d, or they might sell because the fund had great performance, and since they know that most investments regress to the mean, i.e., become just average over time, they want to take their chips off the table today and put the dough elsewhere.
So let’s say a new investor comes in and wants to invest, $6000 in the fund, which closed at the end of today at exactly $20 a share. Let’s also say that, on this given day, everybody was happy with their investment. Nobody wanted to sell and nobody wanted to buy. Well, unlike buying shares in Apple, Walter doesn’t need another already-existing investor to sell him the shares. He can buy $6,000 divided by $20...or 300 shares of the fund. Those shares didn’t come from a disgruntled (or gruntled) other investor.
They were sold directly by the fund itself.
The analogous situation would be if Apple sold shares directly to the public - those things happen, they’re called IPOs and secondary offerings, but they’re not a daily event. Mutual funds selling shares to the public IS a daily event, however, and after this transaction, the investor now has 300 shares of this fund, a fund which now has 200,300 shares outstanding.
The value of the fund went up the $6,000 that was put in. So the fund’s value is now 200,300 times $20...or $4,006,000.
And Walter now owns 300 divided by 200,000...or 0.15% of the fund. Which is money we’re sure he’ll spend wisely.
He’s having fun. You’ll just have to trust us.
Naked Option
Definition
Warning. You’re going to be disappointed in this video. It’s not nearly as hot as you probably hoped.
Naked options are just options that you sell without having enough of the underlying security to cover your, uh...butt if the price changes. They are an investment that stands on their own, but with extreme amounts of risk.
You invest $10,000 in Coca-Cola stock at $40, buying 250 shares. The stock goes up $2 in a year, and you’ve made a whopping 5% on your money, or about $500. You bought the stock, not the option.
But let's say you had bought $10,000 worth of naked Coca-Cola call options, with a strike price of $42.50, expiring in 4 months. The stock remains at $42.50. Well, guess what. You’ve lost all of your money.
Had the stock gone to $45, however, that $10,000 invested in those call options, which bought you exposure to some 20,000 shares, would have made you something like $2.50 a share of in the money value on those options...times 20,000 shares, or 50 grand. Yeah. Way more than your boring experience of just owning the stock.
In reality, professional investors rarely just buy naked options alone, because they are so risky and volatile. But every now and then, somebody bets the ranch on 22 black. It comes up. They make 36x their money in a very short period of time. And everyone asks them for the best way to angle their thumb when they’re trying to flip a “head” on a quarter…
NASD
Definition
OK sing it with us, people. It’s the...
National
Association
Of (you can, whisper that part)
Securities
Dealers.
NASD is sort of the 12-games-a-year NFL season. It USED to be the thing, the way things were done, the governing body. And it was an SRO, or self-regulating organization. But eventually it just didn’t change with the massively increased demand, and it ended up being replaced as an organization by the much catchier named FINRA, originally sponsored as a bill by Flipper.
So the new song goes...
FINRA, FINRA...we love you...
You stand for:
Financial
Industry
Regulatory
Authority
Yeah. That’s all we got.
It was a pleasure vocalizing with you.
NASDAQ
Definition
What are NASDAQ and the NYSE? NNNNNAAASSSSDDDDAAAQQQQQ. It stands for:
National
Association
Of
Securities
Dealers
Automated
Quotation-systems
And yeah, it feels like they got cheated out of an ‘S’ there at the end. Like NASDAQS. But, uh, that’s what happens when life’s on a budget.
So NASDAQ is an electronified version of the original wall, as in the street, Wall Street. Yeah, that where well dressed folks would come with cash in hand, scream out a stock and a price and then trade shares. They would trade for whatever was trending at the time:
Like eyeball massagers, or wooden swimsuits, or motorized surfboards.
All real, by the way.
NASDAQ is the much more modern version of its predecessor NYSE, which is anything but nice when you lose money there.
The N Y S E stands for:
New
York
Stock
Exchange
And it too was an outgrowth of the well-dressed folks at the wall.
There are two key structural differences in the two trading systems — the NYSE is an actual place. It has a physical location, address, etc. And this is what it looks like:
NASDAQ is a concept. A religion. A network. It’s not really a place, at least not a geographic place. The other big difference is the manner in which shares are traded - the NYSE is an auction based system. One individual is a buyer of AMZN at $1,983.25. He screams (electronically) that number and then buys from whoever is willing to sell at that price.
Individuals buy from individuals. That’s an auction market.
But NASDAQ is a dealer market. That is, somebody deals in a stock.
They go out into the market and buy, say, a million shares of whatever.com that was bought in the market conveniently for exactly 10 bucks even. That dealer now ‘makes a market’ in that stock - i.e., the dealer is kind of a market unto herself and she moves with the market to manage the spread on the trades.
Like....she might have a narrow spread where she’s a buyer of the stock at 10.02 a share and a seller of it at 10.07 a share.
Or, if it is a really wild, volatile stock on a wild and volatile day, she might be a buyer at only 9.90 and a seller at 10.30...a 40 cent spread.
You can do the fancy math that, if she keeps her ‘inventory’ steady at a million shares, and trades a million that day with that spread, she makes 40 cents times a million or 400 grand for that day’s efforts.
However, after staring at a screen all day, she’s going to have to spend at least some of that money on eyecare. Thank goodness for eyeball massagers…
Negotiated Deal
Definition
A type of contract signed between a company and the bankers acting as underwriters during an IPO. The contract outlines the standards and rules for the bankers. It's part of the big amounts of paperwork that go into issuing securities.
Negotiated Underwriting
Definition
See competitive underwriting.
A single underwriter can handle a public offering when things are small scale. Before the offering can be made, the offering price and the purchasing price have to be hashed out. If this negotiation about prices happens directly between the underwriter and the issuing company, it's known as negotiated underwriting.
Net Asset Value (NAV)
Definition
NAV is the method with which mutual fund shares are valued or priced at the end of each trading day. We're making up the composition of a mutual fund. It has 1,470 shares of GOOG and 300 shares of AMZN and 500 shares of IBM and well, you get the idea.
At the end of each day, the ask prices in the bid ask spread, i.e. the ask is the price at which somebody will sell these shares are added up. Yep, total’d. In this case there are 114 different names in the portfolio and $7 million bucks in cash, all of which total 82.3 million dollars in value at the end of the day.
There are 2 million shareholders, exactly, at this moment. So the NAV at today's close? Well, it's $82.3M divided by 2 million, or $41.15 per share. That $41.15 is the NAV of the mutual fund.
And what happens when more investors join? Like let’s say somebody invests a million dollars at the end of today, well, then the fund goes from having 7 million bucks in cash to 8 million.
And that investor just bought one million divided by $41.15 per NAV share, so that the mutual fund company printed out of thin air an incremental 24,301 shares, bringing its total to 2,024,301.
The total value of the fund is now $83.3M from the $82.3M yesterday, and the shares outstanding are now 2,024,301. Yeah, the NAV didn’t change...just the shares outstanding.
Net Income
Definition
See earnings.
Net income is the earnings of a company after taxes. It's sometimes called "the bottom line."
Your net income is what you earn in income after taxes. It's a number that might make you weep into your coffee.
Net Present Value
Definition
NPV (net present value) is usually calculated using a formula and lots of charts and spreadsheets. (Helpful, we know.)
Basically, it compares the present cash value a company plans to invest and the expected returns on the investment.
Here's the catch: It considers the expected returns in today's cash value. If your company invests $1 million today and makes $2 million from the investment ten years from now, that $2 million will not be worth the same as $2 million today (thank inflation). NPV tries to account for this by figuring out what the returns would be in today's money, which makes it easier to tell whether a possible project or investment will be profitable or not.
Net Worth
Definition
Having a lot gets you on the Forbes Top 100, and gets you lots of dates.
For a company, it boils down to assets minus liabilities. Nice and straightforward.
New Account Form
Definition
The form that the SEC and FINRA require for all new accounts. If you're registering a new brokerage account or adviser account, you're going to have to fill out this form and pay the application fees.
Nine Bond Rule
Definition
If an order is put to the NYSE for nine bonds or less, this rules requires that the order stay on the floor of the exchange for one hour. The idea is to look for a market for the bonds and get the best price for the investor.
If the order is not filled within the hour, the customer can ask the broker to try to fill the order away from the exchange or over the counter.
There's just not a ton of bond trading at the NYSE, and this rule can help net a better price.
No-Load Fund
Definition
On a mutual fund, index fund, or other fund, loads are the commissions you pay to the people who manage and sell you your fund. So, no-load fund suggests free stuff, right? No commissions?
Not so fast.
It's really just a marketing phrase that's supposed to make you think you're getting a free lunch. In reality, you still end up paying money for your fund—it's just sneakily hidden as a yearly management fee. Instead of paying a 2–5% commission up front and then having an investment management company manage the money for 0.8% a year in management fees, no load funds charge 0% commission up front, but then investors pay 2% per year in management fees.
Over time, it can end up costing more than the funds that charge you up front.
Nominal Yield
Definition
The coupon, or percentage that the bond makes, is the nominal yield of a bond—and it always stays the same. The bond may trade up or down, but the nominal yield stays the same.
By the way, "nom" means "name" in Latin. We showed up in class that day.
Example:
A bond has a $1,000 par value, 8% coupon, and is due 2034. In trade, the bond might be worth $800 a year from now, $1,200 six months from now, and so on. The nominal yield, though, is 8%. Is now, and always will be.
Non-Accredited Investor
Definition
See Accredited Investor.
Non-accredited investors might not have the institutional ties or the big bucks to qualify as accredited. They might still have the know-how to make money and might even be doing better than the accredited kind—they just lack the "official" cred.
Non-Cumulative Preferred Stock
Definition
Preferred stock that does not require the issuer to pay any missed dividends before it pays dividends to the common stockholders. The company can say "Yeah, here's a juicy 10% dividend, but if we decide it's not in our best interest to pay you, too bad."
It's not usually the best kind of investment, since you're at the mercy of how the company is feeling about dividends and might end up in a "tough luck" kind of situation.
Non-Diversified Funds
Definition
Funds where there's no diversity. Shocking, we know.
Basically, non-diversified funds are investments (stocks, bonds, you name it) that are all in one area—like, say, tech or healthcare or commodities. If tech or healthcare or commodities then tank, you're in major trouble if you're not diversified.
Non-Qualified Plan
Definition
See qualified plan.
A non-qualified plan is a retirement plan in which your taxes are not deferred (i.e., you don't get tax breaks while contributing to the fund). Instead, when you're old and grey and taking money out of the account, that's when you get the breaks.
Which is good, since that's when you'll probably be complaining about the cost of everything anyway... arewerite?
Non-Voting Stock
Definition
Stock that doesn't give you any rights to vote on company decisions as a shareholder.
Not Held
Definition
Brokers who make "not held" trades can choose when to submit a trade. If the broker thinks he or she can hold out and get a better price for their client, they can go ahead and wait. The only right the broker has in this case is how long they can sit on the trade; they still have to do what the client says when it comes to how much to trade or whether to buy or sell.
NYMEX
Definition
The New York Mercantile Exchange (NYMEX) trades commodities like cotton, oil, sugar, gold, and lawyers.
The NYMEX is the largest physical commodities futures exchange on earth and is sometimes called the Merc. (Sounds fancier than it is.)
NYSE - New York Stock Exchange
Definition
The NYSE is the oldest stock exchange in the United States and one of the biggest exchanges in the world. When news anchors show something happening in the economy, they almost always flash an image of the floor of the NYSE.
NASDAQ and electronic trading networks have meant that the NYSE is less important than it used to be... but don't tell them that; they get very touchy about it.
Companies can list their shares on the NYSE if they meet SEC standards and go through a whole process of getting listed.
Odd Lot
Definition
Here at Shmoop, we pride ourselves on being an odd lot.
In trades, an odd lot is an uneven number of shares traded in a transaction; specifically, a multiple of shares less than 100. Transaction costs for a trade can be high, and if the number is so small that the commission is a meaningful percentage of a given trade, maybe the trade isn't such a hot idea.
Odd Lot Theory
Definition
The theory here is that when you see a lot of trades with odd lots (small lots of less than 100 shares and in odd numbers), you should run in the opposite direction.
The idea is that odd lots are usually traded by small retail investors (so average Joes who think they're the Wolf of Wall Street because they read some of Investing for Dummies that one time on vacation). Most pros think that small retail investors don't know Jack and that you should do pretty much the opposite of what these guys are doing.
Offer
Definition
See bid-ask.
This is the price at which a seller is willing to sell you a security. The offer might have some wiggle room so you can make another offer, or the seller might be pretty sure they're not willing to negotiate.
Omnibus Account
Definition
An account that has a bunch of investors.
Since a group of accounts are combined into one, the idea is that the investments are easier to manage. The brokers handle the records of all the investors involved, so the investors get some anonymity... in theory).
It's kinda like a mutual fund except no formal shares are issued.
Open-End Fund
Definition
See closed-end fund first.
Back? Okay.
An open-end fund is your typical vanilla mutual fund. It owns hundreds of securities and maybe millions of shares in 'em. Each day, the prices of those securities change and close at a given value. At that value, the fund then prices itself with a Net Asset Value (the total value of the securities prices, times the number of shares of each that the fund owns, divided by the number of shares outstanding that are owned by investors in the mutual fund). An open-end fund must buy and sell shares in the fund at each day's NAV. Since NAV isn't determined until the end of the day, an open end fund will have no transactions in its shares during a trading day.
Opening Price
Definition
At the start of the trading day, brokers and other finance types come into the office, drink their coffee, and check opening prices on securities: the prices that a security has at the start of trade on any given day.
During the day, this price can go up and down at dizzying speed until we get to the closing price: the price the security ends up with at the end of the trading day.
Hey, sometimes names make sense.
OPEX (Operating Expenses)
Definition
Just a fun way of saying operating expenses. (Hey, something about finance has to be fun, right?)
The term refers to the cost of running a business. It can include the cost of staples and ink or the cost of paying employee wages. When companies start getting into trouble, they sometimes think about trimming back on their OPEX. This can result in a leaner, meaner company—or in disaster. Cut operating expenses too far and you won't have enough staff and stuff to offer your customers a good product or service.
Option
Definition
Options give you the right to buy (or sell) a security at a specific price on or by a certain date. You're not locked into buying or selling, though—hence, option.
Options come in lots of flavors (employee stock options and naked options, to name two), but the important thing to remember is that they don't give you the same benefits as actual stocks. You won't get dividends or voting rights with options—just the right to buy (or sell) stocks later on. You can trade options just like other investments, though, if people want 'em.
Example
A stock you're interested in is selling at $100 a share. You want to buy 1,000 shares of the stock but don’t have $100,000 to pony up. So you buy the option to buy within the month for $110,000 for 1,000 shares (the extra $10,000 is because the stock might go up in price). You pay $5,000 for the right to do that.
In a month's time, if 1,000 shares of stock are worth $170,000, you have a great deal. You can buy 1,000 shares for $110,000 ($115,000 with the $5G you spent on the option). If the stock drops in value and 1,000 shares are now worth $60,000, you don’t have to buy. You're not locked in. So you've lost $5,000 that you paid for the option, but you've saved a lot of headache.
Option Premium
Definition
The money that investors pay for a premium.
Example
Marybeth wants to buy $70 strike options in KO, which is trading for $67 a share now. The options expire in 3 months. She is willing to pay $6 for those options because she thinks KO will be a knockout on the stock market and will be at $85 or more in 3 months. The $6 she is willing to pay is her option premium.
Option Schedule
Definition
An option schedule lists all the different strike prices and expiration dates available for a stock or security.
In a company offering stock options to employees, this list contains the size of shares, too. It's important in accounting because it shows how much in liabilities the company will have in the future.
Options Clearing Corporation
Definition
An organization that issues and guarantees futures contracts and options.
It's owned by the American Stock Exchange and the Chicago Board Options Exchange, among other exchanges. The SEC and the Commodities and Futures Trading Commission (CFTC) regulate this organization.
Ordinary Annuity
Definition
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
Definition
Ordinary income refers to the tax rate you get charged for your earnings and for investment gains on investments you've held for less than a year.
The tax rate for ordinary income is way higher (like almost twice as much) than it is for capital gains (profits you've gotten on investments you've held for a short period of time).
Moral of the story: Hold on to your investments for more than a year, or the government will consider it ordinary income and take more of it from you.
Original Issue Discount
Definition
Original Issue Discount (OID) is the difference between the face, or par, value of a bond and the amount actually paid for the bond.
Example
Let's say you buy a $1,000 bond but you pay $800 for it because it's a zero coupon bond, which doesn't pay interest. You get a nice discount when you buy the bond, and you get the full face value when it matures. The difference between the discount rate and the money you get at maturity is the original issue discount. (In this case, $200.)
Out Of The Money
Definition
When a stock option has a strike price above the value of the stock.
Yeah... not good.
Example
A stock option has a strike price of $88; then the CFO commits fraud. The stock is now at $5. The option is $83 out of the money.
You probably don't want to buy—just a guess.
Over-The-Counter - OTC
Definition
Buy drugs? The um…non-prescription kind? Nyquil. Tylenol. Preparation H? Yeah. Then you’ll buy them over the counter.
Prescription drugs? Those are different. Much more highly inspected. Regulated. Structured.
Well, stocks work the same way. When you trade over the counter, you’re generally trading within a network of other dealers all trading stocks.
Think of it like…everyone on Facebook had a trading account. Nothing really is supervised or regulated or controlled. It’s just a transaction happening among two strangers in the night… exchanging glances.
Get a fair deal on this trade? Well, on the exchanges, Amazon was offered for $1,502 a share; but on the OTC deck network, it’s offered at $1,507. Maybe you’ll have overpaid 5 bucks a share for Amazon if you buy it here rather than on NASDAQ, which is a normal securities exchange.
Stocks, bonds, commodities, derivatives: They all trade OTC and also on exchanges. So why are there both methods of trading in the first place?
Well…demand. If everybody was happy with the trades they made from 9:30 to 4 New York time, then there wouldn't be a whole lot of demand for trading outside of those hours.
But there is.
So there is.
And OTC trading accommodates after hours trading, which can be a really big deal when a company announces earnings at 4:30 pm New York time, and the Street either loves or hates the numbers they’ve printed.
The stock can move a lot in a short period, so a lot of investors are happy to be able to either dump or scarf up positions in whatever.com at 4:32 pm after the numbers have been published, not wanting to wait the dozen and change hours until the market opens again in the morning.
The basic idea behind OTC trading is that the world of OTC is kind of the wild wild west of stock exchanges. Unlike trading on the NYSE, where companies have to meet a very high standard to be accepted for trading on the exchange.
To qualify for OTC trading, companies basically have to spell their name properly. And even then, there’s, uh...a lot of flexibility...
#TK FIX CONC
Overbought
Definition
What happens to a market when there are too many buyers.
According to financial journalists, it means that there need to be more sales.
But some financial pros think there's no such thing as overbought, since lots of buying affects market prices and eventually leads to selling...so it all sorts itself out in the end.
Oversold
Definition
See overbought.
What happens when there are too many sellers in the market and some people think there needs to be more buying.
Paid In Capital
Definition
Well, first you start with the original $1,000 Grandma gave you, or rather, invested in you, to buy 10% of your lemonade business. And note that it’s very important for defining paid-in-capital that Grandma is buying a slice of your pie, representing 10% ownership of your company.
She’s not giving you a low interest rate loan. despite her career as a collection agent for the mob. So the thousand dollars is equity, aka ownership.
That capital is paid in, and it’s likely that, in order to build the 16,000 lemonade stand stores, you will need to attract other investors, who will then pay in more capital to own incremental percentages of you, as your own original 100% ownership of the business when you founded it gets diluted down to some much smaller number than the 90% you own after Grandma’s grand.
But things go well. And it turns out, amazingly, that you didn’t need to sell any more equity in your company.
You were able to grow by taking short-term loans, which you then paid off by charging $5 a cup for the absynthe kicker. It was a huge hit among third graders. So after four years, you found yourself with $196,000 in cash in your bank account.
Yes, you had $5,000 worth of cups in inventory, a bunch of sugar, and other things.
Yes, they are probably convertible quickly into cash, but if you converted them quickly, you would also suffer a massive discount in pricing, because semi-used cups, or at least ones that have been previously sold, even if they are in their original packaging, probably don’t sell for much on eBay.
So for your purposes in assessing your own capital surplus, you’re going to ignore inventory and all of the other elements, that in a big or real company you’d have to account for, or at least consider when you thought about how liquid your company was. And... that’s not a reference to the product you actually sell.
So of that $196,000, $195,000 of that cash was capital surplus, or just capital, aka cash that came in in the form of after-tax profits as you grew your company from a nothing to...a something.
Now that’s how you make the most of your, uh…seed money...
Paid-in-Surplus
Definition
Extra money, more or less.
Paid in surplus is a balance sheet term: it represents the amount that investors have paid in shares above the par value of the shares. It only refers to shares bought directly from the company—not traded on the market. Usually, companies price the par value pretty low so a lot of money earned from a public offering is from paid in surplus.
Example
A company's common shares have a par value of $1. The company prices these shares at $10 on the IPO. The paid-in surplus is the difference between the par value and the price, or $9. If the company sells one million shares, they put $9 million in the paid in surplus section on the balance sheet.
Painting The Tape
Definition
Painting the tape is an illegal way to manipulate the ticker and a market.
Here's how it goes down:
Two people or firms trade stocks or securities back and forth. There's no real benefit to the trades—except that everyone looking at the ticker will see lots of activity on this one stock. The idea is that the stock will seem hot and real investors will also start to buy the stock. If you get caught running this scheme, you can expect some time in the Big House (and we don't mean a McMansion).
Par Value
Definition
The stated value of a bond or share—it's the face value, the dollar amount right there on the bond.
Most bonds are sold in increments of $1,000, so if you want to sound like you know what you're talking about, you'd refer to "par of a grand."
Pari-Passu
Definition
We always thought this would make a great name for Aunt Elma's toy poodle, but she doesn't see it that way.
In the financial and legal world (and, uh, in French), pari-passu means "on equal footing": two investments, sides of a deal, or parties are treated equally; there is no preferential treatment.
In a bankruptcy, sometimes it's said that the creditors are treated pari-passu: each of them have the same rights to get repaid, no one has a better crack at getting his or her money back.
Parity
Definition
What happens when two things are the same. A equals B.
So if two currencies are trading at parity, one dollar of one country's currency gets you one dollar of the other country's currency.
Participating Preferred Stock
Definition
PPS is a popular term in venture capital circles.
Think of it as common stock on steroids. When you hold this type of stock, you have preferred stock that also participates in the profits of the company. If the company goes belly-up and has to sell its assets, you might get back the purchase price of your stock plus any extra money common shareholders get from sales of inventory and other assets.
Pass Through
Definition
This type of security is backed by assets, like property.
Each month, money is gathered from one party and handed to an intermediary. The intermediary collects some of the cash as a fee and passes the money on to investors who own the pass-through.
Example? A mortgage-backed certificate, which is backed by the homes that people have bought with mortgages. Each month, people pay their mortgages; the money is collected by the bank and then goes through government agencies involved in the mortgage industry. Finally, it makes it to the investors who've bought the certificates.
Passive Income
Definition
Income you make without having to deal with your boss or having to schlep into work every day. It's usually money made from investments or from businesses that are mostly self-managing.
Example
Ellen hates her job as a barista and decides she’d rather be relaxing rather than spending all her time dealing with caffeine zombies every morning. She decides to set up some passive income for herself. She sets up an online business where people can download her e-books and seminars about how to make the perfect cup of coffee, and she uses her savings to buy up a house she rents out to tenants. The money she makes from her coffee business and real estate business is passive income.
Of course, Ellen would still have to work really hard (at least at first) on creating her coffee business or investing cash (in the house) to earn passive income. There are online courses that promise you can create a passive income with no cash and no work, but the reality is that it usually does take time, money, and hard work (sometimes all three) at first to start creating a passive income. And that income might not be enough for you to give up that crummy job right away, either.
Sorry.
Passive Loss
Definition
In limited partnerships, limited partners can't take part in managing their own investments.
These investments generate huge accounting losses at the beginning, which pass through the partnership entity to the limited partners. (Those are the passive losses.) It could be beneficial to those partners who might have a lot of income from other sources and would love to offset that income with these investment losses, but the IRS has put a stop to that. Passive losses can only be used to offset passive income, the income that you get from those limited partnership investments.
Penny Stock
Definition
Stocks that trade for very little—but not necessarily for a penny.
According to the NYSE, anything that trades under $5 a share is a penny stock. So basically, anything that costs less than a Starbucks.
Usually, these stocks come from companies that are in their last death throes (i.e., they've been caught in a huge lie and now the SEC wants to shut them down) or small companies that are volatile and speculative (hello, new startup created by a genius who lives in a bunker in the desert).
You might see ads in magazines promising you that you can make big bucks with penny stocks. These ads usually imply that penny stocks are a hidden, untapped resource for investors. But in reality, it's easy to lose your shirt in penny stocks. The idea of "there's nowhere to go but up" does not apply: You can buy a stock for $3 a share and watch it plummet even further—or watch the company fold, leaving you with a very expensive piece of paper and no money.
Buyer beware.
Pink Sheets
Definition
What some very macho rock stars sleep on.
Also, a publication by the National Quotation Bureau that lists prices of over-the-counter (OTC) stocks—usually shares of delisted or very small, thinly-traded companies. These shares don't need to file papers with the SEC or meet their rules the way that stocks on exchanges do; they tend to be highly illiquid and have (maybe) a single dealer.
Thanks to that publication (which used to be printed on pink paper), trading OTC stocks is sometimes referred to as trading on the pink sheets.
If a company's stock symbol includes the letters "PK," it trades on the pink sheets. No word on whether matching shams and throw pillows are included.
Placement
Definition
See Regulation D.
Most offerings of securities are made to the general public, but companies can also sell 'em to a small number of investors instead (usually under a Regulation D registration)—then they call 'em placements.
Portfolio
Definition
An investment portfolio refers to all of the investments that you have, including stocks, mutual funds, bonds, real estate you've bought for investing, and the money you've sunk into your grandpa's cough drop venture.
Pre-Emptive Rights
Definition
Rights that allow you to do something first.
For example, if you have pre-emptive rights to buy shares, you'd get the chance to buy 'em before they were released to the general public. It's like the Disneyland FASTPASS but with fewer puke bags.
Prearranged Trades
Definition
In a legal trade, a customer buys or sells a security at the market price.
In a prearranged trade, two brokers meet over chai lattes for breakfast and decide to buy and sell a security at a specific price. When the market opens, they don't have to worry about market prices.
Yeah, it's illegal. Why? Because it gives them an advantage over other folks, who have to deal with market prices and changes in prices.
Preferred Stock
Definition
Stock of a company that has a higher position on the food chain than common stock. If the company liquidates and there's any money left after all the creditors are paid, holders of preferred stock get paid before the common shareholders.
Bonus question: how much do they get paid? Answer: up to the amount of the par value of the preferred stock.
P.S. Preferred stock was also the name of a cologne in the 1990s. Those were the days.
Preliminary Prospectus
Definition
This is a document your company has to file with the SEC before an IPO.
The document includes all kinds of stuff investors need to know about the company: management, financials, the CEO's favorite steakhouse. It's like the "red herring" lite: It's not official, but things are so hot that we have to put something out or our marketing people will kill us.
Premium Bond
Definition
To us, Daniel Craig. That was one prime 007.
Oh... you mean financial stuff. Right.
A prime bond is a bond that trades for a higher price than its par value. It can happen if the bond had a higher coupon or interest rate when compared with other bonds being sold. Investors are willing to pay more because the bond can make them more.
Price Limit Orders
Definition
This is an order to your broker to buy or sell—but only within specific price range. For example, you might order your broker to sell for at least a certain amount (and no lower) or buy for no more than a specific price. This gives you some control over how much you pay for your investments. Most brokers charge more for limit orders, so be sure to check the fine print.
Example
From your Greek villa, you call your broker and say "I'll buy 1,000 shares of KO at $85 and not a penny more." That's a limit order.
Primary Offering
Definition
Pretty much an IPO.
A company goes public and starts selling shares of its stock so that you get to own a little bit of the company. The shares have not yet been sold on the secondary market—they're farm-fresh.
Primary Shares
Definition
Freshly-minted common shares sold to investors from a company. See Secondary Shares.
Prime Rate
Definition
The lowest interest rate that banks offer to low-risk folks.
You know that number banks advertise on mortgage and financing ads? The rate that includes the fine print "rates may vary"? That's the prime rate.
If you pay your bills on time, have a good credit history, and are very likely to pay the bank back, you might get the prime rate. If your credit score is not so great or you make fun of the lender's tie, you'll get charged a lot more to borrow money.
Them's the breaks.
Principal Protected Fund
Definition
Nothing in life is guaranteed except death and taxes, right?
Well, a principal-protected fund can be added to that list—sort of.
This fund guarantees that you will at least get back your initial investment. So if you invest $10,000 and the investment goes to crap, you'll still get back $10G. You won't lose money.
Sounds great, but be sure to read the fine print. To qualify, you have to hold onto the fund for some time. There might be other loopholes, too. Since these funds make big promises, they tend to net smaller returns. You might not lose much but you won't gain much, either, and, uh, isn't that kind of the reason for investing in the first place?
Principal-Only
Definition
Think of a bond as having two parts:
- the principal that will be paid on the maturity date
- the interest that's paid in coupon payments regularly
Usually, it's all tied up in a pretty package, but you can separate the two and sell the bond without the coupon payments as principal-only.
Private Equity
Definition
While public equity is a highly scrutinized and regulated dance, private equity is a secret dark corner of the dance floor, where nobody is supposed to look.
Private equity involves the sale of stock from a company to private investors who must sign "big boy letters," stating that if the company goes completely bankrupt, they are big boys and girls and they knew that there was massive risk when they invested in the first place. Why this kind of treatment vs. the very easy way Joe Sixpack can buy 100 shares of Coca Cola? Because too many fraudsters ruined the dance for too many excitable teenagers greedily seeking to make returns—and ending up broke.
Generally speaking, private equity comes in two forms:
The first form is called growth equity, generally attributed to fast-growing young technology companies simply seeking a late stage investment round, but who are not ready to be a fully public company... yet. Private equity growth rounds tend to be the last private rounds before the IPO.
The second form of private equity revolves around a combination of equity and debt, buying "fallen angels." That is, a company that was awesome 25 years ago and traded at 30x earnings became short-term greedy instead of long-term greedy and, over time, lost market share and mojo. In the process, their multiple declined to only 6x earnings. A private equity group works with a bank or banks to raise a large amount of debt, buying this company, taking it private...such that the private equity invested in it is highly leveraged. When the company goes public 3 or 4 years later, investors can make some 5-10-20x their initial investment if things go well. This latter form is a vastly different skill than growth equity investing, and is usually the primary attribution people consider when they hear the phrase private equity.
Pro Rata Rights
Definition
When a company is raising money, there can be some tension because of dilution.
Let's say you invest a lot in your Aunt Wilma's yarn business when she's just getting started, and you get shares that give you 33% of the company's ownership. But the business is a hit and Wilma is expanding. She launches additional efforts to raise funds. She sells more shares, and now you only own 15% of the company's ownership. You're miffed. What about all the money you ponied up when no-one else believed in the project? What about all those times you listened to her rants about lint?
Pro rata rights address some of these problems (not the lint problems—you're on your own there). Pro rata rights give you the right to invest in future offerings so that you can hold onto the same percentage of the ownership you had before. You don't have to invest at later stages, but if you decide to you get first crack at it—before the general public.
Program Trades
Definition
Program trades are computerized trades that usually involve a lot of shares and a lot of money.
Investors make these trades directly with the system of computers used by the exchanges—no going through brokers like a chump. Usually, you can only complete program trades at specific times of day because the size of the trade can affect market prices.
Progressive Tax
Definition
The wealthier you are, the harder you get dinged with a progressive tax. The rates increase as your wealth does.
Income tax is a good example of this: If you don’t make a ton slinging lattes, you get a lower tax rate. If you make a cozy seven figures as a lawyer, you get charged at a higher rate.
Prospectus
Definition
A legal document issued by a company that lays out everything an investor may need to know in order to make an informed decision.
This report is required by the Securities and Exchange Commission for investments that are being sold. The idea is that clients get this information so that they can make a good decision.
Protectionist
Definition
Any policy or plan that protects the businesses of a country and the local economy.
For example, high taxes on imports are protectionist policies. The idea is that they make foreign goods more expensive to get into the country and make them more expensive on the shelves, so local companies aren't put out of business by overseas competitors.
Proxy
Definition
Somebody who is authorized to act as an agent on behalf of another.
If you own shares in a company, for example, you can get someone to vote by proxy. Rather than casting your vote as a shareholder, you get someone to cast it for you. Maybe because you're too busy frolicking on your yacht.
Proxy Contest
Definition
A proxy contest happens when a bunch of shareholders team up together to sway a vote.
It's basically the corporate equivalent of the villagers showing up with torches and pitchforks and happens with takeovers and when shareholders are upset about a policy change. (The CEO really should have known that hiring his 8-year-old kid as an exec would have repercussions, eh?)
Proxy Statement
Definition
The SEC requires that a proxy statement be sent to the shareholders of a company before annual meetings. This document gives the deets about the issues that will be voted on at the annual company meeting (Should we open a new factory? Are we switching to decaf in the lounge?). Think of it as a sneak peek of the meeting so that you can decide how you'll vote.
Prudent Investment
Definition
An investment that's appropriate or reasonable when you consider the investor's risk comfort levels, financial situation, life, and tolerance for dairy.
For example, getting mom to invest in mutual funds or bonds may be prudent if she wants to save for retirement. Having granny invest in penny stocks is not a prudent investment (even if they make her think of the penny candy she enjoyed as a girl) because granny's likely to lose her shirt and possibly her walker.
Prudent Investor Rule
Definition
An outgrowth of the "prudent man rule."
This standard asks a fiduciary to invest like a prudent investor. They can't just sink all your funds into junk bonds; they have to invest as though they were investing in themselves.
Note that this does not guarantee anything about how your investments will do. A fiduciary might invest reasonably and still lose money on the market; the rule only requires that reasonable decisions are made.
Prudent Man Rule
Definition
Years ago, this term was used after some courts decided that fiduciaries had to act in a reasonable way when deciding what to invest in. The courts eventually decided that prudent men invest in bonds and only bonds, so anyone investing in stocks was not prudent.
Since then, states have become a little more relaxed and use the prudent investor rule, which allows for different types of investments.
Public Offering
Definition
The sale of stocks or other securities to the public.
There are a few different types. There's the initial public offering, where a company hasn't sold stocks before and is going public for the first time (oooh, the excitement). Secondary public offerings happen when a company wants to raise more money but has already sold stocks once. They're now selling more.
Public Offering Price
Definition
POP can mean two things.
If a company is selling stocks or securities to the public, the POP is the price at which they are selling the stocks. This price is usually made pretty attractive to get investors to open their wallets.
In the mutual fund world, the POP is the NAV (Net Asset Value) plus the commissions or loads. It's the cost of buying shares of a mutual fund—and that cost goes up and down daily.
Purchasing Power
Definition
In the Golden Age of Times Past, a nickel bought you a candy bar. You had the power to purchase twenty candy bars with one dollar. Now a Big Hunk costs you a big chunk of change: say, $1. So the purchasing power of a dollar declined from then to now.
Purchasing power is a measure of how much one unit of currency buys in a certain place or time compared to what it buys elsewhere or, uh, elsetime.
Put
Definition
A stock option that lets you sell your stock at a specific date by a specific date. You’re essentially ponying up money now for the right to sell a stock later. If the price of stock goes down, you can profit from put options.
Qualified Dividends
Definition
Dividends that come with no more than a 15% tax rate. If you meet a bunch of restrictions, dividends are taxed at the long-term capital gains tax rate instead of as regular income (the latter of which has a higher rate).
Qualified Plan
Definition
A "qualified" retirement plan meets all kinds of rules and laws so that you can enjoy some tax breaks with the plan. A 401k, for example, is a qualified plan.
Quotas
Definition
Quotas are limits on how many of a certain item can be imported at a time. (No more than 100 million pounds of staples at a time, please.)
RAN (Revenue Anticipation Note)
Definition
A very short-term muni bond.
Example
The municipality has plans to launch a muni bond offering. But they need cash now, so the RAN covers them until that larger offering is made. The money from the larger offering then pays for the shorter-term bond.
Random Walk Theory
Definition
Hipsters' favorite finance term. Especially if the walk is in Williamsburg.
Random walk is a belief that the market is unpredictable and you can't beat it. The market just walks where it wants to, bro—there's no rhyme or reason to it.
Don't tell Warren.
Real Estate Investment Trust - REIT
Definition
Let’s start with the basics. The letters. REIT:
Real
Estate
Investment
Trust
It’s basically a mini-mutual fund for real estate investments. Think: a chain of old age homes, which might carry a market value of a million bucks each, but which throw off 80 grand a year in net cash profits.
In melding together a whole bunch of old age homes, at least in theory, the volatility of any one home, um...dying, and then affecting the credit worthiness of the entire portfolio of real estate holdings...is lowered.
With scale, a REIT can then borrow money more liquidly, or easily, and it can leverage its legal obligations and meds-buying process, along with volume deals on diapers and dentures, across a much bigger swath of buyers.
REITs have been around a while. Ironically, they came into existence as an extension of the cigar excise tax in 1960, and extend as far in ownership as warehouses, commercial office buildings, shopping malls where piercings happen, and apartment complexes of all shapes and sizes.
To qualify as a REIT, a company must invest at least 75% of its assets in real estate, and/or be holding cash or US treasury bonds with the intent of investing in real estate. It has to receive at least 75% of its gross profits from real estate rentals. It has to pay out at least 90% of its taxable profits as dividends to its shareholders annually.
It has to have at least 100 shareholders, and have its ownership diversified, such that at least half of its ownership shares are held by 5 or more individuals. REITs are publicly available for Joe Schmo to invest in. They tend to pay very high dividend rates, and grow asset values at a modest premium to inflation.
That is, they don’t grow much. So most of their payback to investors is “bond-like”. And...that’s a REIT. Now, keep an eye out for those bulk diaper deals for Grandpa. And good luck, uh...dealing with the bulky diapers...
Realized Gain
Definition
The gain you make when you actually sell a stock or asset at a profit. You may own stocks for years and daydream about what you'd do when you sold it, but until it's sold those gains are unrealized.
Important note: You can't be taxed on unrealized gains, but you will fo' sho' be taxed on the realized ones.
And yes, you'll realize it.
Example
You bought GE at 10 bucks a share. You've held it a few years, and now it's at $30. Nice big fat hefty gain.
When you sell, you will "realize a gain" of $20 a share.
Realized Loss
Definition
See realized gain.
Realized loss is a loss you experience when you sell a stock or asset for less than what you paid for it. As long as you hang in there and only see the loss on paper, it's unrealized. Once you sell, boy do you realize it.
Example
You bought GE at $30 and then sold it a few years later at $10 a share. You have realized a loss of $20—and you likely also realized that you have no clue when it comes to investing.
Red Herring
Definition
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.
Redemption
Definition
See: the plot of every movie ever made.
In money terms, redemption just means paying off debt.
Registered Form
Definition
When a security is issued, it can take one of two forms: registered or bearer.
With a registered form, there's a paper trail that notes who bought the security and when. Each time that the security changes hands in trade, information about the new owners is added. Most securities today are registered.
Bearer forms mean that whoever has the paperwork for the security owns the security—they can walk into a bank and cash it in, no ID usually required and no questions asked. These forms are less popular today because terrorists and other shady types can use the anonymity of bearer forms to raise money for their projects.
Registered Investment Adviser
Definition
An investment adviser registered with the SEC and the state where he or she works. This person usually handles the investments of institutional investors and really rich people. See The Investment Company Act of 1940.
Registered Representative
Definition
A person who acts as an account executive and is allowed to sell securities. It's basically just another word for a stockbroker.
To become a registered representative, you have to pass the Series 7 and Series 63 securities exams and show that you have a good enough moral character to register with the Financial Industry Regulatory Authority (FINRA).
And no, those things aren't mutually exclusive.
Registration Statement
Definition
Before launching an IPO, your company has to file a literal crap-ton of paperwork with the state and the SEC. One of the documents is the registration statement, which includes your prospectus and other vital stats.
Regressive Tax
Definition
In a progressive tax, the rich pay more taxes. A regressive tax is the opposite—one that affects poor people more. It's not because they are taxed at a higher rate, but because their tax burden is greater.
Sales taxes, for example, are regressive taxes. When you buy detergent, you might have to pay 8.75% in sales tax—and you'll pay that 5% whether you’re rich or not. The extra buck or two might not matter if you're raking in $100G a year, but it can be bruising if that's your budget for lunch. The less you have, the bigger a problem that sales tax is.
Regular Way
Definition
This term refers to the way in which trades are settled (when they take the usual amount of time to do so); depending on the security, that could mean the next business day or a few days.
Regulation A
Definition
Any offering with a value of less than $5 million in any 12-month period may not have to go through the full SEC treatment (just an abbreviated registration), and may be a Regulation A offering.
Regulation D - Reg D
Definition
This rule lets companies sell to private investors rather than to the general public. Regulation D offerings don't need to be registered with the SEC, but they do need to toe the line in other ways. The offering can be made to any number of accredited investors, for example, but to only up to 35 unaccredited investors. Rule 144 lockup provisions may also apply to this type of offering. Or said another way...
It’s another diet regulation drink, which gets companies selling stocks or bonds out of the small forest they have to kill to print all the paperwork required by the SEC in a full rollout public offering. Regulation D is sort of the special situation common in these letter regulations… which in this case simply restricts the company issuing the securities to only sell to qualified private investors.
What is “qualified”?
Well, it generally means that those private investors are already wealthy: net worth of n millions of dollars; they have continuing income well into the hundreds of thousands of dollars per year. They're educated…yes, broadly defined, and it doesn’t just mean they’ve taken a $14 Shmoop course. And most importantly, they will have signed a big boy or big girl letter, which states that if this risky offering goes completely bust, then...no tears. Or lawsuits.
In a Reg D filing, there is usually an allocation for sales beyond the above accredited private investors and some amount of the stock can be sold to non-accredited investors. And in current Reg D land, that number is limited to 35.
So why would the SEC allow a highly risky private investment be made to a meaningful number of non-accredited investors - people who might be non-millionaires, uneducated, or unsophisticated in the wiles of the financial jungle? Because in many early-stage startup companies, the founder has a few dozen family members who are all anxious to find the next Amazon and even though they are a plumber and a carpenter and a cook, they have 5 grand of savings with which they want to buy a lottery ticket.
So the SEC makes accommodation for this investment in Reg D, and oh by the way, this actually happened when Jeff Bezos founded and started Amazon. So dreams really do come true...
Regulation Full Disclosure - Reg FD
Definition
Laws that require companies to fully disclose data relevant to its stock price broadly and fully in public forums so that all parties who could benefit from knowing this information, benefit equally and contemporaneously.
Or in industry parlance, it's Reg. F. D. Ohhh those whispery hallways of the 1970s and 80s. Insiders. Muckety mucks. Cheaters, liars, deceivers. Key employees on the take. Sound like the dramatic cover for a Hollywood movie?
Well, it was. And it was real life as well.
The practice of gleaning information essentially unavailable to the average investor was a large part of the practice of quote doing research unquote for all too many of the professional buyside investment firms of the era.
The regulators finally uh, noticed. And began to crack down with only modest success for a while, when finally Regulation Full Disclosure was enacted via the SEC in 2000.
That regulation massively prohibited the type of discussions that could happen among analysts and company insiders.
In fact, disclosure of more than much more than the company name, mailing address and the product they sold was prohibited, unless done in a broadly available and well publicized public forum.
The goal was to take away free money from insiders, who could make bets with waaaay more info on whether or not the roulette wheel was going to in fact land on red 23. So yeah. That’s what Reg FD is about.
Trust us. We’ve fully disclosed everything we know about it...
Regulation T - Reg T
Definition
Imposed by the Federal Reserve, this nugget regulates how margin can be extended by broker-dealers as well as the limits on how much margin can be made available to investors. According to this rule, brokers can offer up to 50% margin.
So you probably remember all those horror stories of clueless investors borrowing more than the usual 50% maximum margin to either buy more securities or just, um…stuff. Not shockingly, this was a big problem in the unregulated world, before the various securities acts went into power in the 30s and 40s.
Reg T basically covers the form and manner in which brokers, or brokerages, can extend credit to their customers. That is, in most cases, for normal retail investors, the maximum amount they can borrow, courtesy of the kindly, loving, care-taking people at Reg T, and think of that T as “training wheels” is 50%.
So who hates this law? Who loves this law?
Well, if you think about the dynamics of a brokerage, they are the casino. The house. The matron. They don’t like to take a lot of risk. But, undoubtedly, they have clients who do. So think about the situation where Joe RollsBigDice borrows right up to the limit of 50% margin, and things go well, and he borrows more and more, continuing his practice of being right up to the limit of a 50% limit structure.
From a margin account, Joe is allowed to buy anything legal. He can buy more securities, or he can buy that shiny red convertible Porsche with the awooga horn. So in his margin account of $300k, he’s borrowed a hundred grand to buy more stocks, and since his margin limit at 50% leaves him head room for only 50 grand more when he just had to have that Porsche, he was limited to buying the 9-year-old one with a dent in it, and that fish smell that will never go away.
So Joe is now all in, just kissing his maximum margin borrowing capacity of 150 grand, against the 300,000 dollars in equity value in his account. Then, one day, North Korea gets moody, and nuclear things...happen.
And the market takes a huge Dr. Strangelove-ending kind of dive. So now Joe RBD’s broker, with whom he has become friends-ish over the last few years, has to have the unpleasant phone call that Joe must present money to make his 50% margin maximum work.
Joe has to sell shares, producing cash, until the total amount he has borrowed against his investment portfolio is 50% or lower. So this is bad enough. It’s an unpleasant conversation. Joe will probably blame the broker for not preventing him from making whatever stupid bets he made, and Joe might switch and go to eTrade, or somewhere else.
So yes. That’s bad. But in the era before the 50% margin, where there were essentially no training wheels, investors could borrow whatever they were allowed to borrow. So then, instead of having a 50% cap, investors would have to not only sell essentially all of their stock portfolio, but they might suffer incremental debts beyond it, where sadly, the brokerage has to bring the sheriff, kick the wife and kids out of their home, and repossess their icebox, their horse named Betsy, and their brand new, state-of-the-art electric toaster.
And now, instead of being less wealthy, Joe and his entire family are flat broke, and living on a horse down by the river. So while Reg T drew a lot of mumbling about overly active government intervention at the time it was released, it in fact made for a dramatically smoother transition when times got tough.
Maybe that's what the T stands for…
Relative Strength Index
Definition
How do you measure the strength of a stock? Try the relative strength index (RSI).
Imagine lots of charts and graphs (fun, right?). The price of a stock is graphed over a period of days, months, or years. Everything is put on a scale of 0–100, and analysts start paying attention when the stock prices go above the 70 mark or below the 30 mark. The idea is that too many peaks and valleys or lots of ups and downs is bad news.
Reset Date
Definition
The date when the rate adjustment of a dividend happens.
"The preferred shares of BUBB will pay an interest rate no less than 50 basis points more than whatever the 10 year T-Bill is yielding on the last trading day of each quarter."
That last trading day is the reset date.
Residual Claim To Assets
Definition
The claim to leftover assets.
If you have common shares, you have a residual claim to assets. This means that if the company goes bankrupt and sells its assets, the creditors and others are paid first. If there's anything left over, you have rights to that leftover (residual) stuff.
Spoiler alert: By the time everyone's paid off, there's usually nothing left.
A few percent of $0 is still $0. That's just how math works.
Restricted Stock
Definition
A type of unregistered stock that a company can sell or give to execs or investors. This stock cannot be sold or transferred until the SEC registration is handled.
Retail Investors
Definition
Investment pros love to complain about retail investors. These are the average shlubs, not the money pros. They're the teachers, plumbers, dentists, and grandpas who want to make money with investments but who might not be all that sophisticated about money.
Hint: If someone says "So an interest rate makes me money, right?" they're probably a retail investor.
Retirement Accounts
Definition
Life is fleeting, nothing lasts forever, and all that jazz.
Eventually, you too will get old, and no matter how cute you are now, you'll have to deal with hip aches and bratty kids. When you can no longer work, you'll want money to pay for food, heat, and adult diapers. You can invest money for that time with a retirement account—like a pension fund, 401k, or IRA.
These funds make your money grow faster (and a lot, if you start early); they offer tax breaks, to boot.
Return On Assets (ROA)
Definition
The return on investments is the money you make from your investments and it's usually pretty easy to figure out. You invest $10 and you make $5... your returns are $5.
But companies don't just make investments. They sink a lot of money into assets—like land, factories, brand names. How can a company figure out how well it's making money with its assets?
Answer: by figuring out the ROA (Return on Assets). And, yes, there's a formula for that:
ROA = net income / assets
If your company has $1 million in net income and $5 million in assets, that's a ROA of 0.2 or 20%. Is that good? Bad? It depends in the industry and what assets you have.
You want the ROA number to be as high as possible—it means you're squeezing more juice from your assets and really putting them to work.
Return On Investment (ROI)
Definition
The money you gain or lose on your investments over a specific period of time. For example, if you own a stock, you look at your returns on investment over a period of two years, and you may find that you have gains of $1,000. Is that good? Bad? Depends on what you are expecting from your returns and what other investors have seen on their returns.
Example
Put in a dollar. You expect to get more than a dollar back. If you invested a dollar and 3 years later you got back $3, your ROI was 300%. You made $2 in profits. But it's still written nomenclature as a return of 300%. If you invested $3 and 3 years later got back just $1, your return was negative 67%.
Revenue
Definition
The bucks you get from sellin' your wares or conducting business activities.
Revenue is important for a few reasons: First, you gotta have some to pay your bills. Second, how much you make decides how much you pay in taxes. Finally, revenues are often the starting point when you're trying to decide whether you're making good business decisions ("How can we increase revenue?")
NB: also called "top-line" in kitsch Wall Street circles.
Revenue Bond
Definition
A municipal bond that pledges the revenues generated from the project with the amount borrowed. Toll roads, municipal parking garages, city councilmen's Lexuses... those are all examples of projects that are funded through revenue bonds.
Reverse Split
Definition
When a stock is tanking, it risks getting laughed off the exchanges (i.e., being delisted). When this happens, the company can try a reserve split, which means that shares are merged together. If you hold 100 shares at a dollar each, you suddenly own just ten shares—but each is worth $10. It doesn't mean your investment is worth more, but the per-share value has less overall suckage.
Reverse Stock Split
Definition
Sort of like a stock regeneration. Instead of 1 share becoming 2 (like in a stock split), 2 shares become 1. Your investment is worth the same overall, but the window-dressing makes it all look more impressive.
Example
If you had 20 shares at $10 before the reverse, you'll have 10 shares worth $20 after, but your investment is still worth $200.
Risk Averse
Definition
Risk-averse people don't want to take unnecessary risk. They wear knee pads when walking up hills and bike helmets in classrooms—just in case.
When these folks want to invest, it's best to set them up with bonds and T-bills. The poor dears can't handle the ups and downs of high-risk stocks.
Road Show
Definition
Before a company issues an IPO, they sometimes hit the road like a rock star—except with fewer wrecked hotel rooms... usually.
Road shows take company management around the country to give presentations to possible investors, analysts, and groupies. The idea is to drum up interest so that when the IPO happens, people will buy shares.
Think Cirque du Soleil but with charts and suits.
Roll Up
Definition
Typically using debt, when a company buys a bunch of smaller companies to create market power in a domain; it can then raise prices and margins go up a load.
That's the theory, anyway.
Round Lot
Definition
A hundred shares of stock. (It can also refer to shares that can be neatly divided by 100.)
Usually, exchanges require you to buy at least 100 shares of stock before they talk to you (same with brokers), and they like to do trades in rounded numbers ending in zeroes.
Maybe they're not as good at math as they claim to be.
Rule 144
Definition
If you want to sell unregistered or restricted stocks and securities, the SEC wants you to follow some rules. For example, you might have to hold onto the stocks for a while before trading or selling (that's Rule 144).
See lockup provision.
Rule Of 72
Definition
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.
Example
You buy $1,000 worth of a stock (50 shares at $20 a share), which compounds at 8% per year. The Rule of 72 tells you how many years it'll take to double the principal compounded value of that stock—to get the magic number, you take that 8 and divide it into 72. In this case, at an 8% compound rate, it'll take you 9 years to double your money.
S&P (Standard & Poor's) 500
Definition
The Standard & Poor's 500 is a U.S. stock market index that's based on 500 major companies in the U.S. If you want to know how the U.S. stock market is doing, check the S&P 500.
For more, head on over to our Learning Guides.
Sales Charge, Sales Load
Definition
Mutual funds ain't free, no matter what the ads say.
When you invest in a mutual fund, you pay a commission (a load) or an annual fee. The money goes to the people who sell and manage the fund. The money that's collected from you to pay those folks is known as the sales charge or sales load.
You could be paying one of a few ways. You could have a straight-up sales charge or a high annual fee (it's usually one or the other). A good rule of thumb is to think about how long you'll have the fund: If you plan on holding, choose low annual fees and you'll save in the long run. If you'll sell soonish, look for no loads or low loads.
Sandbagging
Definition
When a flood is imminent, people put bags of sand against the shores of rivers and lakes. The idea is that the sand absorbs the water and slows the flooding, hopefully saving a few basements along the way.
When a company sandbags, they try to keep estimates of financials pretty conservative. They publish underwhelming numbers so that when the real numbers come in, the company looks that much better.
Underpromise, overdeliver.
Sarbanes Oxley
Definition
The Sarbanes-Oxley Act (SOX) of 2002 was created after the accounting scandals at Enron and WorldCom showed just how much numbers could be fudged.
Under Sarbanes-Oxley, there are stricter penalties for fraud and more rules about transparency and the reporting of accounts.
Savings Bond
Definition
Back in the day, this was your grandmother's preferred birthday present to you.
Savings bonds are issued by the Treasury and are a simple and cheap way of lending to Uncle Sam. There is no stated maturity date, but interest would be paid for a certain period. After that period ends, the bonds no longer pay interest. Also, interest isn't paid each year; instead, it's tacked on to the existing principal, so when you cash it in for college (or that '69 Barracuda), you receive the face value (they're usually sold with a $500 face value), plus all that accrued interest.
Scales
Definition
Do re mi fa so la ti do!
Ahem.
The term also refers to the way companies grow. If a company sells a widget for a buck and that widget costs them 85 cents if they make a million them a year, and it only drops to costing them 80 cents if they make a billion of them a year, then that company "does not scale."
The opposite would be a software company which might cost $30 per unit for the first million units but might drop to $2 a unit on the next hundred million; if the retail price stays around 50 bucks, that's a lotta mega profit.
Second Market
Definition
A platform where shares of non-public companies can be traded.
Secondary Offering
Definition
First, there's an initial public offering. Any time a company sells shares after that, it's a secondary offering.
You can only be first once, but you can be second all you want.
Sector Fund
Definition
Seems sort of obvious, yeah? It's a mutual fund that invests in a particular sector, like tech or healthcare.
It's is the opposite of a diversified fund, which usually invests in lots of sectors or areas so that when one slides, you still have all those other investments holding the fund up.
Secured Bond
Definition
A secured bond is backed by an asset. It guarantees that if the company gets into trouble and can't pay you back, they will sell the asset and use the money to pay the principal and interest on their bonds.
Secured Creditor
Definition
Secured is better than unsecured because you have something to grab and sell (collateral) if the borrower defaults. But you have to ask how real that security is: If you have a security interest in a nuclear power generator, just how easy is that thing gonna be to sell?
Securities Act 1933
Definition
Before this law, securities trading was the Wild West. Companies could lie about their shares and financials and do all kinds of other unethical things. This was the first major securities law, and it required companies to register before their shares could be sold to the public.
Suddenly, overseeing the securities market in the U.S. became possible.
Securities Exchange Act 1934
Definition
A law that helped make securities trading safer for investors.
Thanks to this law, the SEC came to oversee the industry, the New York Stock Exchange became linked to the government, and insider trading became a major no-no.
Security
Definition
The generic term for anything that you can invest in: stocks, bonds, mutual funds, REITS—all of them are securities.
Sell Limit
Definition
You call your broker to sell a stock or other security, but you only want the sale to go through if the broker can get you at least a certain price. You put in a sell limit, so the broker can only sell at or above the price you want.
Sell Side
Definition
Brokers. Brokerages. People who sell stocks.
The opposite is the buy side: folks who buy and manage money for a living.
Sell Side Analyst
Definition
Someone who works for a firm and assembles reports and research about a specific industry (like energy or tech). This person creates graphs, charts, and lots of information that investors can use. But their real role is to get clients to trade with them or their firm. When that happens, the clients pay a nice commission. The real work of the analyst is more of a marketing thing, so take those charts with a grain of salt.
Sell Stop
Definition
This is an order to your broker to sell a stock at less than the current market price. Why would you want to do that? Usually because you think the stock is headed downward and you want to sell before it drops too low. It protects you from losing even more.
Example
You have a stock that's worth $40 a share, but you think it's about to do much worse. You put in a sell stop order for $38. If the price reaches $38, your broker sells for $38 and you lose $2 per share. But a week later the stock drops to $30. You feel pretty good—you kept your losses from being too big.
Separate Account
Definition
An investing account that's in the name of specific individuals or entities.
The difference between a separate account and a mutual fund is that the investor of a separate account owns the stocks or securities in the account rather than shares in a basket of securities. You need a lot of dough—like $100G or more—to invest in a separate account since the money isn't being pooled together.
Settlement
Definition
The process of taking care of trades and seeing them to the end.
When a trade is settled, it means that the buyer has his stock and the seller has her money.
SG&A (Sales, General & Administrative)
Definition
Sales, general and administrative expenses.
It's a line on an income statement and stands for the money used to manage a business, deliver products or services, and market the company. These costs are important to the overall expenses of a business, but they don't fit with the costs of production.
Shareholder
Definition
A person who own stocks in a mutual fund or company. This person basically owns a bit of the company and has some rights.
Sometimes known as stockholders.
Shares Outstanding
Definition
The number of shares of a company that are out there in the world, owned by investors and shareholders. Any shares bought back by the company are not included in this number, which will change over time as the company raises more funds.
Example
Company X has issued a hundred million shares to employees, investors, and the general public. The company bought back ten million shares. They have ninety million shares outstanding.
Short Interest Theory
Definition
This investing theory states that stocks with lots of investors betting that the stock will go down will actually go the other direction.
When a stock sees lots of short sales—where people sell something they borrow but don't own—any slight increase in price will cause these sellers to buy because they stand to lose money if the stock price goes up. All those buys will push the stock price up.
That's the theory, anyway.
Short Sale
Definition
Selling something that you don't currently own because you think the price will go down. You borrow the security and sell it. If you're right, the price drops and you buy it back later for less. Put another way: Your Granddad always said, "buy low, sell high." This is just "sell high, buy low."
The net result is the same.
Example
You see sales of Lost company for $40 a share. You think the price is about to head down so you borrow ten shares and sell 'em for $40. You make $400. A week later the shares are selling for $10. You buy the stock for $10. That's 10 shares for $100 and you give back what you've borrowed. The $300 difference is your profit.
Short-Term Capital Gain
Definition
When you make money on an investment you’ve had for shorter than a specific amount of time (usually a year and a day), they're known as short-term capital gains. You can expect to pay taxes on this gain, and you’ll pay higher capital taxes than someone with a long-term capital gain, so it can make sense for you to hang onto your investments.
Short-Term Capital Loss
Definition
Loss on an investment you’ve had for a short period of time (usually less than a year and a day, although you might want to read the fine print or the information that came with your investment).
Shorting Stock
Definition
When an investor makes a bet that the price of shares will decline.
When you short stock, you sell a stock you don't own by borrowing it from your broker. Once you make the sale, the money is credited to your account. Then you close the short; that is, you buy the stock to give the money back to your broker.
If the stock has declined in price, you pay less than what you earned, and the difference is your profit. If the stock you've already sold has gone up in price, you have to buy the more expensive price and you lose some cash.
Sinking Fund
Definition
A company with bonds outstanding will buy back some of the bonds each year, gradually paying off the debt. They do this by handing over chunks of money to a trustee who uses the cash to buy some of the bonds on the open market.
Investors love sinking funds because the company is putting money toward the bonds, so it's much less likely that they'll default (not pay). Low risk = happy investor.
Example
Company X has $100 million a year in extra cash. It has 10 bonds outstanding, each with a $50 million face value. The company takes half of its free cash flow (that's $50 million a year) to buy back the bonds. On the company's balance sheet, that's one less debt. The company's financials look rosier already.
SIPC (Securities Investor Protection Corporation)
Definition
The Securities Investor Protection Corporation (SIPC).
This non-profit offers insurance for accounts, and broker-dealers who register with the SEC have to be part of SIPC. If your broker goes bankrupt, SIPC makes sure your investments come back to you. If some assets are missing, SIPC will replace them—up to certain limits.
Skew
Definition
Trends in options, stock prices, and other financials show up on graphs as lines that, uh, don't go straight. When a line on a chart goes on an angle horizontally or vertically, it has a skew. When trying to figure out where options, stock prices, and other stuff will go, skew can give analysts a clue as to where trends are headed.
Small Cap
Definition
Stocks that have a small market capitalization, generally because the company doesn't have many shares outstanding.
Of course, this is Wall Street, where big is small. Small cap refers to companies with less than $1 billion in capitalization. So yeah... not so small, after all.
Sole Proprietorship
Definition
This is a business structure where there is one person in charge and one person owning the company.
There is unlimited liability: If something goes wrong and the business is sued, lawyers can come after all the business assets and all the owner's assets—even their house and car and other stuff that's not linked to the business at all. Why? Because the business is simply an asset the owner has; there is no divide or safety barrier between the business and the owner.
Special Memorandum Account
Definition
Have extra margins in your margin account? You can put them in an SMA.
In fact, you should.
Keeping those extras in a different account makes sure that your gains stay protected and you have extra margin you can use when you want to buy more investments.
Specialist
Definition
A member of a stock exchange who is responsible for maintaining an orderly market in a particular stock or stocks that are traded on the exchange. The specialist is required to provide liquidity through purchasing shares when there are no other buyers and selling when there are no other sellers.
The specialist maintains a book that shows all limit and stop orders for the stock, which, yes, is considered inside information—but specialists are specifically exempted from the normal insider trading rules as long as the trades made on inside information are to maintain an orderly market.
Order in the market!
Spread To Treasuries
Definition
Ever wonder how bonds get priced? It sure ain't random.
It happens through a spread to treasury, which is the yield difference between a a U.S. Treasury security and a similar bond. U.S. Treasury securities are considered to have pretty much zero risk, so if a U.S. Treasury is yielding 4%, a bond from a private company could yield maybe 14% because (duh) it's a much higher risk.
Stagflation
Definition
It sounds like a class at Starfleet Academy, but it's really a combo of inflation and stagnation—and it's really bad news for the economy.
Stagflation happens when the economy isn't growing. It's stagnant, which means low interest rates, few jobs, few opportunities. Things are sluggish. At the same time, there's inflation; the cost of stuff is going up, which means people can afford less stuff, which means less demand and fewer jobs... sensing the vicious cycle yet?
Statutory Voting
Definition
For every share you have, you get one vote.
That's statutory voting.
You can't weight your vote, meaning, if you have 100 votes, you can't cast them all for the same director. (That would be cumulative voting.)
Stock Dividend
Definition
Some stocks pay out dividends, and you can use that cash however you want.
Stock dividends are dividends paid out in the form of—wait for it—stocks. One problem: Since the company has created more stock, you get to deal with dilution, meaning that every individual share is a smaller slice of the company pie.
Stock Option Plan
Definition
A stock option plan is just the, uh, plan that the company uses to issue stock options.
The plan outlines the number of options that will be issued, what the options are like, the time frame for the options, any rules that relate to the options, the strike price, and the level of insanity of the start-up founder. (We wish.)
Stock Split
Definition
See stock dividend. They are identical in result.
Basically, it's what happens when a company takes its shares outstanding and doubles them. So if you hold 100 shares, after the split, you'll hold 200 shares. That might seem exciting, but it does nothing—for you. If you owned $100 of shares before the split, you will own $100 of shares after; just the number of individual shares will be bigger.
The company might get some benefit from a split because the price per share will be smaller, which can encourage more investors to buy.
Example
You own 100 shares of BananaSplit and each share is worth $10 (for a grand total of $1,000). Then they split their stock. You now have 200 shares of BananaSplit all worth $1,000 or $5 per share. Not much has changed. But if you were a new investor and wanted to invest in the stock, you'd only have to pay $500 to buy 100 shares. That might be more realistic for you if you're on a budget.
Stop Limit Order
Definition
See stop loss, buy stop, sell stop... actually, just pull out all the stops.
The wrinkle is that this type of order combines the features of a stop order and a limit order. If you're short the stock, you probably entered a buy stop to limit your losses. The "limit" is that you don't want to execute that buy stop at a higher price than the buy stop price.
Stop Loss
Definition
A trade order you give your broker to stop the bleeding.
If you think a security is heading down in price, you can put in this sort of order. When the price starts dropping below a certain limit, the broker sells before you lose any more money. See buy stop and sell stop.
Example
You've bought a stock at 43 bucks per share. You were hopeful that the new drug from this company would cure cancer. Instead, it only grew hair on people's knuckles. Wisely, just in case that hair-knuckle thing happened, you had put in a stop loss order with your purchase at $42 to sell everything. When the price reaches $42, the broker starts selling at the next available price, which is $25. You've lost a lot of money, but the next day the stock is at three dollars a share. You got out before your stock bled out all over the floor. Lucky—those things get messy.
Stop Order
Definition
A stop order is a longer-term order you give your broker. It basically says "when the stocks reach this price, buy" or "when they reach this price, sell." The idea is that these orders prevent you from losing money or losing control of stock prices.
Straddle
Definition
You feel like something is about to go down with a stock. You can smell it: big change is coming.
The only problem: You don't know whether the stock will soar or tank hard. So... you need an option trade that will make you money in either case.
Allow us to introduce you to the straddle. In this option trade, you buy a put and a call with the same expiration and strike price. Whether the stock goes up or down, you can make money.
Strangle
Definition
A way that you can take advantage of stocks going up and down like crazy. With a strangle, you buy a put option and a call option where the call strike price is higher than the put strike price.
Street Name
Definition
Shares are yours, but the broker holds them in her name (the street name). Why? If you decide to sell or trade, it's easier to make the trades without you having to sign a bunch of papers.
Strike Price
Definition
The price at which you may strike—whaBAM!—lightning fast. It's the price on an option where you can either buy or sell the security. WhaBAM! (We just like saying that.)
Example
You have a stock trading at $14 a share. You were a lucky employee to have joined before the IPO and you received stock options with a strike price of a dollar a share. You can say that you are $13 in the money based on the stock trading here at $14. In practice, to buy your Beemer, you would execute what's called a same-day sale with your broker who would remit to you the difference from the strike price to the actual clearing price or 13 bucks. Then go 325i.
Subordinated Debenture
Definition
A corporate bond that is lower in priority—i.e., subordinated—to other debt that the company has.
Big companies have lots of layers of debt, and they need to prioritize to figure out what gets paid first. Subordinated bonds are lower rated and they get paid after the higher-priority, higher-rated bonds.
P.S. Debentures are usually not secured by specific collateral, so they're the equivalent of a standing room ticket at an English soccer match.
Good luck.
Subscription Agreement
Definition
When you apply to become a limited partner in a DPP, you have to show that you're worthy. You do that by filling out a form called the subscription agreement. This form asks about your net worth, income, past investments. It will also outline out the risks you take on with the DPP. It's all written in legalese so it's hard to read but it tells you that you can lose your money and that DPPs are risky. So now you know.
Super-Voting Stock
Definition
Super-voting stock owners have super(voting)powers that other stockholders don't.
This type of stock is sometimes used when owners have founded a company and want to have more voting rights than their shares would allow. It can also be used when a group of people think their vote will better protect the company.
Example
Super-voting stock might be structured so that the founder who owns 20% of a company might have 5 to 1 super voting stock, in which case that founder's 20% economic share gets treated as if it's 100 votes against the 1 vote for 1 normal share owned by everyone else.
Translation: The founder can't be fired by the board.
SuperDOT
Definition
This is the electronic trading system used by the New York Stock Exchange for limit orders. It's considered more efficient because it sends orders directly to a floor specialist instead of to a broker.
Supply-Side Economics
Definition
Supply-side economics is a group of theories that suggest we should slash capital gains taxes—and lower corporate and business taxes while we're at it.
The folks behind these theories say that policies that help out suppliers and producers (the people who bring goods and services to the economy) have the best effect on making the economy stronger and that we don't need to worry about consumers or the people buying.
Surrender Charge
Definition
Most annuities require you to keep the investment for a minimum period—usually 7 years. If you surrender or give up the annuity before then, the annuity company will make you pat (usually 1–5%).
Surrender Fee
Definition
This is the amount of the surrender charge, which you pay if you back out of an annuity early. The surrender fee is usually expressed as a percentage of the original investment.
Surrender Period
Definition
See Surrender Charge and Surrender Fee.
If you have an annuity, you are expected to hold onto it for a specific period of time—usually seven years. That's the surrender period.
Withdrawing before the end of the surrender period will mean you have to pay extra fees and costs. (Is it just us, or is that the ending to every finance definition on the planet?)
Syndicate
Definition
When a company wants to make an offering, they need underwriters to handle all the details. A syndicate is group of underwriters assembled to handle jobs (issues) too big for one underwriter alone. Like the Avengers of finance—only less cool and more nerdy. Actually, a lot of the Avengers are pretty nerdy, so strike that last one.
Syndicates usually consist of a lead underwriter (like Captain America), investment banks, and smaller broker/dealers.
T+1 (T+2,T+3)
Definition
The T here refers to time, and the 3 refers to 3 days.
So T+3 = the 3-day time period that you have to wait after you buy or sell a stock. Yep, it takes three days from when your order is executed until you actually have the stock or the money in your hot little hands.
The T here is time, as in days. And the 3 (in T+3, for example) is, um… the number of said days. That is, if you put in an order on Thursday with your broker on a 3 day holiday weekend; call it Labor Day weekend, and your particular purchase is a T plus 3 settlement purchase, it means that you will have transacted on that thursday, but then you need to weight 3 business days until that transaction is considered, settled.
So in this case yeah we threw curve balls at your head. There was not only a weekend to deal with, but a holiday too. A good one. Love the hot dogs. So had this been a T plus 1 settlement, the trade would have settled….Yes, friday.
If T plus 2, then it would have settled…no, not monday, a holiday, so it doesn't count; it would have settled Tuesday. But its T plus 3, so it settles Wednesday.
Why all this lag in the era of light-speed computers? In the olden days, people waited for physical delivery of a dead tree with ink on it to consider a trade settled…
Used to be 5 days, stocks 3 days, and bonds and money market funds 1 to 3 days. If, however, you hear T minus 3…uh, it may be time to climb into your bomb shelter…
T-Bills
Definition
T-Bills are federal debt you can invest in. T-Bills have short maturity dates of 91, 182 or 365 days, so they're a good bet if you want short-term investments. They have low risk because you're basically borrowing money from yourself.
T-Bonds
Definition
Want to invest in federal debt? You hear about it often enough, so why not?
T-bonds are a low-risk way to invest in federal debt; they have a maturity of ten years or more, so be prepared to wait.
T-Notes
Definition
You're always lending money to your BFF, so why not lend to Uncle Sam and actually make money from it?
T-notes are Treasury securities that let you invest in federal debt. These have a maturity date of 2, 3, 5, or 7 years.
What happened to 4 years and 6 years? No one knows. They just don't exist.
Takedown
Definition
A syndicate is a group of underwriters who help a company issue stock. They get paid for it, usually by making a profit when they sell those stocks. When they make this sort of profit, it's called a takedown.
Tariffs
Definition
Ut oh—it’s tariff time. Tariffs have a way making things awkward between countries. A tariff is a tax on an import (or export) between different countries (or other borders).
What’s all the tariff riff-raff about? Tariffs can be used to try to artificially affect the global market by making importing or exporting certain things more expensive than they would be otherwise. This can help artificially (in the economic sense) prop up industries.
Yet, tariffs aren’t that simple. For instance, the Trump admin put a 25% tariff on steel and a 10% tariff on aluminum imports, with some exceptions. This was great for American steel and aluminum producers. They used to have to compete with cheaper, imported steel and aluminum, but now that the imported stuff was more expensive, it became easier for them to sell their steel and aluminum to other U.S. businesses.
Which gets to who it wasn’t great for: those other U.S. businesses. Business who rely on a steady stream of cheaper, imported steel and aluminum all of the sudden experienced a price hike, dramatically affecting their businesses. Who else is paying? American consumers. The businesses who have to pay more money for steel and aluminum will pass that extra cost onto consumers, making a ton of goods more expensive than the used to be. To decide the effects you want out of a tariff, one must look beyond the immediate effects and to the secondary and tertiary effects to get the full picture.
Like we said—ut oh.
Tax Anticipation Notes
Definition
How can you not anticipate paying taxes?
Tax anticipation notes rely on the fact that the city will collect $X in taxes so many months from now. They issue bonds today using that expected tax money as collateral so that they can pay for stuff today.
Tax Deferred
Definition
A type of tax break that lets you pay taxes later—as opposed to now.
For example, on some retirement accounts, capital gains and income aren't taxed until you start taking out money from the account as a silver-haired retiree. You don't avoid paying taxes (no one has that superpower); you just put it off.
Tax Exempt Bonds
Definition
Want to pay fewer taxes?
Tax exempt bonds are one way to do that. With these bonds, you don't pay local, state, or federal taxes on your investment so your investment dollar goes further. Municipal bonds are an example of tax-exempt bonds. Whatever money you make from your muni bonds is money the IRS can't touch.
Tax Loss Carry-Forward
Definition
It sorta is what it says it is: If you have a tax loss—you lose operating profits one year in your business—you can "carry it forward" into the next year. So if you suddenly do well one year, you can use the carried over tax loss to pay less taxes.
In fact, you have 7 years in which to use those tax losses.
Example
Do the math: a company called Scooby Dude pays 30% tax. It has been a taxpayer all along, profiting nicely from its van decal painting business. This year, it lost $1M on $5M of sales. It had just enough money in the bank to keep going.
When a popular political candidate adopted Scooby Dude to paint vans as part of her media blitz, SD made $3M in profits the following year. Normally SD would pay $900K (30% of $3M) in taxes, but because they had $1M in tax loss carry-forwards, they deduct the $1M loss from the $3M to show a taxable profit of $2M this year, on which they then pay 30% or $600K.
Tax-Equivalent Yield
Definition
First, let’s get some groundwork laid out with tax-free municipal bonds. Tax-free municipal bonds are given out by states, municipalities, and counties that aren’t taxed. However, tax-free municipal bonds also typically come with measly yields.
For an investor looking to invest in bonds, they have to decide: do I choose to invest in bonds that are taxed that may have higher yields, OR do I choose to invest in tax-free municipal bonds, which aren’t taxed but may have lower yields? To help investors decide, they can calculate the tax equivalent yield, like so:
Tax equivalent yield = Tax-free municipal bond yield / (1 - Tax rate)
The tax equivalent yield calculates the pre-tax yield a taxable bond needs for its yield to equal the yield you’d get from a tax-free municipal bond. It tells investors: taking into account taxes for the taxed bond, which type of bond (tax-free or taxed) will give me higher yields?
If it’s higher than the tax-free alternative, it would make more sense to go with the taxed bond. If it’s lower than the tax-free alternative, that means it’d be better to go with tax-free municipal bonds. See: Corporate Bonds.
Technical Analysis
Definition
Take the two driest words in the English language, put them together, and what do you get?
Something pretty useful, actually.
Technical analysis takes a look at past prices of stocks, trading volume, and other stuff that has gone down in the market. Using charts and formulas, the idea is that you can use this information to figure out what might happen with securities in the near future.
Tenants-in-Common
Definition
A type of account that has more than one owner.
Each owner puts in a certain amount of money, and the amount of money they share in the account is based on this investment. If we put in twice as much as you, our share is twice what yours is. If one of the owners dies, their share of the money goes to their estate, not to the other account owners.
(Yeah, put the baseball bat down.)
Tendering
Definition
Tendering is what the government does when they invite bids for a project. It's also what happens when shareholders hand over their securities or shares for a takeover. Shareholders who want to see the change that the takeover promises will pony up their shares. If enough shares are submitted or tendered, the takeover can happen.
Term Sheet
Definition
A piece of paper that sets out terms of a deal. Sometimes on a napkin.
Even if on a napkin, it can be legally binding, so stay away from napkins and other pieces of paper unless you're really sure you want the deal and agree to the terms.
Example
I invest $1,000,000.00 in you.com today.
In return, I get:
- 51% of your company
- your lungs
- your liver
- your soul
Thank you.
Sincerely,
Mr. Faust
Theta
Definition
Greek symbol for time, usually in reference to stock option trades. Theta refers to the way that stock options decline in value over time.
Carpe Diem and all that stuff. Time's a ticking.
Theta Decay
Definition
See theta. It sounds like what happens when you don't floss, but it actually refers to the way that the time value of a stock option decays or declines with time.
The closer to the expiration date, the smaller the time value of the option.
Example
You sold puts on GOOG at $450 for $35 which expire in 4 months; the stock today is at $600. That is, you sold the right for someone to make you buy shares of GOOG at $450 any time between now and 4 months from now for 35 bucks. Things go along and, well, GOOG just stays pretty flat, doing a whole lot of nothing.
It's now 3 days before those put options expire (we've gone 3.9 months with a whole lot of nothing happening in GOOG). The stock is still around $600 a share. What are the odds it plummets $150+ in 3 days? Really low. So the value of those puts is almost fully expired—its THETA has decayed to just 3 days' worth of trading time and it is highly likely you just collect your 35 bucks, walk away, and buy yourself a really nice burger at a Manhattan eatery.
Ticker Tape
Definition
Back in 1927, stock information (e.g., prices) were passed on through telegraph.
Yep.
Still with us?
The info was printed on thin paper known as ticker tape. Back in the day, this paper was synonymous with the stock market, and people used to throw the stuff around during parades. By the 1960s, the traditional ticker tape was no longer needed; there were better and faster ways to transmit stock price info.
Today, it's all done electronically. No more dead trees, thankyouverymuch.
So, now, ticker tape refers to the stream of stock prices and information that come through, usually on a mobile device or screen of some sort.
Time Value
Definition
See intrinsic value. All options have two parts that decide their value.
- Intrinsic value is how much you'd make if you exercised the option right now: it's the difference between the strike price and the current price of the underlying stock.
- Time value is the difference between the current price of the option and its intrinsic value.
Time value also refers to the way that options can help you use time to make money and to limit how much you can lose.
Let's say you buy a stock option today. You know the value of the stock today—you can just Google it. But will it go up or down? Will the option make you money? Since a stock option doesn't require you to buy or sell a stock today, you can use time to your advantage. Maybe a company is launching a new product in three days. If you have a stock option, the value of the stock (and your option) might increase or decrease sharply after that. A call option lets you make money if the stock price goes up, but limits the amount you stand to lose if the stock value goes down (you only ever lose as much as you paid for the option). The closer the stock option gets to its expiry date, the lower the time value involved, since it's unlikely the stock price will change much in the eleventh hour.
The idea of time value is an important concept in investing in general. That is, "a dollar today is worth more than a dollar tomorrow" (in a normal world). Why? Because today you can invest that dollar. Even if you only buy a 1% very safe T-Bill, that dollar today will be worth something like 1.00001 dollars tomorrow. Thanks to inflation, though, the money you get tomorrow will actually be worth less.
TIPS (Treasury Inflation Protected Securities)
Definition
Treasury Inflation Protected Securities. They're exactly what they sound like: treasury securities that are very low risk because they protect the investor from losses caused by inflation.
These securities are linked to the Consumer Price Index and their par value increases with inflation. The interest rate remains the same no matter what inflation does.
Trading Volume
Definition
HOW LOUD IT IS ON THE TRADING FLOOR!
JK.
Trading volume is the number of shares traded in a specific security today or over a period of time. If trade volume is high, it means lots of trades are being made involving a specific market or security.
Example
Can you find it? Keep lookin'... that's the number of shares that have traded thus far today.
Transfer Agent
Definition
When you sell a security, a lot happens. Paperwork gets filed, money gets exchanged, eyes glaze over, the security changes hands.
The person who makes sure that the security gets to the right person and things go smoothly is known as the transfer agent.
Treasury Stock (Treasury Shares)
Definition
It’s stock. You keep. In your treasury. Like down in that bubbler thing at the bottom of your fish tank with all the shiny jewels. Glug glug.
So how is it that a company would then own shares of its own stock? Well, it would buy them back. From the public or previous investors, most likely.
And companies buy back stock all the time, in part, because it’s a different and more tax-efficient way to return to shareholders quote “excess cash” unquote, as if there ever really is excess cash. When dividends are paid, they are taxed a second time on the backs of the individuals receiving those cash dividends.
But when cash is used to shrink the shares outstanding, in theory, anyway, it charges the stock price per share to go up. So in buying back shares, the company stores them as an asset, and those shares are carefully tracked, because...who knows? The company might some day sell shares and then the treasury stock could come out of the bubbler thing here and get sold back to investors, presumably at a much higher price than at which it was bought.
Treasury stock is really just a kind of placeholder. It doesn’t vote. It doesn’t get dividends. It just sits there, a result of an overfed market.
Trust Indenture
Definition
It's right there in the fine print of the bond contract.
The trust indenture describes where the money for your investment comes from and what will happen in case the company goes bankrupt or can't pay its bondholders. This is stuff you want to know before the company looks like it's taking a swan dive.
Trust Indenture Act Of 1939
Definition
This Federal Act requires any bond issue over $5,000,000 have an indenture before being offered to the public.
An indenture is the laundry list of details about the bond, such as coupon, maturity date, collateral, mother's maiden name, and so on. "The Trust" in the act refers to the requirement that the issuer hire an independent trustee who acts on behalf of the bondholders.
The same writer who misread the moral obligation bond messed this one up as well. Sorry, 1-800-Fixodent. Okay, so arguably the most boring act of all time - even more boring than the third act of Henry IV, Part 2 - a total snoozefest, the Trust Indenture Act basically extended the set of laws trying to make financial dealings more fair and square for the little guy, the average Joe, the Joneses.
Specifically, this act focused on trusts, i.e. legal entities set up to manage and allocate money in the event that life…changes. You die; you have kids; you get married; you get divorced; you turn into a zombie...yeah. All of those.
So the TIA does a couple of things:
First, there’s the “indenture” part. An indenture is a written agreement - a legal contract, more or less. The Act made it illegal for bonds of $5M+ to be offered without one of these protective docs, and it had to disclose everything up front, so an unwitting bondholder wouldn’t suddenly be shocked to discover that their bond ceased to hold value after the third waning moon following the winter solstice...or whatever other clever catches the issuer decided to throw in there.
And then there’s the “Trust” part. The Act also made it a requirement for there to be a trustee appointed any time a bond is issued, someone whose job it was to make semi-annual disclosures of any relevant info related to the bond. So yeah, by putting these safeguards in place, the little guy, uh, wouldn’t get stepped on.
Two Dollar Broker
Definition
An independent broker on the floor of the exchange who takes care of business for other brokers.
Usually, this person handles orders for brokers who are too busy to handle their own. Back in the day, two dollar brokers were paid $2 a trade. Today, they earn a commission.
UGMA (Uniform Gift To Minors Act)
Definition
UGMA is what you say when your mother tells you to go wash your face.
It's also the Uniform Gift to Minors Act, a law from the 70s that outlines the gifts minors can receive and the taxes they have to pay. Thanks to this law, you can give your kid securities and assets without having to set up a trust. If you stay below certain limits, Junior, Jr. might not even have to pay taxes on the gift—but you do have to make sure you follow a bunch of rules.
Underwriter
Definition
The underwriter can be a person, but more likely it's a bank or firm that helps a company sell new stocks or securities to investors. They handle the many details of an offering, and they act as middlemen, buying stocks from the issuer and reselling 'em to the public (at a profit).
Example
Goldman Sachs is an underwriter. They financially back companies during the IPO process (and other financing events), such that they in fact own the company for a brief moment in time... like 5 minutes... and then turn around and sell that company at a mark-up in price.
Unfunded Pension Liabilities
Definition
If a municipality offers a pension to its employees, that's a financial obligation that stays on the books. But that pension seems far away, so the municipality doesn't put any cash away for those pensions. They're not sure when money will be needed, and there's no extra money available anyway because the politicians spend it all.
As long as no money is being put aside for the pension, it's an unfunded obligation.
Example
Welcome to Detroit. A city worker—let's say a janitor—would make (today's dollar, inflation adjusted) $37,000 a year with 5 weeks off for vacation and get $8,000 a year invested into his pension fund. He also got $3,000 worth of health care benefits and other perks. So it cost the city $48,000 plus various city taxes to employ the janitor. He was paying into the pension with the understanding that he'd have money to live off when he was too old to work.
And all of this was fine until, one day, a clever union negotiator tweaked one phrase: "defined contribution" became "defined benefit" and all of the sudden, the city was on the hook for making up losses that the janitor might have suffered in the stock market with his investments.
This worked fine—and was generally unnoticed when the market went up 10% a year for a long time—but along came the crash of 2008/9 and, well, that was the end of Detroit courtesy in large part to its pension liability. The janitor and others like him who had paid into their pensions suddenly weren't getting the money they were promised. The janitor paid into the pension but the city used up the cash on other things and went bankrupt.
Oops.
The result was that the pensioners sued and will likely end up getting only a small part of their pensions. That's what happens when great negotiating and financial mismanagement collide.
Uniform Securities Act
Definition
An act that defines what your company has to do when registering securities.
Each state also has its own laws based on this act.
If you're looking for some light bedtime reading, dig in.
Unit Investment Trust
Definition
Also called a UIT, a unit investment trust is like a mutual fund, but without the management and with an expiration date.
Like a mutual fund, there are stocks and bonds, and the whole thing can be traded on the secondary market.
The goal of the UIT is usually to create income.
Unlimited Liability
Definition
It means you can have your pants sued off—literally.
In this structure (like a sole proprietorship or a freelance business), if your company is sued, the lawyers can go after your company and your own money and assets—even the stuff that has nothing to do with your business. That's why lots of people prefer limited liability companies.
If your company destroys a city, the business can be sued. But you can still take your personal money (which remains yours) and move to a city you haven't destroyed yet.
Example
It's a tale of two pizza parlors: the Joneses and the Smiths. The Joneses owned their pizza parlor personally as a sole proprietorship style of business ownership. The Smiths set up a limited liability corporation for $299 on LegalZoom.com.
Both operated basically the same. Until The Cheese Day happened. It was bad cheese. They had the same supplier. It turned all of their clients' stomachs to mush. And both operators got sued. And lost. A million dollar judgment.
The Smiths lost the restaurant, but they had taken money out of it for years, so they were just fine financially. They'd open a new one down the street. And change cheese suppliers.
The Joneses were not so lucky: the parlor brought $300,000 at auction and the family still owed $700,000. The lawyers stepped in and sold their house, net of mortgage and realtor commissions for $500,000. The cars went for $25,000. Then went the fish tank, the shoes, the jewelry brought over from Europe during the war. All of that was another $20,000.
It still wasn't enough. We shan't continue with what happened to the Joneses, but you don't want to keep up with them. It's called a "limited liability corporation" for really good reason and costs a couple hundred bucks to set up.
Unrealized Gain
Definition
See realized gain.
When you have an unrealized gain, you own something (a stock, maybe), and if you sold it today you'd make a profit or gain from it. But you don't sell—so that gain is unrealized.
You don't get to fully enjoy it. Then again, the IRS doesn't get to tax it, either.
Example
You bought 1,000 shares of Planar Televisions for $2 a share; the stock now trades for $12 a share. You've made 10 bucks a share. But you haven't sold the shares yet. As it sits in your brokerage account now, this nice gain of 10 grand is "unrealized."
Uptick Rule
Definition
This old-school rule from the 1930s meant that if you were making any short sale transaction, you had to enter at a price higher than the price of the previous trade.
The idea behind the rule was that when the price of an asset was already nosediving, short sellers wouldn't push the price even lower. In 2007, this rule was taken off the books. In 2009, there was some talk to bringing it rule back in some form.
Oh, fickle economists.
USTD (U.S. Treasury Department)
Definition
Not to be confused with STDs (although some people like 'em about the same amount), the USTD is the U.S. Treasury Department.
This government department handles government revenues and issues treasury securities.
UTMA (Uniform Trust To Minors Act)
Definition
The UTMA (Uniform Trust to Minors Act) lets parents set up trusts and entities to keep money and assets on ice for their kids. When Junior was 21 and could make his own bad decisions, UTMA made it easy for the assets and cash to pass over to him.
Valuation Analysis
Definition
What's it worth? And why?
These are the questions people ask about companies when they want to invest, and valuation analysis attempts to answer 'em.
How we get to the valuation analysis is another story. Some people use charts or formulas or ratios. Some compare a company's earnings to an index or an average company. Some use Discounted Cash Flow Analysis. Some seem to pick a number out of a hat.
Bottom line: It's not an exact science.
Valuation Formats
Definition
A small sample of how bankers, investors and others compare and value companies:
- Multiple of Sales—The company does $100 mil a year in sales. Buy it for... twice that number? How are others handling this?
- Multiple of Margin (Gross or Operating)—Same as above, only with margins instead of sales as the foundation.
- Multiple of Cash Flow—Often used in industries which don't really depreciate (like the entertainment industry—Gone with the Wind or Snow White might be worth more today than when they were made).
- Multiple of Earnings—the most common denominator. This means dividends paid to common stockholders plus the value of the company when the Argentinians buy it in 2009.
- Establishing the Health of the Company—There are lots of ratios and equations you can use here to please your cold mathlete heart. We've put together the "dirty" Dozen ratios to illustrate some valuation techniques. That's a lot of number crunching.
The "Dirty Dozen" Ratios
RATIO | DEFINITION |
| Return on Sales (ROS) or Net Margin | After Tax Profit/Total Sales |
| Gross Margin | (Total Sales - COGS)/Total Sales |
| Return on Assets (ROA) | Net Income/Beginning of Year Total Assets |
| Return on Equity (ROE) | Net Income/Beginning of Year Shareholders’ Equity |
| Current Ratio | Current Assets/Current Liabilities |
| Quick Ratio | (Cash + Stocks & Bonds… + Accounts Receivable)/Current Liabilities |
| Borrowed Debt/Capitalization | (Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases))/(Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases) + Shareholders’ Equity) |
| Pretax Interest Coverage (times Interest Earned) | (Pretax Income + Interest Expense)/Interest Expense |
| Asset Turns (TURNS): Sales/Assets | Total Sales/Beginning of Year Total Assets |
| Days Sales Outstanding (DSO) | (Accounts Receivable x 365)/Total Sales on Credit |
| Days Payable Outstanding (DPO) | (Accounts Payable x 365)/Total Purchases on Credit |
| Inventory Turns | COGS/Inventory |
Value Investing
Definition
Value investing is often considered "conservative," but in practice, that's not always how things pan out.
Value investors look for companies they think the market has undervalued. They buy them, eagerly awaiting the day when the market smartens up and all the other investors (who they think react emotionally to the market) start buying again (meaning the price goes up).
One small detail: it's almost impossible to tell what a company is really worth, which means there's no real way to tell if a company is actually undervalued.
Example
From ancient history: Yahoo! came public with its IPO in 1995. At the time, it carried a market valuation of $350 million, give or take. It was considered an astronomically high multiple on $5 million of earnings... 70x.
Yet two years later, Yahoo! earned almost $120 million—on a forward 2 year earnings multiple. Yahoo! came public at just 3 times earnings. Like the lowest multiple ever for an IPO kinda sorta.
Was it "value investing" to buy it at 70x? Courageous? Stupid?
Vanilla Bonds
Definition
Basic bonds. Nothin' fancy. No special features.
Personally, we prefer mint chocolate chip, but what can you do?
Vanilla Terms
Definition
Vanilla terms are the basic terms you get with stocks and bonds. Nothin' fancy; just what you'd expect reading the fine print on your investments.
Because you totally do that.
Variable Annuity
Definition
A retirement account you create with an insurance company.
For years, you put money in the account, and the company invests in money market funds or different types of mutual funds.
Then you get old and wrinkly.
Time to tap into all that cash so you can get serious about your bingo game. At that point, the insurance company promises a minimum payment ("we'll pay you at least $500 a month"), but the payments each month can vary (always above that minimum) depending on how the investments did and how much money you socked away.
Vested
Definition
If you're vested, you're wearing a sleeveless jacked. That, or that you've stayed in your job long enough that you get to tap into your stock options.
Hopefully, those meetings with the most neurotic staff on earth and the late nights listening to your co-workers talk about their cats were worth it.
Example
At Shmoop, we pay in three forms: cash, peanuts, and options. Our fearless content leader, Deb, was given 100 options to start at Shmoop (and an enormous bag of peanuts). Her options carried a 5-year vest provision, so that at the end of the first year, she was "vested" into 20 options—meaning that on her 1-year Shmoopiversary, she had the right to buy those options, no matter what.
Then she had 4 more years or 48 more months on that grant of 80 remaining options and she vested a bit each month, until 5 years down the road, she was "fully vested" and could by every one of those 100 options.
In that time, she's only developed a few minor facial tics from dealing with our antics, so we think it's a win for her.
VIX (Volatility Index)
Definition
Volatility Index (VIX).
It generally refers to about how choppy the market has been the last 200 days. The VIX is like a gauge of the anxiety levels of the market: Is the market chewing its nails and rocking back and forth or more sunning itself in the corner and taking a nap?
The VIX also helps price derivatives.
Example
Here's the VIX. Makes you kind of anxious to look at it, doesn't it?
Volatility
Definition
Ups and downs (in the finance world, it's referring to the market).
Sometimes, volatility is called beta and is measured in numbers. If the market moves 2% and your stock moves 4% on average, it's beta is 2, roughly.
Example
Here's a volatile stock chart. And here's one that's (relatively) a dead man's pulse.
Why the diff? Well, Netflix has more ups and downs because investors are less sure about the company. The company doesn't pay a dividend and it has monster competitors. GM, on the other hand, is a slowly dying-ish company. It has relatively steady (albeit scant) earnings, and it pays a dividend, which keeps its stock price stable.
For a better encapsulation of volatility, we suggest Real Housewives.
VRDO (Variable Rate Demand Obligation)
Definition
Variable Rate Demand Obligation. Translation: a redeemable debt that has a changing interest rate.
Example
You have a variable rate bond. It adjusts annually and it pays 100 basis points above LIBOR. This particular bond, however, has a demand obligation which makes it automatically convertible into a flat 7% yield bond, payable in U.S. dollars, if the dollar to Euro ratio ever drops below 1:1. The bond carries this VRDO feature as a kind of hedge against strange fluctuations in currencies, interest rates, and other bizarroland occurrences.
Wash Rule
Definition
A rule that says you should shower regularly—with soap, please. This rule also says you cannot sell a stock and then buy it back within 30 days, claiming it as a loss with the IRS to pay lower taxes.
Example
You bought Netflix at $400 a share in October. It's now December 27th and you want to sell it here at $320 and take the $80 a share loss to make up for your gains that you realized by selling GOOG and YHOO at a tidy profit. It's smart tax planning so you sell.
New Year's Eve happens and you get anxious that Netflix is going to skyrocket in the next week. So you buy the same amount you sold January 15th. Bad news for you. You don't get to deduct the $80 a share loss you realized December 27th because you effectively "washed" that sale.
When-Issued
Definition
A conditional transaction where the security has has not yet been issued but is authorized to be issued. When-issued transactions can happen as part of IPOs, secondary offerings, and stock splits: The trade happens but doesn't really go through until the stock is actually issued. If it never gets issued, the transaction or trade gets cancelled.
Example
Shmoop Enterprises Global or SHMEG decides to spin off its European business as a separate company based in Paris. (We like the food and the tiny dogs.) So we declare that all shareholders of SHMEG will get 0.35 shares of SHMEUR, a new company to be spun off of the parent. The spin will officially happen on May 4th (our favorite day of the year), but they can begin trading in March as "when-issued," so that people who really want SHMEUR can rush to the head of the line.
Whisper Number
Definition
The numbers Wall Street Guys whisper as part of their seduction technique. Sort of a mathematical version of "whispering sweet nothings."
Ah, darling, 7546, 76758, 87878...
Also, the earnings per share (EPS) that are not published or official but which the pros on Wall Street have access to.
If you're their favorite investor or someone they whisper sweet nothings to, they'll share. But this information is not available to the Average Joe.
In theory, you can use these numbers to make better investment decisions. In reality, the accuracy of these number varies and lots of people in the know point out that with all the rules requiring companies to disclose financial information, there's not much out there that's secret.
Work In Process Inventory
Definition
An item on the balance sheet that tracks the production process. It refers to stuff in inventory that's not fully made yet and isn't part of finished goods.
Example
Your business has five half-finished tractors in inventory right now because it takes months to complete one. They are evaluated on their value in their current state and added to the balance sheet. Overhead, materials, and labor went into 'em, so they have to be accounted for. Once they're finished, the tractors get listed in regular inventory.
See the Shmoop blurb on working capital for more.
Working Capital
Definition
The difference between a company's current assets and its current liabilities. This number shows how liquid the company is: dDes the business have enough money on hand to pay for stuff right now or are they paying suppliers with rolled coins?
Working capital is a delicate balance. Too low and the company will struggle to pay the bills. Too high and the company might not be using its assets to its best advantage.
Example
Okay, you're at the prototypical lemonade stand, whose lemonade has to cure for exactly 100 days before it's just bitter enough to be called Miss Havisham's Lemonade.
You know that you sell on average 500 glasses a day, so you have to stockpile the lemonade for 3+ months before the day comes when you'll serve it. And bitter lemonade ain't free. In fact, it costs you about a dime a glass, with all the sugar you use to combat the bitterness. Even at just a dime, that's 50 bucks a day (a dime times 500 glasses) times 100 days. It totals to $5,000 of stored lemonade.
Then there's the fridge you have to rent to keep it cold. And insurance. And cups. And a whole bunch of other stuff. How'd you get the 5 going on 10 grand in cash to pay for all of this? Well, you may have borrowed it.
Wrap Account
Definition
Jay-Z's brokerage account. Or something.
In a wrap account, you pay an annual fee (based on a percentage of what's in the account), and the broker manages the account for you. The fee you pay covers commissions and extra expenses (but not the costs exchanges or the SEC charge). You don't pay extra commissions each time a trade is made in the account, which prevents brokers from making trades just to earn more commissions.
Examples
If Jay-Z gives his broker $100 million under a wrap account that charges 1%, he'll be charged a million bucks a year in return for handling all of Jay-Z's trading, wiring, account, and a whole bunch of other services.
For many large brokerages, wrap accounts allow for their clients to be able to buy various flavors of funds (mutual, hedge, index) at "wholesale" prices; that is, if the fund is a captive fund maintained by the brokerage, the wrap account allows the client to buy with no commission or upfront charges.
Writer
Definition
Shakespeare was one. But in this case, "writer" is the person who sells an option. They're called a writer because years ago sellers of options probably had to write up some of the sales contract. By hand. By the light of a candle.
Example
We have shares of Google (GOOG) that are trading at $500. We write you a call option that gives you the right to buy a share of GOOG from us for $550 a share. If you decide to exercise that option when Google is trading at $600, we'll sell the stock to you for $550, and you'll make a nice profit. If Google drops to $400, you might not want to buy, and we get to keep the money you paid us for the option.
Yield
Definition
Yield is just the dough you get back after investing an initial sum. It can come in the flavor of bond yield—like a coupon—paying whatever percent face value, based on par value. That is, for a bond trading at par, with face yield of 5%, that bond pays the investor 25 bucks twice a year for that 5% face on a grand invested.
Got it? It is just the percentage rate of return on a bond.
But what if the price of the bond got cut in half? Maybe something bad happened to the company—patent law suit or CEO caught in bed with an alien from Mars—so investors suddenly feared for the creditworthiness of the company. And they sold heavily their bond positions. Now the bonds are selling at 50 cents on the dollar or $500 a unit instead of the standard $1,000. The bonds still have to pay the 50 bucks a year interest but now they yield 10%... 50 bucks of the grand at which they were created.
But yield is also derived in the land of equities. Coca Cola stock trades at 50 bucks a share and pays a $1 dividend. It yields 1/50 = 2%. You get 25 cents 4 times a year for each share you own. And another big note: Equities pay dividends 4 times a year while bonds pay twice.
Yield Curve
Definition
The Yield Curve (YC) is just the graphic representation of what investors think will happen to interest rates in the future. The most common YC that gets put in books and in the news is the yield curve of U.S. Treasury securities. This YC can impact the YC of other markets (like mortgage YCs).
Here's what a yield curve looks like:
Notice a few things about it. The vertical axis is the interest rate paid and the horizontal axis is time. Notice that over the short term, money is cheap... around 1% for 1-year paper. But also notice that as we move out 10 years, the yield curve is flirting with 4%. What this curve is saying is that investors believe that 10 years from now, odds are best that bonds will be trading around 4%. The curve is now said to be positively sloped because rates today are lower than they are expected to be in the future.
Yield To Call
Definition
If a bond is callable, the issuer can call in the bond early—meaning you might not get the full amount of money you would have gotten if the bond went to its maturity date.
How much can you make with a callable bond? The answer will depend on when the bond is called. You can figure out a minimum yield by calculating the yield from the day you get the bond to the first possible date that it could be called.
Whether the bond will be called will depend on what interest rates do. If they drop, it's likely that the bond will be called early because the issuer won't want to pay the higher interest on the debt. If the rates stay the same or go up, just calculate yield to maturity. It's cheap borrowed money for the company at that point so they probably won't call the bond early.
Yield To Maturity
Definition
This is the money that a bondholder will enjoy by holding the bond until it matures. The amount you make assumes that the interest payments the bond gave you are all reinvested, so yield to maturity will change over time as the reinvestment rate changes.
Since there are so many variables (such as how much you'll earn when you reinvest your payments) the formula for figuring out YTM is complicated. It's a handy number to figure out, though, as it can tell you whether you're better off selling a bond early or keep it for a long while.
Zero Coupon Bonds
Definition
You know what’s a great graduation present? Getting a bond, especially one that doesn’t pay its face value for 20 years. Thanks, Grandma.
If you ever received one of those Series EE paper savings bonds at graduation, you know that the $50 on the face of that bond won’t reach its value until the date of maturity. Which could be 20 years away. And since they were zero-coupon bonds, you never receive any interest payment for the duration of the investment.
So, you put it in a box, and forget about it, until your parents move out of their old house and tell you to come pick it up. And you have to remember why you have this thing, and how it works. So, you go to Shmoop.
The way it works is simple: Grandma bought the thing at a steep discount, i.e. below its face value. The interest pays over the duration of the bond’s life. And when it reaches its maturity date, you can go to the Post Office and finally turn this bond that’s covered in ketchup and Budweiser in for a picture of Ullyses S. Grant.
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