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GLOSSARY
OF TERMS
A | B | C
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| H | I | J | K
| L-Z
A
Account Executive: another name for a stockbroker.
Account Statement: a brokerage firm will send a client a
statement that summarizes the activity of his or her account--that
is, if there have been any dividend or interest payments, as well
liquidations or purchases of stocks, bonds, mutual funds and other
investments.
Accumulation: when an institutional investor buys large amounts
of stock, but does this over time so as not to affect the stock
price.
Acquisition: when one company buys all the stock of another
company.
Active Market: a securities market that has high levels of
trading.
Adjusted Gross
Income (AGI): AGI is a
computation used to help determine an individual's federal taxes.
Basically, AGI is the amount of money a person makes (such as wages,
dividends, Social Security, etc.) minus certain deductions (such as
IRA, Keogh and SEP contributions, etc.).
Administrator: a person appointed by a court to settle a person's
estate.
ADR: stands for American Depository Receipt, which is a foreign
corporation listed on a U.S. stock exchange.
Advance/Decline Line: a market indicator that shows the number of
stocks going up compared to those stocks going down. The
Advance/Decline Line is used to indicate the general direction of
the stock market. For example, if more stocks are going up than
down, then the market is considered to be bullish.
Aftermarket: This is the active market where traders buy and sell
shares in a public company. The most common markets are NASDAQ, New
York Stock Exchange and American Stock Exchange.
Aggressive Growth Mutual Fund: this is a mutual fund that invests
in companies that have explosive growth potential. However, these
mutual funds also have a high degree of risk.
All-or-none Offering: Essentially, this means that a company will
have a minimum number of shares it will sell. If this cannot be
done, then the offering will be cancelled.
Allotment: In a securities offering, every underwriter will have
an authorized number of shares to sell.
Alternative Minimum Tax: this is a complex tax calculation, which
primarily affects affluent taxpayers.
Analyst: someone who researches companies, so as to determine
which ones are worth purchasing or selling.
Angels: These are friends, family or wealthy individuals who will
invest their money in start-up companies.
Annual report: a document that the government requires every
public corporation to distribute. The annual report will show: the
names of the directors, the earnings, sales, corporate strategies,
assets, etc.
Annuitize: this is when a client begins withdrawing money from an
annuity.
Annuity: a contract that exists between an insurance company and
a client, in which the insurance company agrees to make periodic
payments to the client.
Appreciation: when the value of a stock or bond increases.
Arbitration: in nearly every brokerage client account form, there
is an arbitration clause--which means that the client agrees to
arbitrate disputes with his or her broker. Arbitration is supposed
to be a cheaper and quicker alternative than the court system.
Ask: the price at which the client buys a stock.
Asset: the property of an individual or a corporation.
Asset Allocation: this is an investment approach, in which you
divide your client's assets into a variety of categories. For
example: 50 percent in stocks, 40 percent in bonds and 10 percent in
cash.
Asset Play: buying a stock that you believe is selling below its
actual value.
Auditor: This is a firm of certified public accountants who will
independently review the books of a company before a public
offering.
Automatic Reinvestment Plan: this allows clients to reinvest
earnings--such as interest, dividends and capital gains--into more
shares of a mutual fund.
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B
Back-End Load: this is when the broker earns a commission when
the client sells mutual fund shares. The commission is a percentage
of the value of the shares sold.
Back Office: this is the location where client records are
maintained and processed. Many back offices are computerized, quick
and efficient. Though, there are still mistakes.
Bad Boys: These are individuals who have violated securities
laws. Such offerings as Reg A and SCOR will prohibit bad boys from
participating in these offerings, unless the Securities and Exchange
Commission and state authorities consent.
Balanced Mutual Fund: this is a mutual fund that invests in both
stocks and bonds. This tends to be a conservative investment.
Balance Sheet: shows a company's assets, liabilities and capital.
You can find the balance sheet in the company's annual report.
Basis: this is the initial cost--which the IRS uses to determine
an individual's tax liability--of investments.
Basis Point: equal to one-hundredth of a percentage point. For
example, if a bond's interest rate increases from 8.40 percent to
8.42 percent, then the bond interest rate has increased by two basis
points (8.42% minus 8.40% equals 0.200%).
Bear: a person who believes stocks will decline.
Bedbug Letter: Once you make your filings for your public
offering to the Securities and Exchange Commission (SEC), they will
review it. If the SEC finds problems that cannot be resolved, it
will write a bedbug letter.
Bellwether Stock: a company that has an enormous influence on the
direction of the market.
Beneficiary: the person who receives property under a will, trust
or insurance policy.
Best Efforts Offering: This is when a securities firm will agree
to sell the stock of a new company to the public without
guaranteeing the company any money. That is, the securities firm
will do its best to sell the shares.
Beta: a statistical measure of the risk-level of a stock or
mutual fund. The higher the beta, the higher the risk.
Bid: the price at which a client sells a stock.
Big Board: the nickname of the New York Stock Exchange.
Big Six: These are the major accounting firms in the nation. They
are: Arthur Andersen, Coopers & Lybrand, Deloitte & Touche,
Ernst & Young, KMPG Peat Marwick, and Price Waterhouse.
Blind Pool: This is a public offering, in which the company does
not disclose how it will use the proceeds.
Block Trade: a trade of 10,000 or more shares.
Blue Chip Stocks: large, well-known stocks--such as AT&T, GE,
Phillip Morris, GM--that are usually traded on the New York Stock
Exchange. The phrase "blue chip" is said to derive from
playing poker, in which blue chips have the highest value.
Blue Sky Laws: These are the state laws that regulate the
issuance of initial public offerings.
Board of Directors: This is a group of persons, who are voted by
the shareholders, to oversee the strategic direction of a
corporation.
Bond: a long-term (ten to thirty years maturity) debt instrument
that pays a fixed amount of interest every six months and will pay
the face value of the bond (usually $1,000) at maturity.
Book Value: shows the equity or net worth of the firm, which is
equal to its assets minus liabilities.
Bottom Fishing: when investors buy stocks that have fallen
greatly in value.
Broker-Dealer: another name for a brokerage firm.
Bull: a person who believes the market will increase in value.
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C
Call: when the issuer decides to pay off its bonds before the
maturity date.
Capital Gain: when a client sells a stock, bond or mutual fund at
a higher price than he or she paid for it.
Capital Loss: when a client sells a stock, bond or mutual fund at
a lower price than he or she paid for it.
Capital Market: another name for a stock or bond market.
Capitalization: equal to a company's stock price multiplied by
the number of shares owned by the public (that is, outstanding
shares). For example, if a company is selling for $50 per share and
has 1,000,000 shares outstanding, then the capitalization is
$50,000,000 ($50 multiplied by 1,000,000).
Cash Account: the most basic type of brokerage account a client
can open. As the name implies, a cash account allows the client to
make transactions using cash, not loans (which would require a
margin account).
Cash Cow: a stable company that generates huge amounts of
consistent cash flow.
Cash Management Account (CMA): Merrill Lynch created the first
CMA in 1977. A CMA is a brokerage account that consolidates all
client transactions--stocks, bonds, mutual funds, limited
partnerships and options. Typically, a client can write an unlimited
amount of checks against a CMA, as well as borrow money using a CMA
credit card.
Cash Value: the value of money that has accumulated in an
insurance policy--which can be borrowed or withdrawn by the client.
Certificate of Deposit (CD): an amount of money a client deposits
in a bank. This amount will be in the account for a fixed period of
time, during which the client will receive interest. The value of a
CD is guaranteed up to $100,000 by the federal government.
Charitable Remainder Trust: used in estate planning. This trust
will save taxes for clients by gifting all or part of their assets
to charity. However, this actual transfer will not occur until the
death of the client. Thus, while the client is still alive, he or
she will be able to earn money from the trust.
Chartist: a person who practices technical analysis.
Churning: when a broker engages in excessive trading of a
client's account. This is a forbidden practice in the brokerage
industry.
Close: the final transaction price of a stock, bond or mutual
fund on a particular trading day.
Closed-End Mutual Fund: a company traded on a stock exchange that
buys and sells stocks of other companies.
Closely Held Company: a company that has a few people who own
large amounts of stock.
COLA: see Cost of Living Adjustment.
Cold Comfort Letter: When an auditor reviews the books, it will
issue a cold comfort letter indicating that the firm found not
problems with the company's books.
Common Stock: many companies will raise money by issuing common
stock, which will then be traded on a stock exchange. In essence,
this common stock represents ownership in the company.
Consumer Price Index: known as CPI. The CPI measures consumer
inflation.
Contrarian: an investor who does the opposite of what most
investors do. For example, if most people are selling airline
stocks, then a contrarian will buy airline stocks.
Control Person: These are persons who have special influence on
the company-such as officers, directors and person who own 10% or
more of the stock. These persons must meet strict regulations
regarding the buying and selling of the company's stock.
Convertible Debenture: a bond that can be exchanged for a fixed
amount of common stock.
Corporate Cleanup: This is the changes that must be made to a
company-such as rearranging the books, changing contracts, etc.-to
prepare a company to go public.
Correction: a temporary fall in the stock market (usually a 10%
drop).
Cost Basis: see Basis.
Cost of Living Adjustment: when your employer adjusts your wages
for inflation. Social Security benefits, for example, have COLAs.
Coupon: the semiannual interest payment on a bond.
Coverage: a company's ability to take on debt.
Crash: when the stock or bond markets fall tremendously. The 1987
crash, in which the stock market fell over 20 percent, is the most
recent example. However, crashes are a rarity.
Credit Rating: indicates the probability of whether a corporate
or municipal bond will be able to meet its interest payments and
repay principal. The two most well known rating agencies are
Standard & Poors and Moody's Investor Service.
Current Yield: a stock's dividend divided by its stock price. For
example, if a stock has an annual dividend of $1 and a stock price
of $10, then its current yield is $1 divided by $10 or 10 percent.
Cyclical Stock: a stock that performs well during economic
recoveries but does badly during recessions. Examples: companies
that sell large-ticket items, such as General Motors.
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D
Death Benefit: the money (as stated in a life insurance policy)
that the insurer will pay to the insured (the person who is insured)
on the death of the insured.
Debenture: this is a bond that is backed by the "full faith
and credit" of a corporation. In other words, the bonds have no
collateral. Usually, only strong, established companies will issue
debentures, such as AT&T, Exxon, etc.
Deductible: the amount a client pays before the insurer will pay
any benefits.
Default: when a company or individual is unable to meet debt
payments.
Defensive Stocks: stocks that do well during recessions. Usually,
these are stable companies, such as food producers (for example,
Kellogg).
Deferred Annuity: an annuity that will not start payments until a
specified future date.
Deferred Sales Charge: see BACK-END LOAD.
Deficiency Letter: When a company files with the Securities and
Exchange Commission and state authorities, so as to go public, these
government agencies will issue a deficiency letter, which makes
suggestions on what to do with the offering. Although these are
"suggestions," your company should follow them.
Defined-Benefit Plan: a pension plan in which a client is
guaranteed (by the employer) a certain amount of money at
retirement.
Defined Contribution Plan: a retirement account, in which the
client has the discretion on how much money to contribute to various
investments, such as stocks and bonds. Example: 401(k)s.
Deflation: a general decline of prices in the national economy.
Delisting: taking a stock off an exchange because it does not
meet requirements.
Devaluation: when a country's currency falls in value.
Dilution: When a company issues new shares, this will lower the
percentage of ownership for current shareholders.
Direct Public Offering: This is when a company bypasses an
underwriter and goes public on its own.
Directors: see Board of Directors.
Discounting the News: if good or bad news comes out about a
company, then investors will immediately react and discount (that
is, buy or sell) the information into the stock price.
Discount Rate: the rate that the Federal Reserve charges to banks
to borrow money. If the Federal Reserve lowers this rate, then
interest rates throughout the whole economy will begin to fall and
vice versa.
Discretionary Authority: this is when a client allows the broker
to make trades without prior notification.
Disinflation: a slowing of the rate of inflation.
Distribution: see LUMP-SUM DISTRIBUTION.
Diversification: spreading money into different investments so as
to help reduce the risk of loss.
Dividend: a payment--usually made quarterly--to shareholders of a
corporation. The board of directors of the company is the group that
decides whether there should be a dividend payment.
Dog: a stock that does poorly.
Dog and Pony Show: This is when the underwriter will generate
interest in investors for a new offering. This is usually done by
putting on presentations to brokers and institutional investors.
Dollar-Cost Averaging: an investment strategy in which a client
invests a fixed amount of money periodically (such as monthly or
quarterly). So, when stock prices are low the client will buy more
shares and when stock prices are high, the client will buy fewer
stocks.
Dow Jones Industrial Average: the most widely watched indicator
of the stock market. This average is composed of 30 major stocks,
like IBM and Phillip Morris.
Downside Risk: the price at which an investor feels a stock will,
on a worst-case scenario, fall.
Due Diligence: This is when an underwriter makes a reasonable
investigation of a company, to see if they are ready to go public.
The underwriter will delve deeply into the financial statements of
the company. This can take several months.
Dumping: when many investors sell stocks.
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E
Early Withdrawal Penalty: for a retirement plan (such as a
401(k), IRA, Keogh, SEP and so on), as well as an annuity, a client
must pay a 10 percent penalty if money is withdrawn before the age
of 59 1/2.
Earned Income: the amount of money a person makes from labor, not
from investments, such as stocks, bonds and mutual funds. Earned
income can be important, especially for an Individual Retirement
Account (IRA). Why? Because a person is only allowed to contribute
earned income to an IRA.
Earnings Per Share: the profits of a company divided by the
number of shares owned by the public. For example, if a company
earned $1,000,000 and has 1,000,000 shares, then the earnings per
share will be $1 ($1,000,000 divided by 1,000,000 shares).
Easy Money: when the Federal Reserve reduces interest rates to
help improve the economy.
EDGAR: This is an online system where an investor can obtain
financial information about public companies (such as prospectuses
and annual reports).
Effective Date: This is when the registration statement has
become effective with the Securities and Exchange Commission and
state agencies. Then the company can distribute a prospectus to
potential customers of the new issue of stock.
Emerging Market: a Third World country that is poised for strong
economic growth. There are many emerging markets in such areas as
Eastern Europe, Asia and South American. In fact, there are a
variety of mutual funds that invest in these emerging markets.
Equity: see COMMON STOCK.
ESOP: stands for Employee Stock Ownership Plan, which is used by
corporations to buy their own stock on behalf of their employee
retirement plan.
Expense Ratio: shows the percentage of a mutual fund's assets
that go to pay for such things as operating expenses, management
fees and 12b-1 fees (which are used to pay for a mutual fund's
advertising). The expense ratio, though, does not include loads
(that is, commissions to brokers and financial planners).
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F
Face Value: the amount--which is usually $1,000 per bond--that a
government or corporation will pay its investors when the bonds
mature.
Fallen Angel: a stock that was once successful, but has recently
experienced great financial troubles.
Fannie Mae: known as the Federal National Mortgage Association.
This private organization buys and sells government insured
residential mortgages and makes them into bonds, which people can
buy.
FED: See FEDERAL RESERVE SYSTEM.
Federal Funds Rate: the rate at which banks lend money to each
other. Many people on Wall Street analyze the Federal Funds Rate in
order to predict the direction of interest rates.
Federal Reserve System: also called the Fed. The Fed is an
extremely influential factor in the American (as well as the world)
economy. The Fed is the nation's central bank, which regulates the
amount of money and credit availability in the economy, as well as
regulating the banking industry.
Front-End Load: the commission, which is paid up-front, for
mutual funds.
Fiduciary Responsibility: a relationship of trust to another
person. For example, a broker has a fiduciary responsibility for his
or her client.
Filing: This is the date on which the registration statement is
filed with the Securities and Exchange Commission or to state
authorities. This will begin the time for the waiting period.
Financial Consultant: another word for broker.
Financial Printer: This is the firm that will create the
necessary documents-registration statement, prospectus-for your
public offering. These printers are quick, efficient and understand
the regulatory rules for public offerings.
Finder: This is a person who establishes a relationship with a
company and then refers the company to a firm that can bring the
company public. The finder will receive a fee for this service.
Firm Commitment Underwriter: This is when the underwriter will
buy the shares from a company and then resell them to the
public-hopefully at a higher price.
Fixed-Income Security: see BOND.
Flat Market: when the stock market is not moving much.
Flipper: This is a speculator, who will buy shares in an IPO and
then quickly sell them at a profit. 403(b): a reference to an IRS
code section, which allows tax-sheltered retirement plans for
employees of nonprofit organizations, such as school districts.
Float: This is the number of shares the company has outstanding.
Fully Diluted: This shows the earnings per share assuming that
all the warrants and options have been exercised.
Fully Valued: when a stock or a bond has reached its peak and is
poised for a fall.
Fundamental Analysis: a method of valuing stocks by considering
financial data, such as cash flow, earnings, sales, market share,
debt levels, etc.
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G
General Obligation Bond: also known as a GO. A GO is a municipal
bond that is backed by the taxing power of a municipality.
Ginnie Mae: stands for Government National Mortgage Association.
This is a corporation owned by the government, which buys mortgages
and makes them into bonds, which can be sold to the public.
Glamour Stock: a well-known, popular stock that has great growth
prospects. Typically, glamour stocks are in exciting
industries--such as biotechnology and software, etc.
Going Private: when a group of investors (usually management)
buys all the stock in their company.
Good Will: the intangible assets of a company, such as
reputation, brand names, commitment to the community, etc.
Going Public: see INITIAL PUBLIC OFFERING.
Grantor: a person who creates a trust. A Grantor is also known as
a settlor or trustor.
Gross Domestic Product: known as GDP. This shows the value of a
nation's goods and services.
Growth Stock: a stock that grows faster than the economy. These
companies are usually small. However, bigger companies can be growth
stocks, too, such as Wal-Mart.
Guaranteed Investment Contract (GIC): a contract between an
insurance company and an individual investor. The amount a client
invests in a GIC is guaranteed by the insurance company, as well as
the rate of return, which is fixed (and this return is about 0.5 to
1.5 percent higher than a comparable certificate of deposit).
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H
Hard-Money Assets: gold and silver.
Hedge: methods of protecting a client's portfolio from a falling
market.
Hidden Asset: a valuable asset (such as real estate, a patent,
etc.) whose value is understated on a company's financial reports.
High Flier: a stock that climbs quickly in a short period of
time.
High-Yield Bonds: see JUNK BONDS.
Holding Company: a company that has controlling ownership in one
or more other subsidiary companies.
Home Run: a stock that doubles in a short period of time (such as
three to six months).
Hot Issue: This is a new issue that immediately sells higher than
the offering price.
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I
Illiquid: an investment that cannot be easily converted into
cash, such as real estate (which typically takes months to sell).
In-and-Out Trader: an investor who tries to make a quick profit.
Income Investment: this is an investment that pays mostly
interest or dividends. These investments tend to be conservative.
But this does not imply there is little risk in income investments.
Index: an index is a statistical calculation that measures the
performance of a group of stocks or bonds over time. That is, if the
stocks or bonds in the index--in general--increase in value, so will
the index and vice versa.
Index Mutual Fund: a mutual fund that invests in the stocks or
bonds of a market index, such as the Standard & Poors 500 Stock
Index (which measures the performance of 500 heavily traded stocks).
That is, an index fund will try to mirror the performance of the
general stock or bond market.
Individual Retirement Account (IRA): a tax shelter, in which the
government allows each person to contribute $2,000 annually (of
earned income) into an account that has tax-free features.
Inflation: a general rise in prices throughout the economy.
Initial Public Offering (IPO): when a corporation offers stock to
the public for the first time.
Inside Information: material information that has not been
disclosed to the general public. It is illegal to act on this type
of information.
Insiders: directors, officers and major stock holders, who own 10
or more percent of the company's stock.
Institutional Investor: an organization, which has much money,
that invests in the stock and bond markets. Examples of
institutional investors: pensions, insurance companies, and mutual
funds. Much of the trading volume in stocks and bonds, in fact,
comes from the transactions of institutional investors.
Intermediate Bond: a corporate or government bond that has a
maturity between one to ten years.
Intestate: when a person dies without a written will.
Investment Bankers: professionals who help corporations with
mergers or initial public offerings.
IRA: see INDIVIDUAL RETIREMENT ACCOUNT.
Irrevocable Trust: a trust agreement that cannot be changed or
canceled.
Issuer: This is the company that issues new stock to the public.
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J
Joint Account: a brokerage or mutual fund account, in which a
client owns stocks, bonds or mutual funds with one or more people
(all of whom must sign the account).
Junk Bonds: bonds that offer a high yield but are backed by
companies that usually have a higher probability of default.
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K
Keogh Plan: a retirement plan for self-employed
people.
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