The Center Online (securities glossary)

12b-1 fees: Advertising and promotional costs incurred by a mutual fund and charged against the assets in the fund under a Rule 12b-1 plan filed with the SEC. Funds filing a 12b-1 plan may distribute the shares themselves or distribute them through an underweriter and charge an additional sales load. The maximum 12b-1 fee charge is .75% of net assets.

401(k) Plan: A qualified corporate retirement plan in which the employee can take part of his or her compensation in the form of contributions to the plan.

401(b) Plan: A qualified retirement plan, similar to a 401(k) but restricted for use by teachers and employees of certain nonprofit organizations.

Accelerated Cost Recovery System (ACRS): A statutory schedule of depreciation deductions for assets put into service after 1980 and before 1987. Salvage value is disregarded in computing ACRS allowances. Replaced by Modified Cost Recovery System (MACRS).

Acceptance, Waiver, and Consent Procedure: A disciplinary procedure used when the Department of Enforcement of the NASD believes a violation has occurred and the member or associate does not dispute the violation With this procedure, the Department of Enforcement prepares and asks the respondent to sign a letter that accepts the charges, waives rights to have a hearing and appeal the decision, and consents to imposition of sanctions.

Account Guarantee Acknowledgment: A written acknowledgment to the firm that it may use the money and securities in the guaranteeing account without restriction to carry the guaranteed account and pay any deficit in the guaranteed account. The margin to be maintained is then calculated by combining the two accounts.

Accredited investor: An investor in an offering who meets certain criteria under Regulation D, who does not have to be counted for purposes of limitations on the number of purchasers in an offering. At least one of the following criteria must be met to be an accredited investor: (i) a buyer with a net worth individually or with a spouse of $1,000,000 or more; (ii) institutional investors including banks, insurance companies, registered broker/dealers, and large pensions plans; (iii) tax-exempt organizations with total assets in excess of $5,000,000; (iv); private business development companies; (vii) directors, officers, or general partners of the issuer; and (viii) entities owned entirely by accredited investors.

Accretion: The process of adjusting the cost of a bond purchased at a discount. Only original-issue discount municipal bonds are accreted.

Accumulation period: For a variable annuity, the time from when the first payment into the annuity is made to when the first annuity payment is made.

Accumulation units: An accounting measurement used to measure an annuitant's ownership of the separate account during the deposit period of a variable annuity contract.

Acid test ratio: See Quick Ratio.

ACRS: See Accelerated Cost Recovery System.

Actively traded securities: Securities that have a current worldwide average daily trading volume over 60 consecutive calendar days (ADTV) of at least $1 million and an issuer with common equity securities having a public float value of at least $150 million. This condition is used for an exemption from Regulation M, which restricts the trading of an existing security by participants in a public offering of that security.

Additional bond test: An income test, which ascertains that revenues must meet certain levels to allow the sale of additional bonds against the financed facility. A provision in the trust indenture of an open end revenue bond.

Additional takedown: The profit to a syndicate member selling municipal bonds to broker/dealers who are not members of the syndicate.

Adjustment bonds: See income bonds.

ADR: See American Depository Receipt.

Ad valorem taxes: A tax levied "by value," usually used to describe property taxes.

Advance/decline ratio: The ratio of the number of stocks increasing in price to the number of stocks decreasing in price. Also called the "breadth of the market."

Advertising: Under NASD rules, means promotional items that have uncontrolled distribution. In other words, the firm has no way to know who will see the item. The material is published or designed for use in newspapers, magazines or other periodicals, radio, television, telephone or tape recording, video tape display, signs or billboards, motion pictures, telephone listings (other than white-page listings), or other public media. Does not include communications that are neither advertising nor sales literature.

Adviser's client account: An account with a brokerage firm in which an investment adviser pools the funds of all his customers, keeping a record of each customer's percentage of the account. The brokerage firm does not know the identity of the individual customers. The investment adviser pays for securities and meets margin calls. The customers make their checks out to the investment adviser. Also called an omnibus account.

Affiliated Persons: Persons (individuals, corporations, trusts, etc.) in a position to influence a corporation's decisions. Includes officers, directors, and principal stockholders (those with 10% ownership or more) of the corporation, and their immediate families. Also called insiders or control persons.

Affirmative defense: A defense in a legal proceeding that attacks the legal grounds for an accusation rather than the truth of the facts.

Affirmative determination: The inquiry a registered representative makes to ensure that a customer who has custody of the securities certificates in a trade can deliver the certificates in good delivery form within three days of the trade date. The registered representative must talk with the customer and make a notation on the order ticket about his conversation with the customer.

Agency sales ticket: A memorandum of each brokerage order received or given, whether executed or not.

Agency transactions: Transactions in which a broker acts only as an agent for the customer, putting together a buyer and a seller, and makes a commission on the sale.

Agent: One who acts for another. When a firm acts as agent, it is acting as a broker, bringing together a buyer and a seller. As agent it does not buy or sell for its own account.

Aggregate indebtedness: A firm's unsecured liabilities, including any customer-related liabilities. Aggregate indebtedness does not include subordinated agreements or loans fully collateralized either by fixed assets such as real estate or by the firm's securities.

Agreement among underwriters: The contract that governs the syndicate members in a negotiated offering.

Agreement of limited partnership: The contract between the general partners and the limited partners that governs the limited partnership.

Aggregate exercise price: In an options position, the total amount of money involved in the resulting stock trade if the position is exercised. If a customer is long 1 XYZ July 50 Put, the aggregate exercise price is $5,000.

Alpha: A statistical measurement used to determine the percentage of the change in a stock's price due to factors internal to the company, rather than to the stock market's fluctuations.

All-or-none: A limit order for multiple round lots that bars partial execution of the order. The customer waits until the entire order can be filled in a single trade. Often abbreviated "AON."

All-or none underwriting: A type of best-efforts underwriting that withdraws the offering if it cannot be sold completely.

Alternative minimum tax: A tax on certain "preference items," most of which are tax deductions allowed under the normal income tax calculation. Taxpayers pay either the regular tax or the alternative minimum tax, whichever is greater.

Alternative orders: An order with two parts. When one part is filled, the other part is automatically canceled. For example, a customer may enter an order to buy at 32 or 38 stop. He is trying to buy the stock for $32 or less, but if the price increases to or above $38, it becomes a market order.

Alternative trading system: An electronic system that brings together buyers and sellers of securities and completes trades by matching orders according to a predefined logic. Electronic Communications Networks (ECNs) are alternative trading systems that have sufficient volume in non-government securities and commercial paper that they must be registered with the SEC. Unregistered ATSs include the Arizona Stock Exchange, BRASS, and Optimark. The Arizona Stock Exchange is an electronic call market where buy and sell orders are combined into one large daily trade that takes place at a single price. BRASS is a system management network to rout orders, and Optimark is an electronic trading system that can be purchased by an exchange or broker, but is not an exchange or broker in itself.

American Depository Receipt: A receipt for shares of a foreign corporation on deposit with a foreign branch of an American bank.

American Stock Exchange (AMEX): The second largest traditional stock exchange, based in New York City.

American-style options: Options that may be exercised at any time before expiration. (See European-style options.)

AMTI: The Alternative Minimum Taxable Income; the amount on which the alternative minimum tax liability is calculated.

Amortization: A reduction in a debt or fund by periodic payments covering interest and part of the principal. In municipal bonds, amortization refers to adjusting the cost of a bond for any premium paid.

Annual report: The yearly report of a corporation's financial condition. It includes a balance sheet, income statement, and other descriptive information of interest to investors.

Annuity: Money is paid (usually to an insurance company) to someone who invests the money for a set period of time and then pays money to the annuitant (the one receiving the annuity) when he/she reaches a certain age. Fixed annuities guarantee a fixed payment amount, while variable annuities pay a varying amount depending on the fixed amount of initial investment.

Annuity units: An accounting measurement used to determine the annuitant's ownership in the separate account during the annuity period when payments are being made to the investor on a variable annuity contract.

Anti-dilution clause: A clause in the trust indenture of a bond offering which provides that the conversion price (or conversion ratio) of a convertible bond be adjusted in the case of stock splits or stock dividends paid to common stockholders.

AON: See all-or-none

Arbitrage: Taking advantage of minor aberrations in the market to try to profit as the market returns to normal. Arbitrage might take advantage of imbalances in prices between two markets for the same security (such as a domestic and a foreign market) or between two types of securities whose value depends on the same underlying security (such a stock and a bond convertible into the stock).

Arbitration: A method of settling disputes. The parties present their arguments to a panel of one or more arbitrators who will render a decision. There are no appeals from arbitration.

Asked price: The lowest price a seller of a security is willing to take for a unit of a security at a particular time. (Note that the OTC market uses the term "asked," while the exchanges use the term "offered" or "offering.")

Asset: Anything of value owned by a company or individual. Assets include cash, investments, and physical property.

Asset allocation: A fundamental concept in portfolio management in which an investment adviser determines the investment profile for a client, including their risk tolerance and time horizon, then uses this information to split the client's funds between appropriate classes of investments. As relative movements in the market for the various asset classes change the mix of assets in the portfolio over time, the adviser must rebalance the portfolio.

Asset class: A group of investments with similar risk and return characteristics, such as cash equivalents, government bonds, municipal bonds, corporate bonds, common stock (or industry groupings within the broad category of common stocks), real estate, precious metals, and collectibles.

Assignment: For options, the notice from the OCC telling the broker/dealer that an option written by one of its clients has been exercised.

Assistant Representative-Order Processing: A Series 11 representative who only accepts unsolicited customer orders for execution. Cannot solicit customers, give investment advise, make recommendations to customers, or effect transactions for the NASD-member's account. Must not be registered in any other capacity for the firm. Compensation cannot be based on the number or size of transactions they handle.

Associated persons: Employees of a brokerage firm who are required to be licensed.

ATS: see Alternative Trading System

At-the-close order: An order to be executed at or near the close of trading. Round-lot orders entered at-the-close are executed in the last thirty seconds of trading.

At-the-money: An option contract with a strike price that equals the market price of the underlying stock.

At-the-opening order: An order to be filled on the first trade of the day in that stock. If the order cannot be filled on the first trade of the day, it is canceled.

At-risk rule: A provision in the tax code stating that a limited partner may only include debt as part of his or her basis in the partnership if he or she is personally liable for the debt (i.e., if it is a recourse loan).

Auction market: A market in which the price of a security is determined by supply and demand, through a continuous auction. Exchanges are auction markets.

Auditor's report: The public accountant's statement as to the scope of the review of the books and records of the corporation and the accountant's opinion as to the accuracy of the financial statements (i.e., unqualified or to some degree qualified approval).

Automated Confirmation Transaction (ACT): A computer system that matches trade information, determines locked-in trades, and submits them to clearing through the National Securities Clearing Corporation (NSCC). The primary way that OTC transactions in equity securities are reported. Participation is mandatory for all brokers that are members of a registered clearing agency and for all brokers who have a clearing arrangement with such brokers.

Backing away: The illegal practice of publishing a quote that a firm has no intention of honoring.

Balance of payments: A summary statement comparing the money coming into a country with the amount of money leaving the country for one period of time. Usually divided into the current account (showing imports and exports of goods and services), the capital account (showing movement of investments), and gold (showing movement of gold). The statement uses double-entry bookkeeping, which ensures that though individual categories may have a deficit or surplus, the overall statement must not.

Balance of trade: The net difference in imports and exports of goods by a country for a period of time. (Note: This is not the same as the change in the current account portion of the balance of payments, since the current account also includes imports and exports of services.) More exports than imports produce what is generally considered a favorable balance of trade, while the reverse is generally considered unfavorable.

Balance sheet: A financial report of a corporation, showing the corporation's assets, liabilities, and stockholders' equity at a point in time (usually month-end, quarter-end, or year-end).

BAN: See Bond Anticipation Note.

Bankers' acceptances: A short-term instrument used to finance import/export activities. Usually sold at a discount.

Basis: The cost or book value of an investment. The gain or loss on an investment is the sale price less the basis. Basis is often called "cost basis."

Basis book: A series of tables used to determine the dollar price of a serial municipal bond issue (quoted on a yield to maturity basis), or to determine the yield to maturity on a term bond (quoted in the same manner as corporate bonds).

Basis points: 0.01% in yield. Increasing from 5.00% to 5.05%, the yield increases by five basis points.

Bearer: Certificates (usually bonds) that are not registered in the holder's name, but are payable to the presenting party when due.

Bear market: A situation in a market for investments in which price trends are generally downward.

Bear Spreads: An options spread position that is profitable when the stock price decreases. The position is characteristically entered by purchasing a high strike price option and selling a low strike price option.

Best-efforts underwriting: Underwriting without a guarantee to the issuer to sell the securities. The underwriters act as brokers.

Beta: A statistical measurement correlating a stock's price change with the movement of the stock market.

Bid price: The highest price a buyer of a security is willing to pay for a unit of the security at a particular time.

Blanket fidelity bond: Insurance brokerage firms are required to carry to protect customers from the dishonesty or carelessness of brokerage employees and officers. Covers loss of money or securities, forgery, and fraudulent trading. The amount of coverage required is linked to the firm's required net capital under SEC Rule 15c3-1. The minimum bond allowed for all categories is $25,000.

Block trade: A trade of a large number of shares, usually 10,000 shares or more.

Blue Chip Stocks: Stocks of strong, well established corporations with a history of paying dividends in good and bad times.

Blue List: A listing of municipal bonds offered for sale in the secondary market.

Blue List Total: The total par value of the bonds offered for sale on the Blue List. This is a measure of the secondary market for municipal bonds.

Blue Skying: The process of registering a new issue with the states.

Blue Sky Laws: State securities laws. The name is derived from a court decision in which a state judge held that a particular offering had "no more substance than the blue sky above."

Board Broker: The employee of the CBOE who maintains the public limit order file, which is similar to a specialist's book, and executes limit orders for customers. Also known as an Order Book Official, or OBO.

Bond: A long-term debt instrument issued by a corporation or government entity. The bondholder loans the issuer money and the issuer promises to pay the bondholder interest at a specified rate on the loan for a specified period of time and then to repay the loan at expiration. The bondholder is a creditor of the issuer rather than a partial owner.

Bond Anticipation Note: A short-term municipal note issued in advance of long-term bond financing, commonly referred to as a BAN. The BAN is repaid from the proceeds of the bond issue. BANs are normally general obligations of the issuer.

Bond Buyer: A publication which contains news of interest to the municipal bond market; also contains worksheets designed to assist syndicates in preparing their bids for an offering.

Bond Index: An index of 20 high quality, general obligation municipal bonds, also known as the 20 Bond Index.

Bond Swap: Selling municipal bonds (usually at a loss) and using the proceeds to buy other municipal bonds, to establish a loss for tax purposes, to diversify a portfolio, to increase cash flow, or increase yield. Also known as tax swaps.

Book entry: A bond registration procedure in which the bondholder does not receive the physical certificates held by a depository. The depository maintains ownership records and forwards interest payments.

Book value: The value of a corporation's assets or liabilities on its balance sheet. Assets are valued at their original purchase price less any depreciation taken for accounting purposes. The book value of common stock is the corporation's assets less its liabilities and the liquidation value of its preferred stock. Book value may have little relationship to market value.

BP Option: "BP" is the abbreviation for the British Pound. An option to buy or sell British Pounds.

Branch office: Any location identified to the public as a location where an NASD member conducts investment banking or securities business. However, telephone directories, business cards, etc. may refer to a non-branch, as long as they also give the address and telephone number of the branch office or office of supervisory jurisdiction that supervises the non-branch.

Breadth of the Market: See Advance/Decline Ratio.

Breakeven Point: The point beyond which a trade begins to be profitable. Up to this point, it is a losing trade.

Breakpoint: A purchase amount that qualifies for a reduced sales charge for mutual funds.

Breakpoint sale: The prohibited practice of selling mutual fund shares in an amount just under a breakpoint (usually within $1,000 of a breakpoint) to earn more commissions.

Broker: See Agent.

Broker/Dealer: A brokerage firm.

Broker's broker: A municipal securities firm that acts as broker for other firms. Broker's brokers do not deal with customers and do not trade their own accounts.

Bull market: A situation in a market for investments in which price trends are generally upward.

Bull spread: An options spread position that is profitable if the stock price rises. The position is characterized by a low strike price for the long position and a high strike price for the short position.

Bunching: Combining two or more odd lot orders into one order for a round lot.

Business cycle: A recurring cycle of economic conditions starting with credit expansion, economic activity becoming feverish, then depressed. Recovery occurs when the malinvestments and maladjustments have been corrected.

Buyer's option: A contract giving the buyer the right to specify a later date on which to settle the trade. The specified date must be from six business days to sixty calendar days after the trade date.

Buying power: In a margin account, the dollar amount of securities the customer may purchase without making a cash deposit. The buying power in an account is a function of the SMA (which see).

Buy stop: An order to buy a security if it trades at or above a trigger price. Often used to limit a loss or protect a profit in a short stock position.

Calendar spread: An options spread position with the same strike prices, but different expiration months. Calendar spreads are entered to take advantage of the decay of time premium.

Callable securities: Securities that may be bought back by the issuer before they are due, usually at a premium over the par value. Many bonds and preferred stocks are callable.

Call option: An option contract that gives the holder the choice to buy the stock and the writer the obligation to sell the stock at a specified price.

Call rate: The rate of interest banks charge broker/dealers on loans collateralized by securities, often called the broker loan rate.

Call spread: An options spread position in which the customer is long a call and short a different call on the same underlying security.

Canadian interest cost: See True Interest Cost.

Cap Interval: The point at which these special index options are automatically exercised if the underlying index touches or exceeds the cap price on the close.

Capital Asset Pricing Theory (CAPT): A theory of portfolio analysis stating that diversified investments in a portfolio are less risky than the sum of the risks of the individual stocks.

Capital gain: A gain recognized when a security is purchased at one price and sold at a higher price. It does not include dividend or interest income.

Capitalization: The long-term financing of a corporation, including the shareholder's equity section of the balance sheet plus long-term bonds outstanding.

Cash flow: The net profits or losses of a business plus noncash expenses such as depreciation, amortization, and depletion.

Cash settlement: A trade that is settled on the same day as the trade date.

Catastrophe call: A provision in the trust indenture of a bond issue that allows the issuer to call the bonds if the facility is destroyed by a natural disaster. It is usually called at par.

CBOE: See Chicago Board Options Exchange.

CD: See Certificate of deposit.

Certificate: The physical paper that evidences ownership of stock in a corporation.

Certificate of Deposit: A document certifying an unsecured time deposit with a bank, usually known as a CD. To be negotiable, it must be for $100,000 or more.

Certificate of Limited Partnership: A document summarizing the provisions of a limited partnership. It must be filed with the secretary of state in the state in which the partnership is formed. Filing the certificate creates the limited partnership.

Chicago Board Options Exchange (CBOEJ): The largest options exchange. Located in Chicago.

CFTC: The Commodity Futures Trading Commission.

Chinese Wall doctrine: Doctrine by which firms must establish barriers restricting information flow between departments to ensure that insider information acquired by one department (legal or investment banking, for example) will not be used in trades of another department or in recommendations to customers.

Churning: Excessive trading in a customer's account to give profit to the broker/dealer in disregard of the customer's best interests. Prosecutable under the 1934 Securities Exchange Act.

Circuit breakers: Trading halts, curtailment of automated trading systems and/or price movement limits used by the exchanges to attempt to prevent the free-fall of stock or stock index futures markets. Established after Black Monday in 1987 by major stock and commodities exchanges. The breakers are triggered when the market has fallen by a specified amount in a specified period. Amounts that trigger the breakers are changed from time to time.

Class of Options: Options of the same type (put or call) on the same underlying security.

Closed-end investment company: An investment company with a fixed number of shares that trade in the secondary market.

Closing purchase: A purchase of an option to eliminate or reduce a short options position.

COD: Cash on Delivery. Payment for goods is made upon delivery. See Delivery versus Payment.

Code of Arbitration: Procedure of the NASD for settling disputes among participants in the securities markets by arbitration. Applies to disputes between and among members, members and their associates, members and public customers, associates of members and public customers, and members and clearing agencies or persons using the facilities of a clearing agency (however, only when the clearing agency has an arbitration agreement with the NASD).

Code of Procedure: Procedures of the NASD that detail the form for disciplinary actions against members and their associates for violations of the rules over which the NASD has jurisdiction.

Coincident indicator: An economic indicator that reflects changes in the economy. The index of industrial production and retail sales are both coincident indicators.

Collateral: Securities or other assets that a borrower pledges to a lender to secure repayment of a loan. If the borrower does not make payments as promised, the lender may legally seize the collateral and use the proceeds from its sale to pay off the loan.

Collateralized Mortgage Obligations (CMOs): Bonds secured with GNMA, FNMA, and FHLMC mortgage-backed securities. Also known as REMICs.

Collateral trust bonds: Bonds secured by securities of another corporation.

Combination: An options position in which an investor is long both a put and a call option on the same stock or short both a put and a call option on the same stock. The options usually have different strike prices.

Commercial paper: Short-term business notes, drafts, and acceptances maturing in 270 days or less.

Commission: The fee charged by a broker/dealer for acting for others in executing buying or selling orders.

Commodity Futures Trading Commission: U.S. Government Agency that regulates U.S. exchange trading in futures.

Common stock: The most basic type of equity security, representing ownership of the corporation.

Communications that are neither advertising nor sales literature: Items exempt from the NASD's advertising and sales literature rules, including: 1. tombstone advertisements or similar communications; 2. documents intended for the internal use of the firm and not given to the public; 3. communications which only identify the member and/or offer a specific security at a stated price; 4. prospectuses, offering circulars, etc. used in connection with a public offering of a security that has been registered or filed with the SEC or a state (except for the prospectus for investment company shares); and 5. communications merely stating facts, such as the member's new name or address, facts concerning a merger or acquisition, the firm's NASDAQ® symbol, or the NASDAQ® symbol of a security in which the member is a registered market maker.

Competitive bid underwriting: An offering in which syndicates enter bids for the opportunity to underwrite the issue.

Competitive trader: A person who owns a seat on an exchange and uses it to trade for his own account.

Complaint: Defined by the NASD as a written statement of a grievance by a customer or his agent, involving persons associated with the member concerning the solicitation, execution, or disposition of funds or securities.

Compliance Registered Options Principal: A registered options principal who has been designated by the broker/dealer to maintain compliance with industry rules and federal law, usually referred to as a CROP. He must approve all items of advertising, sales literature, and educational material.

Concession: In a municipal underwriting, the compensation given up to broker/dealers who are not members of the syndicate.

Conduct Rules (formerly known as the Rules of Fair Practice): Rules maintained and enforced by the NASD that apply to general business activities of members.

Conduit Theory: Theory governing an exemption on paying taxes for Regulated Investment Companies. The theory governing this exemption is that an RIC that distributes most of its income is acting only as a conduit for income on investments.

Confirmation: A written report giving details of the trade to the customer or the other broker/dealer involved in the trade. Confirmations must be sent the next business day after the trade.

Consent to service of process: Legal document used by the state administrator to simplify filing of complaints under state securities laws. The person or entity signing it (such as the issuer of a security, or a securities registrant with the state) agrees that, for noncriminal complaints, any legal papers regarding the signee that are served on the state administrator in lieu of the signee have the same force and validity as if they were served directly on the signee.

Consolidated Tape: System for providing the last sale price and volume of trades in exchange-listed securities. The system has two tapes: Network A and Network B. All trades in NYSE securities, regardless of where they occur, are listed on Network A with an identifier as to where they originated. Transactions in securities listed on AMEX and other regional exchanges are reported on Network B. Participants in addition to the NYSE and AMEX include BSE, CBOE, CSE, CHX, NASD, PSE, and PHLX.

Contemporaneous traders: Traders who buy or sell a security at the time of insider trading. Such traders may sue in court for damages.

Continuous issue of redeemable securities: Manner in which shares of a mutual fund are issued. The shares purchased are new shares, and when a shareholder wishes to sell shares, he sells them back to the fund itself (redeems them) rather than selling them on the open market. The shares repurchased by the mutual fund are retired: they do not become treasury stock, nor may they be reissued; the shares simply cease to exist.

Continuous net settlement: The offsetting of payments and certificates when multiple trades involving a particular security have the same two parties on opposing sides. Used by registered clearing agencies.

Contractual plans: A contract committing an investor to invest money over a period of time. The sales charges are deducted over the life of the contract, being higher in the early part of the contract.

Control persons: See Affiliated persons. Control persons are also called "Insiders."

Control stock: Stock owned by control persons.

Conversion price: The price of a bond or stock at which it can be converted to common stock.

Conversion ratio: The ratio specifying how many shares of a common stock will be received upon converting one bond or share of preferred stock.

Convertible: Designation for a bond, debenture, or preferred stock which signifies that it may be exchanged by the owner for common stock or another security, usually one issued by the same corporation. Conversions are subject to terms established in the issue of the original security.

Cooling-off period: The time between the filing of the offering with the SEC and the effective date when it is released by the SEC.

Cost basis: See Basis.

Coterminous: Overlapping debt, such as the bonds of a city and a school district where both debts are being paid by the same tax base (taxpayers).

Coupon bond: A bond in which coupons for interest payment are physically attached to the bond paper. The bondholder must clip the coupons as they come due and present them for payment of interest.

Coupon rate: The nominal yield on a bond or share of preferred stock. For example, a bond with a face value of $1,000 that pays $100 per year has a nominal yield or coupon rate of 10%.

Covered options: A short options position in which the writer has the means of meeting the obligation. For example, a person who is short a call option and long the stock.

Credit agreement: An agreement between broker and customer on the conditions of a margin account.

Credit balance: Money on deposit in a customer's account.

Credit spreads: An options spread position in which the premium on the short position is greater than the premium on the long position.

CROP: See Compliance Registered Options Principal.

Crossed market: A market in which either a newly entered bid is higher than an existing asked price or a newly entered asked price is less than an existing bid price.

Crossover: The point at which the partnership goes from showing losses for tax purposes to showing income.

Cumulative preferred stock: A preferred stock whose dividends continue to accumulate even though they are not earned or declared.

Currency exchange risk: The risk that the value of an investor's domestic currency may drop against the value of the currency in which an investment is held. Much of this risk can be hedged away through the market for forwards and futures.

Current assets: Assets that are converted to cash within one year.

Current liabilities: Obligations that must be paid within one year.

Current ratio: Current assets divided by current liabilities.

Current yield: The ratio of the current income from an investment to the purchase price or the current price of the investment.

CUSIP number: A number assigned to each issue of securities by the Committee on Uniform Securities Identification Procedures to facilitate tracking lost, stolen, or counterfeit securities.

Custodian: The person appointed by the donor to manage a minor's account. Might be the donor, a guardian, or some other adult or institution such as a bank.

Customer: Any person or entity for whom the broker/dealer holds funds or securities, unless that entity is another broker/dealer. (Though municipal securities dealers may be considered customers on transactions not involving municipal securities.)

Customer agreement: A basic agreement between customer and broker, incorporating the margin agreement, the credit agreement and the loan consent.

Customer book: A listing maintained by the registered representative of every security a customer holds.

Cyclical stocks: Common stocks of companies whose prices vary directly with the business cycle.

Dated date: In a bond issue, the date on which interest begins to accrue.

Day orders: Orders that are canceled if they are not filled on the day they are entered.

Dealer: One who buys or sells stock for his own account, charging a markup when he sells to a customer and a markdown when he buys from the customer.

Debentures: Bonds not secured by any specific property, based on the full faith and credit of the issuer.

Debit balance: Money owed to a broker/dealer by a customer.

Debit spread: An options spread position in which the premium paid on the long position is greater than the premium received on the short position.

Declared date: The date on which a corporation declares a dividend.

Defeasance: Annulment of trust indenture conditions granting new bonds a claim on revenues, and the old bonds a claim on the escrow account containing the proceeds (the money) from the pre-refunding issue.

Defensive issue: Common stock of companies that are relatively unaffected by the business cycle, such as food companies, utilities, and tobacco companies.

Defined benefit plan: A corporate pension plan that guarantees a specific level of benefits for participants, usually based on levels of compensation and years of service. For example, an annuity purchased by the corporation for the employee.

Defined contribution plan: A corporate pension plan that guarantees the employer will pay a specific amount into the plan each year. Either a money purchase plan, such as a 401(k) or a SEP, or a profit sharing plan, or some combination of the two.

Deflation: A decline in the prices of goods and services.

Delivery versus payment: A type of settlement, commonly used by bank trust departments, in which the security is paid for when the broker/dealer has it deliverable in the purchaser's name. Also referred to as DVP or COD.

Demand note: A short-term municipal note that permits the issuer to change the interest rate on a weekly or monthly basis, and the holder to sell the note back to the issuer at the same intervals.

De minimus transactions: A small amount of transactions allowed in a state for a registered rep who is not registered in that state. Applies when an existing customer of a firm moves to another state or stays in another state for less than 30 days. Subject to restrictions.

Depository Trust Company (DTC): A central depository for the physical certificates evidencing securities held by its members. The members transfer securities among themselves to effect transactions using electronic bookkeeping entries.

Depository trust receipt: A written guarantee that can be used for money or stock, and to cover either calls or puts. Unlike escrow receipts or bank guarantee letters, which can only be used once, a depository trust receipt may be used again upon expiration of the option.

Depreciation: A noncash expense reflecting wear and tear of property used as part of a trade or business or held for the production of income. Usually, the cost of an asset, less an appropriate salvage value, is "written off" over its useful life by periodically reducing the book value of the asset with an increase to accumulated depreciation and charging an equal and offsetting amount as depreciation expense. Depreciation used for book purposes may be different from the amounts allowed on tax statements.

Derivative security: A contract whose value depends on the performance of some other security, index, or other investment. For example, a stock option is a derivative security whose value depends on the value of the underlying stock.

Depression: A stage of the business cycle characterized by high unemployment and low levels of business activity.

Designated order: In a municipal bond underwriting, an order by the buyer specifying the syndicate member who receives the compensation for the order.

Designated reporting member: A broker/dealer who engages in many third market trades, and is designated as such.

Developmental drilling: Drilling oil or gas wells in an area of known production.

Diagonal spread: An options spread position in which both the strike prices and the expiration months differ.

Dilution: Reduction of the percentage ownership of the existing shareholders through the sale of more stock by the corporation.

Direct Participation Program: An investment program that allows the flow-through of all tax consequences to the investor, often referred to as a DPP. The most common form of DPP is a limited partnership.

Discount: The difference between some nominal amount for a security and the lower current market price. For example, the discount on a preferred stock or bond is the amount by which it is currently selling below par or face value. For securities sold or loans made "at a discount," the issue or loaned amount is the face amount reduced by the amount of the interest.

Discount rate: The rate of interest the Federal Reserve Board charges member banks for reserves borrowed from the Fed.

Discretionary account: A customer account in which the firm or its registered representative has the authority to enter orders without the prior approval of the customer.

Discretionary income: The amount of income the individual has left after covering his or her essentials such as food, housing, utilities, clothes, and payment of obligations.

Discretionary orders: Orders where the customer allows the registered representative to decide whether to buy or sell, which security; and the number of shares. The order is discretionary even if the customer supplies the other information required to order, such as when to place the order and whether the order is at market price or a limit order at a stated price.

Discretionary power: The power of attorney given by a customer to a registered representative or brokerage firm

Disintermediation: The nonuse of financial institutions as intermediaries between savers and the users of funds.

Disproportionate sharing arrangement: A sharing arrangement in an oil and gas program granting the general partner a greater share of income than would be merited by his capital contribution. For example, the general partner contributes 10% of the total capital but receives 25% of the income.

District executive representative: Person designated by a member of the NASD to vote on NASD matters related to a particular district for the member. A member may designate one district executive representative for each district in which it has at least one branch office. However, the firm cannot designate a district executive representative in addition to an executive representative in the district that is its principal place of business.

Diversification: Reducing risk by spreading investments among several markets and/or industry segments within a market. Diversification reduces the risk that an individual investment will perform worse than other investments in its same class (i.e., non-systematic risk).

Diversified investment management company: An investment company with 75% of the value of its assets held in cash or cash equivalents, government securities, securities of other investment companies, or securities of other issuers; no more than 5% of its total assets in the securities of any one company; and ownership of no more than 10% of the outstanding voting stock of any one company.

Dividend: A payment of corporate earnings to shareholders. Dividends are normally paid in cash, but may also be in stock or property.

Dividend Re-Investment Plan (DRIP): A program offered by some corporations (particularly investment companies) in which shareholders may opt to use their dividends to purchase additional shares in the corporation in lieu of receiving cash payments. Since the shares are purchased directly from the corporation, brokerage fees do not apply. However, the shareholder is still responsible for taxes on the dividends.

Dollar bond: A term municipal bond, quoted in the same manner as corporate bonds.

Dollar-cost averaging: A method of investing where the investor makes fixed dollar purchases at regular intervals regardless of the price per share. The investor purchases more shares with this method when the share price is low and fewer shares when the share price is high. Thus, the investor benefits from temporary downturns in share price.

Don't know procedures (DK procedures): Procedures followed by dealers if confirmations between dealers are in disagreement, or if one party fails to confirm a trade prior to the settlement date. Literally means we "don't know" this trade.

DOT System: The Designated Order Turnaround System, which is the automated execution system on the NYSE. It is now called the Super Dot 250 System.

Double-barreled bonds: A municipal bond based on the revenues to be generated by some facility or project, but also backed by the full faith, credit, and taxing power of a government.

Double-exempt bonds: Bonds issued by a territory of the United States that are exempt from both federal and state income taxes in all fifty states. Some states may tax bonds of other states.

Dow Jones Composite Average: An average of 65 stocks, including the 30 stocks in the Dow Jones Industrial Average, plus 20 transportation stocks and 15 utility stocks.

Dow Jones Industrial Average: An average of 30 stocks that are purportedly representative of the entire stock market. This is the average most widely followed by the public.

Due bill: A written admission of a debt. Due bills are given when a stock split or stock dividend is pending and the shares are sold prior to the ex-date, but too late to transfer them to the buyer's name.

Due-bill check: A postdated check dated to the payment date of a cash dividend. Due bill checks are used when a cash dividend is pending and the shares are sold prior to the ex-dividend date, but too late to transfer them to the buyer's name.

Due-diligence meeting: A meeting held by the issuer and the underwriters shortly before the effective date of an offering. The purpose is to make certain that all disclosures are adequate.

DVP: See Delivery versus Payment.

Earnings per share: The net income of a corporation after taxes and payment of preferred stock dividends, divided by the number of common shares outstanding.

Eastern underwriting agreement: A firm commitment underwriting in which syndicate members are liable for their share of any unsold securities, regardless of how much of their allotment they sold. Eastern underwriting agreements have joint and several liability.

Easy money: A phenomenon occurring when new money is injected into the economy by the Federal Reserve System. The new money stimulates demand for existing goods, thus making it simple to make more money.

ECN: see Electronic Communication Network

Education IRA: A tax-advantaged savings vehicle used to pay the qualified higher education expenses of a designated beneficiary.

Effective date: In a new issue, the date on which the SEC releases the offering.

Electronic Communications Networks (ECNs): Alternative trading systems that have sufficient volume in nongovernment securities and commercial paper that they must be registered with the SEC. An ECN may register with the SEC as either a broker/dealer or an exchange. ECNs registered as broker/dealers must comply with Regulation ATS, which includes a requirement to link to a registered exchange or the NASD and publicly display their best priced orders for any security in which they have had 5% or more of the average daily volume share in the past four out of six calendar months. ECNs registered as exchanges must comply with exchange requirements for self-regulation. ECNs registered as exchanges include Archipelago, Attain, Island, and REDIBook. ECNs registered as broker/dealers include B-Trade, BRUT, Instinet, NexTrade, and Strike. POSIT Crossing Network is registered as a broker, but is not considered an ECN because of its low volume. POSIT is a call market that matches sell and purchase orders six times a day, creating a single trade at the midpoint each time.

Eligible Worker-Owned Cooperative (EWOC): A retirement plan structured as either a cooperative farmers' association or any corporation operating on a cooperative basis except for a tax-exempt organization, a mutual savings bank, an insurance company, or a corporation which furnishes electric energy or telephone service to persons in rural areas. Restrictions apply.

Employee Retirement Income Security Act (ERISA): Act regulating pension plans with regard to eligibility for participation, vesting, funding, fiduciary responsibility, and reporting and disclosure. ERISA also created the Pension Benefit Guaranty Corporation (PBGC), a mandatory pension insurance fund used to guarantee pension benefits.

Employee Stock Ownership Plan (ESOP): A profit sharing plan where the contribution is made in stock.

Equipment trust certificates: A corporate bond offering secured by the equipment of a railroad, airline, or trucking firm, known as rolling stock.

Equity: The value of an asset (or part of an asset) which is not indebted.

Equity trader: Category of registration both for market makers, agency traders, and proprietary traders in Nasdaq® and other OTC market equity or convertible debt securities and for supervisors of those activities. Does not include traders who primarily execute orders for a registered investment company. Equity traders must pass the test for limited representative-equity trader (Series 55) and, in addition, either Series 7 or Series 62.

Eurodollar bonds: Bonds issued outside the United States, but denominated in U.S. dollars.

European-style options: Options that may only be exercised on the expiration date. (Most options in the U.S. are American-style options.)

Excess margin stocks: The stocks held in a margin account whose market value causes the equity in the customer's account to be more than 140% of the debit balance in the account.

Exchanges: Organizations or groups of individuals and/or firms that provide a means of bringing buyers or sellers of securities together. Unless their volume is so small to qualify for an exemption, exchanges must register with the SEC as national exchanges and abide by their rules.

Exchange acquisition: A block trade on an exchange initiated by the buyer. The broker/dealer lines up both sides of the trade prior to bringing it to the exchange floor.

Exchange distribution: A block trade on an exchange initiated by the seller. The broker/dealer lines up both sides of the trade prior to bringing it to the exchange floor.

Exchange rate: The price at which one country's currency can be exchanged for another country's currency.

Ex-dividend date: The date on which a stock starts trading without a pending dividend, usually four business days prior to the record date. It is set by either the exchange or the Uniform Practice Committee of the NASD.

Executive representative: Individual designated by a member in the NASD to vote for the member in all NASD matters. Must be a registered principal of the member who participates in senior management of the member.

Exercise: To exchange the option for its underlying asset at the strike price.

Exercised by exception: Automatic exercise of an option that is in-the-money by ¾ of a point or more on the expiration date, unless the holder gives specific instructions to the contrary.

Exercise: Demand from the holder of an option that the writer perform according to the terms of the option contract. When a holder exercises a call option, the writer of the option must sell the underlying stock to the holder at a predetermined price. When a holder exercises a put option, the writer of the option must buy the underlying stock from the holder at the predetermined price.

Exercise limit: A maximum number of options of the same class that the OCC allows to be exercised by an investor within five consecutive days.

Exercise price: The price at which the trade is executed when the option is exercised. It is also called the "strike price."

Ex legal: Designation at time of trade that is required for municipal securities to be considered good delivery if certificates are delivered without legal opinions or other documents legally required to accompany the certificates.

Expansion: The initial stage of the business cycle in which credit is expanded.

Expense guarantee: Guarantee by an insurer that expense factors will not change during the payout period on an annuity.

Expense ratio: In a mutual fund, the ratio between the operating expenses for the year and the total average net asset value. It usually amounts to less than 1%.

Expiration: The end of trading for an option. The option may not be exercised after the expiration date.

Exploratory drilling: The drilling of oil or gas wells in an area without known production. Exploratory wells are also called "wildcat" wells.

Ex-rights: The buyer of a stock sold ex-rights acquires only the stock itself and not any associated right to subscribe to additional stock directly from the company at a discount.

Extension: When a customer fails to pay for a purchase of securities by the seventh business day after trade date, the broker/dealer may choose to request an extension, allowing an additional five business days to make payment.

Extraordinary call: A call on a bond issue that is used in unusual circumstances, such as a catastrophe call.

Face-amount certificate: An obligation on the part of its issuer to pay a specific amount or amounts at a specific date or dates at least 24 months in the future. If the purchase is made in periodic payments, the face-amount certificate is an installment type.

Face-amount certificate company: A fairly rare category of investment company that issues face-amount certificates, backed with specific assets, such as real estate or securities. The issuer promises to pay the holder at maturity the face amount of the certificate, which is the return of capital plus accrued interest. Investors may also be able to get a surrender value if the certificate is presented prior to maturity.

Face value: The amount on the face of a bond on which interest payments are calculated. This amount is also the amount due at maturity. May be higher or lower than market value. Also called par value.

Fair market price: The price a willing buyer would pay a willing seller for an asset, where both are acting rationally with full knowledge.

Feasibility study: A viability study for a municipal revenue bond, to determine its technical and economic profitability.

Federal covered security: A security that is exempt from state registration because either it must be registered with the Federal government under the Securities Act of 1933 or it is exempt from federal registration under the 1933 Act (except that municipal securities may be regulated by the state of which the issuer is a part). Includes securities listed or authorized for listing on the NYSE, AMEX, the National Market System of Nasdaq®, or securities of the same issuer as those above with equal or higher seniority; registered investment company securities; securities offered or sold to qualified purchasers; securities with respect to certain transactions exempt from Federal registration, including some private placements; and securities that are exempt from Federal registration.

Federal funds: Very short-term loans (usually overnight) between banks, without any collateral.

Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"): Purchases conventional mortgages from federally chartered savings and loans.

Federal National Mortgage Association: An independent association that purchases mortgages from banks and other lenders, known as FNMA, or "Fannie Mae."

Federal Reserve Board: Commonly referred to as the Fed or "the Board," it manages the Federal Reserve System.

Fidelity bond: see Blanket fidelity bond.

Fiduciary: Someone who manages an account for the beneficiary of the account.

FIFO: First-In, First-out, a method of accounting for which shares or inventory items are being sold from a pool of similar shares or items. Assumes that when a sale is made, the items purchased first are sold first.

Fill-or-Kill: A limit order for multiple round lots that must be executed in its entirety at the stated price, or be canceled.

Financial futures: Contracts to buy or sell specific amounts of a financial instrument at a specific price on some specific date in the future. Underlying securities include Treasuries, CDs, and currencies. Used by banks and other financial institutions to hedge against changing interest rates.

Financial and operations principal: Person in a NASD-member firm who is responsible for the financial reports of the firm, keeping of books and records, supervision of back office operations, and compliance with financial responsibility rules, including compliance with net capital requirements. At least one person in each member firm must be registered with the NASD as such.

Firm commitment underwriting: A promise from the underwriters of an issue to purchase the securities for their own account if they cannot be sold to customers.

Firm quote: A quote committing the firm to buy or sell at least 100 shares of stock or 5 bonds at the stated price. All quotes are assumed to be firm unless otherwise specified.

Five percent policy: NASD policy to limit commissions, markups, and markdowns to five percent. This is a guideline rather than a rule because a number of other factors must also be considered.

Fixed annuity: An annuity policy with fixed monthly payments to the owner. See annuity.

Fixed assets: Corporate assets that are used in a trade or business having a useful life of more than one year.

Fixed Income Pricing System (FIPS): An automated quotation and trade negotiation system for the high-yield bond market that is operated by the NASD.

Fixed-unit investment trust: A trust that buys a fixed portfolio of securities (usually municipal bonds) and sells that portfolio to investors in units. Each unit represents an undivided interest in the portfolio. The holdings of the trust are static. When the holdings mature, the redemptions are passed proportionately to the unit holders. The unit shares do not trade on a secondary market.

Floor brokers: Employees of a broker/dealer who execute the firm's orders on the floor of a futures exchange.

Flower bonds: U.S. government securities that were issued at a discount from par value, but are acceptable at par in payment of estate taxes.

FNMA: See Federal National Mortgage Association.

FOCUS report: Financial and Operational Combined Uniform and Single reports that all registered broker/dealers must regularly file with the SEC. Shows the firm's activity volume, cash position, amount of customer exposure, inventory, money and securities owed to or from other broker/dealers, net income, and net capital position. The type and frequency of filing varies by the type of firm.

FOK: See Fill-or-Kill.

FOMC: The Federal Open Market Committee, which controls the open market operations of the Federal Reserve Banks.

Forward pricing: In mutual funds, the practice of filling orders based on the next computed net-asset value of the fund.

Fourth market: Trades in which institutions deal directly with each other, without using broker/dealers.

FRB: See Federal Reserve Board.

Free credit balances: A credit balance in a customer's account that the customer can withdraw upon request. Not all credits are free credits. For example, the credit balance related to a short sale in a margin account is not a free credit, since the customer cannot withdraw that credit until the short sale is covered. The firm must send customers statements concerning any existing credit balances at least quarterly.

Freeriding: Using the proceeds of a sale to pay for a prior purchase.

Freeriding and withholding: Failure of a member firm to make a bona fide public distribution of a hot issue. Such an issue may not be purchased by any broker/dealer or his employees or families, except under certain conditions.

Frozen account: An account that is not readily usable. The customer must have the money already on deposit to enter a buy order, or the security already on deposit to enter a sell order.

Full authorization or discretion: A power of attorney for an account that gives the person holding it the right to enter orders and also add or withdraw funds.

Fully diluted earnings per share: The earnings per share if all convertible securities were converted into common stock.

Fully paid securities: Securities held in a cash account for which full payment has been made.

Functional allocation: A sharing arrangement in an oil and gas program in which the limited partners contribute all the intangible costs and the general partners contribute all the tangible costs.

Fundamental analysis: The study of certain factors affecting prices such as the management of a corporation, the economy, the industry, supply and demand, and so forth. Compare with technical analysis.

Futures: Contracts to buy or sell a specific amount of some product at a specific price on a specific date in the future. The underlying asset might be a financial instrument (financial future), a stock index (stock index future) or an agricultural product, such as wheat, soybeans, or pork bellies. If the underlying asset is a stock index, settlement is made in cash due to the difficulty in delivering a market basket of stocks.

General obligation bonds: Municipal bonds that are backed by the full faith, credit, and taxing power of the issuer.

General partner: The partner who has the responsibility to manage the business and affairs of a limited partnership, and who has unlimited liability.

General securities firms: Brokers or dealers who carry customer or other broker/dealer accounts and receive and hold securities and funds for those accounts. Also called carrying, clearing firms.

Glass-Steagall Act of 1939: The federal law that prohibited banks from acting as dealers or underwriters in any securities other than general obligation municipal bonds.

GNMA: See Government National Mortgage Association.

Good delivery: Acceptable quality for delivery. A security that is in good delivery form must be accepted.

Good-faith deposit: In a competitive underwriting, the bidders must make a good faith deposit, to show that they have the capability of handling the offering.

Good faith margin account: Type of account allowed under Reg T for margin transactions in exempt securities, non-equity securities, money market mutual fund shares, or shares in a mutual fund that has at least 95% of its assets continuously invested in exempted securities. The initial good faith margin required for purchases is the "amount of margin which a creditor would require in exercising sound credit judgment." For short sales, the initial margin required is the current market value of the security plus the good faith margin.

Good ‘Til Cancelled (GTC) order: An order to buy or sell at a specific price that stands until the investor cancels it.

Government bond: A bond issued by the U.S. government.

Government National Mortgage Association: A government owned corporation that is backed by the full faith and credit of the U.S. government, creating pools of mortgages insured by either the Department of Veterans Affairs or the Federal Housing Administration and are sold to investors, commonly referred to as GNMA. Also called Ginnie Mae.

Government securities principal: An associated person who supervises government securities activities and is not registered as any other kind of principal. Must be registered, but no qualification exam applies. A principal who also performs tasks of a government securities representative must pass the appropriate exams for that function.

Green shoe offering: A new issue in which the issuer grants the underwriters an option or a warrant to purchase up to 15% more shares from the issuer at prices below the public offering price. The additional shares are used to cover certificates borrowed when the manager shorted stock to purchasers. The option is exercisable within thirty days after the effective date of the offering. The additional shares are registered with an amendment to the original registration statement. Profits earned by the manager on covering the short position are distributed to syndicate members pro-rata. So-called because the Green Shoe Company first used this arrangement.

Gross investment income: The total of all interest and dividends received on the securities in a portfolio, such as that held by a mutual fund.

Gross-revenue pledge: In a municipal revenue bond, a trust-indenture provision stipulating that the revenues first go to pay the debt servicing costs. The operating costs may be paid from some other source of revenues.

Group net order: In a municipal bond underwriting, an order in which the compensation is shared proportionately among the syndicate members.

Group sales: Sales in an underwriting made to institutional customers, such as banks and insurance companies, and for which all of the members of the underwriting group share in the commissions proportionate to their takedown in the offering.

GTC Order: A type of order that is good until it is canceled.

Haircut: A haircut is a percent reduction required to certain valuations of assets included in a firm's net capital calculation. Percentages are set by the SEC to allow for three types of potential losses in rapid liquidation: fluctuations in the market value of securities positions, losses in open contractual commitments made in firm commitment underwritings, and losses for aged fail-to-delivers.

Head and shoulders pattern: A technical chart formation that resembles a head and shoulders. It is a reversal pattern, representing the end of an up-trend and the beginning of a down-trend.

Hedge clauses: Cautionary statements or caveats made in a communication, such as an advertisement.

Hedging: An investment strategy by which the investor tries to eliminate all potential future gain or loss on an investment. For example, investors may hedge their investments with stock options, future contracts, or by selling short.

Horizontal spread: An options spread position in which the strike prices are the same, but the expiration months are different. Also known as time spreads and calendar spreads.

Hot issues: A new issue which, on the first day of trading, trades at a price above the new issue price.

Howey test: The test established in the 1946 case of SEC v. W.J. Howey Co. to determine what an investment contract is. According to the Howey test, an instrument is only an investment contract if it involves an investment of money or other tangible or definable consideration in a common enterprise with a reasonable expectation of profits to be derived primarily from the entrepreneurial or managerial efforts of others. The form of the security (whether it is a formal certificate or nominal interests in the physical assets employed by the enterprise) is irrelevant. Thus, notes that a furniture store issues to finance a customer's purchases are not securities, since their primary purpose is to facilitate the purchase. However, notes issued by a corporation for the general use of the company, where the buyer is primarily interested in the interest to be earned on the notes, would be considered an investment contract.

Hyperinflation: A rise in the prices of goods and services at rates of 100% or more per year.

Hypothecation: A broker/dealer's pledge of a customer stock to a bank as collateral for a bank loan. The proceeds of the bank loan are used to finance the debit balance in the customer's margin account.

Hypothecation agreement: Agreement signed by a margin customer which pledges the securities in the account as collateral for the loan and allows the broker/dealer to use the securities as collateral with the bank supplying the loan money. Also called the margin agreement. Usually combined with the Loan Consent Form into one document with two signature lines. The combined document is called the Customer Agreement.

Illiquid asset: Any asset that cannot be sold or disposed of without any loss in capital value in seven days or less.

Immediate-or-cancel: A limit order for multiple round lots that demands immediate execution at the stated price, and accepts partial execution. Any remaining portion of the order is canceled.

Income bond: A bond on which interest is paid "when, as, and if earned." It is normally issued by companies in bankruptcy. Also called "adjustment bond."

Income statement: The financial statement showing a corporation's performance over a period of time, such as a month, a quarter, or a year. The income statement shows revenues, cost of sales, and expenses.

Indenture: The written agreement that specifies the terms of a bond or preferred stock issue.

Index: A statistical measure of the price activity of some composite group, usually expressed in relation to some previously established base market value. For example, the Consumer Price Index is a measure of the price of a market basket of goods relative to what those goods cost in 1984-85. The NYSE Composite Index is computed relative to the price at the close of market at year-end 1965.

Indication of interest: A customer statement that he may consider purchasing securities in a new issue. Indications of interest are taken during the cooling-off period, after the customer has received a red herring.

Individual Retirement Account (IRA): A pension plan allowing individuals to save for retirement while enjoying some of the tax advantages given to corporate pension plans.

Industrial revenue bonds: A municipal bond the proceeds of which are used to assist in the financing of a corporation in that jurisdiction.

Inflation: A rise in the prices of goods and services.

Inflation rate: The rate of increase in the price of goods and services. Commonly used measures of the rate of inflation are the Consumer Price Index, the Producer Price Index, and the GNP deflator.

Initial public offering: The initial sale of securities to the public, often called an IPO.

Inside market: The inside market is the lowest ask (selling) price and the highest bid (buying price) available for a particular security at a point in time.

Insider: Anyone in a position to influence the decisions of a corporation. Insiders include officers, directors, principal stockholders, and their respective immediate families. Insiders of a corporation are also referred to as affiliated persons or control persons.

Instinet: A computer system designed to assist institutions in trading securities among themselves, or fourth-market trading.

Institutional investor: A investor who is a bank, savings and loan association, insurance company, registered investment company, federal- or state-registered investment adviser, or any other person, corporation, partnership, trust, or other entity with total assets of at least $50 million.

Intangible drilling and development costs: The expenses associated with establishing an oil or gas well. These expenses have no salvage value. They are immediately tax deductible.

Integration: The practice of including sales before and after an offering with sales during the offering to test whether maximums were violated for Regulation A offerings.

Interbank market: The market for foreign currencies in which the largest participants are the money center banks. The interbank market for currencies exists all over the world.

Interest: Money paid as compensation for the loan of someone else's money.

Interbank market: The market for foreign currencies in which the largest participants are the money center banks. The interbank market for currencies exists throughout the world.

Intermarket Trading System (ITS): Electronic system that electronically links seven exchanges (New York, American, Boston, Cincinnati, Midwest, Pacific, and Philadelphia) and, to a limited extent, the NASD (National Association of Securities Dealers). For securities being quoted in more than one market, the system allows orders to execute in whatever market offers the best quotation. The system may be used by brokers affecting trades for public customers and by specialists and market makers trading for their own accounts.

Interpositioning: A prohibited practice of placing another firm between a broker/dealer and the best available market for a security, denying the customer the best available price.

In-the-money: A call option is in-the-money if the market price of the underlying stock is higher than the strike price of the call. A put option is in-the-money if the market price of the stock is lower than the strike price of the put. An in-the-money option contract is more likely to be exercised than one that is either at-the-money or out-of-the-money.

Intrastate offering: A solicitation to sell stock made only to residents of the state in which it originates. Also known as a Rule 147 offering.

Intrinsic value: The amount an option is in-the-money.

Introducing broker/dealers: Brokers or dealers who use another broker/dealer to carry and clear transactions and accounts for their customers and do not themselves hold customers' fund or securities. The receiving broker/dealer, usually a general securities firm, carries the account with the names and addresses of the customers fully disclosed. Customers write checks directly to the carrying broker/dealer. The introducing broker/dealer can receive securities, but must forward them immediately to the carrying firm. Customers may be public customers or other broker/dealers.

Inventory: The total of a corporation's assets held for sale, including raw materials, work-in-process, supplies used in operations, and finished goods.

Inverted head and shoulders pattern: A technical charting pattern that resembles an upside-down head-and-shoulders. It is a reversal pattern signalling the end of a down-trend and the beginning of an up-trend.

Investment: The use of capital to earn more money, by generating income and/or capital gains.

Investment adviser: In investment companies, the person or firm making the trading decisions. In other uses, a person or firm (i) providing investment advice for a fee; (ii) managing money for investors; or (iii) publishing investment newsletters for paid subscriptions.

Investment Advisers Act of 1940: The federal law regulating investment advisers. Among other things, the law requires investment advisers to register with the SEC.

Investment banker: A firm acting as intermediary either between a corporation issuing new securities and the public or between the holder of large blocks of securities and potential buyers. The investment banker may operate individually or in a syndicate with other investment bankers, and as an underwriter or an agent in the transaction.

Investment Company: A company which, instead of manufacturing a product or providing a service, makes investments in securities or issues face amount certificates of the installment type.

Investment Company Act of 1940: The federal law regulating investment companies.

Investment contract: The catchall term for any securities that are not explicitly named but remain within the context of what the SEC was attempting with the 1934 Securities Exchange Act. The 1946 case of SEC v. W.J. Howey Co. established a test to determine what is an investment contract. See Howey test.

Investment grade securities: Securities rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.

Investor brochure: Publication of the MSRB that describes municipal securities trading. Upon receiving a complaint from a customer, the broker-dealer must deliver the brochure to the customer.

In-whole call: The call of an entire issue, as opposed to a partial call.

IOC: See Immediate-or-cancel.

IPO: See Initial Public Offering.

Issue: An offering of securities.

Issuer: The corporation offering or proposing to offer securities.

JTWROS: Joint tenancy with rights of survivorship: a type of ownership right. When one owner dies, his interest passes to his surviving co-tenants.

Keogh (or HR-10) plan: A tax-advantaged investment designed to assist self-employed persons (either full-time or part-time) and employees of unincorporated businesses in saving for retirement.

Layoff stock: Stock that the syndicate acquires and then sells in a rights offering.

Lagging indicator: An economic indicator or signal that reacts slowly to economy changes. Unemployment figures are a lagging indicator.

Leading indicator: An economic indicator or signal that is in the forefront of changes in economic activity. Stock prices are an example of a leading indicator.

LEAPS (Long-Term Equity AnticiPation Securities): Long-term equity options traded on the CBOE with expirations of up to thirty-nine months distant (although in practice usually no more than 30 months hence). LEAPS are available on a number of blue chip (large capitalization) stocks. Work much the same as other equity options, but are not as time sensitive and tend to have a larger premium (price).

Lease rental bond: A municipal revenue bond that is supported by lease payments on a building, usually a building leased to a government agency.

Legal list: A list of investments compiled by a state government as the only investments acceptable for certain institutions or fiduciaries. States without such lists typically use the Prudent Man Rule.

Legal opinion: A written opinion by a bond counsel stating whether or not a bond issue conforms with all the laws of the issuer, and the state and federal governments. It also addresses the tax status of the bonds.

Letter of intent: In mutual funds, a written statement by a customer promising to purchase a stated number of mutual fund shares. The letter assures the investor a reduced sales charge on the entire purchase, provided it is completed within thirteen months.

Leverage: The use of debt when purchasing investments. Leverage increases the percentage profit, but also the percentage loss.

Leveraged Buy-Out (LBO): Financial transaction in which a corporation's management repurchases all public shares, usually by incurring substantial debt, and the company goes private. Usually involves fairly stable, mature companies with good cash flows. Equity money for the LBO often comes from the investment banker or LBO specialist that arranges the buyout and underwrites the debt issue.

Liabilities: All claims on the assets of an individual or corporation. Includes accrued payable amounts, long-and short-term debt, debentures, and notes. Does not include the ownership equity.

LIFO: Last-in, First-out: A method of accounting for which shares or inventory items are being sold from a pool of similar shares or items. Assumes that when a sale is made, the items purchased last in a group are sold first.

Limited authorization or discretion: A power of attorney that allows the person holding it to enter orders in the account but not to add or withdraw funds.

Limited partner: A partner with limited liability who may not engage in business for the partnership.

Limited partnership: A partnership comprised of one or more general partners with unlimited obligations and liability, and one or more limited partners with limited obligations and liability.

Limited rep-government securities: A registered rep who deals only with government securities (Series 72).

Limit order: An order to buy or sell subject to some limitation as to price.

Liquid assets: Cash or assets easily convertible to cash, such as Treasury bills, money market fund shares, or demand deposits.

Liquidate: Convert into cash, using the cash to satisfy creditors.

Liquidation period: For a variable annuity, the time from the date when the first annuity payment is made to the annuitant to the date when the annuity is fully paid out.

Liquidity: For an investment, portfolio, or account, the ease with which assets may be converted into cash. For a market, the ability of the market to absorb fairly large volumes of sales without drastically affecting the price.

Load fund: A mutual fund that either sells shares through an underwriter or broker/dealer and charges either an up-front or deferred sales charge, or sells the shares directly but charges more than .25% in 12b-1 charges per year.

Loan consent form: A customer document that allows the broker/dealer to pledge customer stock to the bank to borrow the money for the margin account. It allows the firm to hypothecate the stock.

Locked market: Market in which the highest bid and the lowest asked prices for a security are equal.

Long: Owning the security or other item with the expectation that its value will increase. When a person is long a stock or an option, he owns the stock or holds the option.

Long Straddle: An options position in which the customer is long a call and a put on the same underlying asset. The position is profitable if the price of the underlying asset moves outside the two breakeven points. Long straddles are only profitable in volatile markets.

Long-term capital gains: Gains on assets held for more than 12 months. Usually qualify for lower tax rates short-term gains do.

Long-term Equity Anticipation Securities (LEAPS): Equity options on the CBOE covering 100 shares of stock with expirations up to 39 months distant.

Lump-sum distribution: A distribution of a participant's entire balance from an annuity or from all of an employer's qualified pension plans in one year.

Maintenance call: In a margin account, the broker/dealer demand for additional funds to restore the equity to the minimum maintenance level.

Maloney Act of 1938: The act that added section 15A to the Securities Exchange Act of 1934, allowing for the establishment of registered securities associations to promote self-regulation of the securities industry, properly supervised by the government.

Management fee: In an underwriting, the special fee paid to the managing underwriter.

Manipulation: The illegal act of creating a false impression of trading volume or price for a security. Includes engaging in wash sales or matching orders, lying, giving or circulating misleading information, or trying to illegally peg, fix or stabilize the price of an issue (i.e., not following the allowable procedure for stabilizing).

Margin: The amount a client pays for a security purchase in a credit (or margin) account with a broker/dealer. Initial margins on purchases are set by the Federal Reserve Board. Minimum margin maintenance amounts are set by the exchanges.

Margin account: An account in which a customer may pay only part of the purchase price of securities.

Margin Agreement: The customer consent pledging his securities as collateral for a debit balance.

Margin call: In a margin account, the request for more equity to bring the account up to the minimum margin maintenance level. Margin calls can be met by depositing cash or stock, or by using SMA.

Markdown: A reduction in price below that at which the security is offered. Acting as dealer and buying stock for its own account from a customer, the firm charges a markdown. This is the firm's compensation.

Market maker: A firm that buys and sells a particular security for its own account.

Market order: An order to buy or sell as soon as possible at the best available price.

Market price: For securities sold on an exchange, the last reported price at which the security sold. For over-the-counter securities, the inside market quote.

Marking to market: Adjusting the value of a security or a portfolio to the current market value. Used in margin accounts to make sure the margin amounts comply with maintenance requirements.

Markup: An amount added to the price of a security. Acting as dealer and selling stock to a customer from his own account, the dealer charges a markup. The markup is the firm's compensation in the trade.

Matching orders: A prohibited practice similar to a wash sale but involving two or more firms trading a security back and forth at the same price in an attempt to show more trading volume than is actually occurring.

Maturity class of option: Options of the same type (put or call) on the same underlying asset with the same expiration month. All XYZ January call options belong to one maturity class; all XYZ April call options belong to another.

Maturity date: The date the face value of a bond is paid.

MBIA: The Municipal Bond Insurance Association, which insures entire issues of municipal bonds.

Member order: In a municipal underwriting, an order by a syndicate member for its own account or a related portfolio.

Merger: The joining of two or more corporations into a single corporation.

MIG ratings: Moody's Investment Services ratings for short-term municipal obligations. MIG stands for Moody's Investment Grade.

Mil: 0.001 points. A percentage used in tax rates to determine tax liability. Equivalent to .1%.

Minimum maintenance: In a margin account, the minimum equity allowed before a maintenance margin call will be issued.

Minimum-maximum underwriting: A type of best efforts underwriting. It is similar to an all-or-none underwriting until the minimum amount is raised, in that the offering is canceled if that amount is not raised. It then becomes a normal best efforts underwriting above that amount. An example is a real estate limited partnership with a $2 million minimum and a $50 million maximum.

Minor: Someone who is under the legal age for his or her state of residence (18 to 21).

Minor Rule Violation Plan Letter: Procedure of the NASD for certain minor violations of rules by members and their associates when the facts are not in dispute. Mechanics are identical to the Acceptance, Waiver, and Consent Procedure, except that sanctions are limited to a fine of $2,500 and/or a censuring letter. The violations that qualify are all related to the keeping, approving, and reporting of data.

Money market account: An account with a bank or broker/dealer where the funds are invested in short-term interest-bearing securities. Similar to checking accounts, except that they have limits on checks written per month and pay interest. Accounts with banks are insured by the FDIC.

Money market fund: A mutual fund whose assets are low risk, short-term money market instruments such as Treasury bills, commercial CDs, and commercial paper. Usually offer check-writing privileges.

Money purchase plan: Corporate pension plan in which the employer commits to contribute some percentage of each participant's compensation each year, such as with a 401(k) or a SEP plan.

Money spread: An options spread position in which the expiration months are the same, but the strike prices are different, also known as a vertical spread.

Money purchase plans: Type of corporate retirement plan in which contributions are based on a percent of the participant's compensation without regard to whether or not the business has a profit.

Moral obligation bond: A municipal revenue bond which the state is morally obligated to redeem, should the bonds go into default.

Moral suasion: Tactic used by the Federal Reserve Board to pressure banks into doing what they want. Officials of the Fed might have heart-to-heart talks with the banks' directors, increase the severity of bank inspections, appeal to community spirit, or make vague threats. Since the Fed has the power to close banks, remove officers, and fire directors, the arguments of the Fed are likely to be very persuasive indeed.

Mortality risk: The risk that the remaining lifetime for an annuitant will be different than expected by the mortality tables used by the insurance company. If the annuitant chooses to receive payments over his remaining life, the insurance company accepts that risk.

Mortgage-backed security: The most common type of pass-through security, secured by homeowners' mortgages and sometimes guaranteed by the Veteran's Administration, the Farmer's Home Administration, or the Federal Housing Administration.

Mortgage bond: A bond secured by a lien on real property.

MSRB: Municipal Securities Rulemaking Board.

Municipal Underwriting: An offering undertaken by a syndicate of broker/dealers to sell an issue of municipal securities.

Munifacts: A wire service that provides news of interest to municipal bond traders.

Mutual fund: An open-end investment company.

Naked option: A short option position in which the writer does not have visible means of meeting the exercise requirement.

NASD: See National Association of Securities Dealers, Inc.

NASDAQ: The computer system designed to facilitate trading of over-the-counter securities. NASDAQ stands for the National Association of Securities Dealers Automated Quotation System.

National Association of Securities Dealers, Inc.: Usually referred to as the NASD, this is the self-regulatory organization which is responsible for supervising the OTC market.

National exchanges: The large exchanges based in New York City are commonly known as the national exchanges: the New York Stock Exchange and the American Stock Exchange.

National Market System: The most actively traded stocks on the NASDAQ System. Commonly referred to as the NMS.

National Medallion Signature Guarantee: A statement (a stamp and signature) given by a participant in the guarantee program to ensure that the sale, transfer, or assignment of a security certificate is not fraudulent. The guarantor could be a commercial bank, credit union, brokerage firm, or other financial institution that is a member of a medallion signature guarantee program approved by the Securities Transfer Association and the SEC. Three such programs exist: Securities Transfer Association Medallion Program (STAMP), the NY Stock Exchange Program (MSP), and the Stock Exchange Medallion Program (SEMP). The medallion program is not a guarantee by a notary public.

National Securities Clearing Corporation (NSCC): Firm that clears trades for the NYSE, the ASE, and the over-the-counter market.

National securities exchange: The SEC's definition includes three types of entities: national exchanges, regional exchanges and Electronic Communications Networks, or ECNs.

NAV: See Net Asset Value.

Negotiable: A term used to describe a security for which title may be transferred by delivery, such as a stock certificate with a properly signed stock power.

Negotiated market: A market in which prices are determined by negotiation between broker/dealers. The OTC market is a negotiated market.

Negotiated underwriting: New offering in which the issuer and the brokerage firm negotiate a contract for the brokerage firm to sell the securities.

Net Asset Value: In a mutual fund, the assets of the fund less its liabilities divided by the number of shares outstanding, usually referred to as the NAV. This is the price a mutual fund shareholder receives when selling shares of the fund.

Net capital: The net worth of the firm less an adjustment for illiquid assets (i.e., the net liquid assets of the firm). The Securities Exchange Act of 1934 establishes uniform and comprehensive net capital standards for all broker/dealers, including members of national securities exchanges and municipal securities broker/dealers.

Net capital ratio: A ratio of the firm's aggregate indebtedness to the firm's net capital. The lower the net capital ratio, the better the financial condition of the firm. For example, a net capital ratio of 6:1 is better than a net capital ratio of 9:1.

Net interest cost: In a syndicate bid on a competitive bid underwriting, the cost of the offering to the issuer. It is adjusted for premium or discount prices, but does not include any net present value computations. (Compare with True Interest Cost.) The firm offering the issuer the lowest net interest cost wins the bid and underwrites the issue.

Net investment income: For a mutual fund, gross investment income less management fees, Rule 12b-1 fees, and administrative expenses.

Net revenue pledge: In a municipal revenue bond, a provision in the trust indenture stating that revenues will first be used to pay the operating and maintenance costs of the facility. The net revenues will then be used to support the debt.

Net proceeds: The offering proceeds less all expenses of issuing and costs of distributing securities, including the underwriting compensation.

Net worth: Owners' equity of the firm, or all assets less all liabilities. For a corporation, net worth is equal to the total of capital stock, paid-in capital, and retained earnings.

New issue: Securities being issued by a corporation for the first time. May be additional shares for a class of securities that are already in existence.

Nine-bond rule: Requirement that members of the NYSE first attempt to execute any order for less than ten bonds on the floor of the NYSE before trading in the over-the-counter market. The only exception is when the customer initiates an unsolicited request to trade in the OTC market.

NMS: See National Market System.

No-load fund: A fund that sells shares directly and charges .25% or less in 12b-1 charges per year.

Nominal quote: A quote that is not a firm quote. A broker/dealer giving a nominal quote is not obligated to trade at that price.

Nominal yield: The stated interest rate on a bond issue, often called the coupon rate.

Non-cumulative: Term used to describe preferred stocks for which dividends that are not paid are gone forever and do not accrue.

Nonparticipating preferred stock: A type of preferred stock that does not pay higher dividends when the corporation has higher earnings.

Nonrecourse loan: In a limited partnership, a loan for which the limited partners are not personally liable.

Non-systematic risk: Risk that an individual stock or bond will perform badly as compared to the market. Diversification effectively eliminates this risk.

Non-tax-qualified annuity: The normal type of annuity. Contributions are not tax deductible; when payments are received, the annuitant is taxed only on the portion representing earnings. The return of capital is not taxed.

Notice of public offering: Notice that Rule 135 allows issuers to publish stating that they intend to make a public offering of securities to be registered under the 1933 Act. May be a news release, a written letter to employees or shareholders, or a published statement. Sometimes used to solicit competitive bids for underwriting the offering. Not considered to be an actual offer of the securities.

Notice of sale: Same as notice of public offering.

NYSE: The New York Stock Exchange.

NYSE Composite Index: An index of all the common stocks listed on the NYSE.

OBO: See Order Book Official.

OCC: See Options Clearing Corporation.

Odd lot: Less than the usual trading unit of 100 shares of stock or 5 bonds.

Odd lot theory: An investment theory that contends that as a whole the odd lotters are always wrong. Odd lotters' buying is a sell signal. Odd lotters' selling is a buy signal.

OEX: The symbol for Standard & Poor's 100 Index options.

Offer: The price a seller of a security is willing to take.

Offering: A new distribution of shares offered to the public, also known as a public offering.

Offering circular: The preliminary version of an offering statement used in a Regulation A offering.

Offering date: The later of the effective date of a new issue's registration or the first date the security is actually offered to the public.

Offering price: The lowest price a seller of a security is willing to take for a unit of a security at a particular time. (Note that the OTC market uses the term "asked," while the exchanges use the term "offered" or "offering.")

Offer of Settlement: An offer to settle a dispute made by the respondent in a disciplinary action of the NASD. May be made any time after the respondent is notified of a complaint. All rights of appeal are waived if the settlement offer is accepted.

Offices of Supervisory Jurisdiction (OSJs): A branch office of an NASD member where registered personnel execute orders; engage in market making; structure public offerings or private placements; hold customer's funds; hold customer's securities; accept new accounts; review and endorse customers orders; approve advertising or sales literature; and/or supervise associates at one or more of the member's branch offices. The main office would automatically be an OSJ.

Official statement: The disclosure document in a municipal bond offering. Issuers of municipal bonds are not required to publish an official statement, but most do anyway.

Oil and gas income program: Buying existing oil and gas wells and producing the wells to generate income. The program does not generate intangible drilling and development costs, and does not generate high tax deductions.

Omnibus account: A special account a broker/dealer opens with another firm to trade on behalf of a subsidiary or affiliate. Also, an account an investment adviser opens to trade on behalf of his or her clients, where the brokerage firm does not know the individual identities of the clients.

Open-end investment company: See Mutual Fund.

Open interest: The number of outstanding option contracts.

Open market operations: Refers to the Federal Reserve's buying or selling U.S. government securities. The Federal Open Market Committee conducts the policy.

Open order: An order that has been entered but not effected.

Option: A contract that gives the right to a holder to buy (call option) or sell (put option) a fixed amount of a security at a specific price anytime before the stated expiration date (for an American-style option). If the holder does not exercise his option, the option expires and he forfeits the amount he paid for the option (the premium).

Options Clearing Corporation: The Options Clearing Corporation, which is the actual issuer of option contracts. It acts as a clearing house, or bookkeeper. When an exercise notice is received, it assigns the notice. It is also considered the obligor and guarantor of option contracts, guaranteeing performance.

Options Disclosure Document: An OCC prospectus explaining the nature of options, the types of options available, and the basic strategies and risk factors. Must be sent to new options customers when an options account is opened. Updated prospectuses must be sent to existing customers no later than with the confirmation of the customer's next options trade.

Order: The specific instructions given for buying or selling a security.

Order book official: An employee of the CBOE who maintains the public limit order file, which is similar to a specialist's book. Also referred to as an OBO or Board Broker, he executes limit orders for options.

Order period: In a municipal underwriting, a short period when all orders are accepted without regard to the priority for orders for the offering.

Ordinary income: For tax purposes, income from wages, salaries, and self-employment, demagogically called " earned income."

OSS System: The automated execution system for CBOE options.

OTC Bulletin Board (OTCBB): Quotation system developed for penny stocks and other thinly traded securities. The system lists domestic and foreign equity securities (including registered ADRs) that have at least one market maker, are not listed on NASDAQ or a national securities exchange, and are not listed on a regional exchange and eligible for consolidated tape reporting. To be eligible for listing, foreign equity securities must be fully registered with the SEC and domestic securities must be providing current financial information to the SEC.

OTC market: See Over-the-Counter Market.

Out-of-the-money: Lacking intrinsic value. A call option is out-of-the-money if the market price of the underlying stock is less than the strike price of the call. A put option is out-of-the-money if the market price of the underlying stock is higher than the strike price of the put.

Overlapping debt: Multifarious debt that rests on a single debtor. In general, obligation municipal bonds, bonds issued by a city, county, school district, and water district may all look to the same people for taxes to support the debt.

Overriding royalty interest: In an oil and gas program, a compensation arrangement giving the general partner a percentage of the gross income, on top of the other royalties.

Over-the-counter market: The market for securities that are not listed on an exchange. Various broker/dealers buy and sell these securities for their own accounts.

Parity: An option trading for exactly its intrinsic value is said to be trading at parity.

Parity price: For convertible securities, the price level at which their exchange value equals that of the common stock.

Participating preferred stock: Preferred stock that shares in exceptional earnings of the corporation. Participating preferred stocks may be paid an extra quarterly dividend if the company has a very good year.

Participating (semi-fixed) Trusts: A unit investment trust that purchases shares of a particular investment company and then sells shares of the portfolio on a contractual basis to investors. Virtually all contractual plans are structured as participating trusts, also referred to as periodic payment plan companies.

Partnership: A business entity in which two or more people agree to share equally the risks and profits of the business.

Par value: The face value appearing on the certificate. Preferred stocks normally have a par value of $100, bonds, a par value of $1,000.

Passive income: For tax purposes, income from direct investments in a business venture by an investor who does not actively participate in management, such as income from limited partnerships.

Pass-through security: In a pass-through security, debt obligations are purchased by an intermediary who packages them into new securities backed by the pooled obligations and then sells shares in the pool in the open market. The interest and principal payments made by the debtor flow through the intermediary, who pays them to the investor net of service fees. The most common type of pass-through security is a mortgage-backed security, secured by homeowners' mortgages and sometimes guaranteed by the Veteran's Administration, the Farmer's Home Administration, or the Federal Housing Administration.

Payment date: The date on which a corporation pays a dividend that has been declared.

P/E ratio: See Price/Earnings ratio.

Penny stocks: Speculative equity securities (excluding options and investment company shares) with prices under $5 per share. Usually do not meet the listing requirements for Nasdaq or the exchanges. Their sale through broker/dealers is subject to certain rules as to approval of customers, maintenance of information to support quotations, distribution of account statements, and disclosure of risk, quotations, and compensation.

PHA Bonds: See Public Housing Authority Bonds.

Phantom income: In a limited partnership, taxable income that exceeds cash distributions.

Pink sheets: A listing (on pink paper) of OTC securities, their quotes, and the firms that make the market.

Placement Ratio: The ratio of new issue municipal bonds sold during a particular week divided by the dollar amount of new issue municipal bonds available during that week. It is published by the Bond Buyer.

Plan completion life insurance: Insurance with an optional feature stipulating that if the planholder dies before completing the contract, a life insurance policy will complete the purchase. The insurance proceeds are paid to the custodian bank of the plan, which completes the purchase.

PN: See Project Note.

Point: A price increment for a security or index. One point is $1 for stocks and $10 for bonds (1% of $1,000 face value). However, a one-point rise in the NYSE Composite Index does not represent $1.

Portfolio income: For tax purposes, an income category that includes capital gains and losses, and interest and dividend income.

Position limits: A limit set by the exchange on which an option trades as to the number of standard options contracts on the same side of the market on the same underlying security that an investor may hold at any given time. Set at 75,000, 60,000, 31,500, 22,500 or 13,500 contracts for each option class. Reviewed semiannually (January 1 and July 1). See side of market.

Positions book: An electronic or paper record maintained by the registered rep that shows which customers have a position in each security.

Pot: In a corporate underwriting, syndicate members estimate their sales to institutional investors. Those shares are set aside (placed in "the pot") and handled by the managing underwriter.

Power of attorney: A written statement executed by a customer to give someone else the right to enter orders in the customer's account. Must be witnessed by a notary public or other public official.

Pre-dispute arbitration clause: An agreement between the firm and either its customer or its employee which states that the parties to the agreement will subject future disagreements to arbitration.

Preemptive right: A corporate shareholder's right to maintain his share of ownership when new shares are sold through a rights offering.

Preferred stock: A type of corporate stock with a stated dividend which must be paid before the common stockholders may receive a dividend. A preferred stock also has priority in liquidation over the common stock.

Preliminary prospectus: A preliminary version of the prospectus that is published as soon as the offering is registered with the SEC. It does not include the final price or spread, and may not be used to solicit orders, but may be used to solicit indications of interest. It is often referred to as a "red herring."

Preliminary study: A short analysis done as part of the negotiation process in an offering to determine if an investment banker wishes to proceed with an underwriting.

Preliminary statement: A preliminary version of the official statement for a municipal bond offering.

Premium: The amount the buyer of an option pays a writer of the option. Also, the amount by which the current market price for a preferred stock or bond is higher than par or face value.

Pre-refunding: Selling a new bond issue to refund (refinance) an old issue prior to the call date of the old bonds. The proceeds of the offering are placed in an escrow account until the call date is reached.

Pre-sale order: An order for a new issue municipal bond taken by a syndicate prior to winning the bid. It is used to help the syndicate gauge the reception the offering is likely to receive.

Price to Earnings ratio: The ratio of the price of a common stock to its earnings per share, often referred to as the P/E ratio. It is used to measure how expensive a stock is, relative to its earnings.

Primary distribution: A sale of new stock to the public.

Primary market: The buying and selling of new issues. Resales are handled in the secondary markets.

Prime rate: The interest rate banks charge their best customers.

Principal: 1) In a loan, the amount of the loan, not including interest; 2) in a brokerage firm, a person in an ownership and/or supervisory capacity; and 3) in a trade, a firm acting as dealer.

Principal stockholder: Any person or entity owning ten percent or more of the common stock of the corporation.

Principal transactions: Dealer transactions done directly with customers. The firm must disclose if it is acting as a principal in a transaction.

Private placement: A securities offering under Regulation D, which is not registered with the SEC. The offering is generally made to a limited number of persons who meet certain suitability standards.

Private placement memorandum: A disclosure document which must be prepared by the issuer in a Schedule D offering if any offers are made to nonaccredited investors. This document must be given to all offerees, not just the nonaccredited investors.

Private securities transaction: A transaction by a registered representative acting outside the scope of his employment with a broker/dealer. If done without the knowledge and consent of the employer, it is prohibited. This is also known as "selling away."

Proceeds sale: Selling one security, and using the proceeds to buy another.

Production purchase program: See Oil and gas income program.

Profile: A summary prospectus for registered mutual funds, permitted by Rule 498 of the 1933 Act. It summarizes key information about the fund and gives investors the option of purchasing the fund's shares based on the information in the profile. An investor who purchases fund shares based on the profile will receive the fund's prospectus with the purchase confirmation. The fund must file a profile with the Commission at least 30 days prior to first use.

Profit-sharing plans: Type of corporate retirement plan in which contributions are made out of net profits, either based on a precise formula or merely made in substantial and systematic way. An employee stock ownership plan (ESOP) is a profit sharing plan where the contribution is made in stock.

Program trading: Computer-aided trading where orders are automatically generated at trigger points.

Progressive tax: A tax that rises in rate as the taxpayer's income increases; for example, income tax.

Project note: A short-term municipal note used to finance low income housing projects.

Prospectus: The disclosure document for an offering registered with the SEC. The final prospectus is issued on the effective date, when the offering is released by the SEC.

Prospectus delivery period: The period after a public offering during which dealers must usually give a final prospectus to purchasers who buy the security in the secondary market. Extends to 40 calendar days after the offering date, or for 90 calendar days if it was an initial public offering. Calculated for shelf distributions the same as for other issues, even though the offering may continue for some time beyond that point. The delivery period is dropped to 25 calendar days if the security is listed on an exchange or included in Nasdaq® by the offering date.

Proxy: A written authorization by a stockholder giving his voting rights to someone else. Shareholders who cannot attend the annual meeting usually give their proxies to someone else, often to management.

Prudent Man Rule: A standard by which a fiduciary is required to invest the funds under his care in some states. The standard demands that a fiduciary should act with the care, skill, prudence, and diligence that a prudent man who is familiar with such matters would use if he were acting under conditions in which the circumstances, his capacity, the character of the enterprise, and the goal of the enterprise were similar. This is a general standard adopted by some states. Other states, called legal list states, specify the particular investments a fiduciary may use.

Public float value: The aggregate market value of common equity securities held by persons who are not affiliated with the issuer.

Public Housing Authority Bonds: Municipal bonds that provide long-term financing (mortgages) for low income housing projects, commonly referred to as PHA bonds, and guaranteed by the U.S. government. Sometimes they are called New Housing Authority Bonds, or NHAs.

Public Offering: Securities offerings that are made to the general public.

Public offering price: For a mutual fund, the price at which an investor may buy a share, or the net asset value plus the sales load. If the fund does not charge an up-front sales charge, the public offering price is the net asset value.

Purchaser's representative: In a Rule 506 offering under Regulation D, pertaining to a private placement, investors are encouraged to appoint someone to act as their representative. He is to analyze the offering to ensure that it is a suitable investment.

Put bond: A bond with a put option that allows the owner to sell the bond back to the issuer at certain intervals, usually at par.

Put option: An option that gives the holder the right to sell the underlying asset, and the writer the obligation to buy the asset at a specified price.

Put spread: An option spread position in which the investor is long a put and short a put on the same asset.

Qualified purchasers: Under the Investment Company Act of 1940, individuals with investments of at least $5 million or persons who have discretion over investments of at least $25 million for their own accounts or the accounts of other qualified purchasers. Exemptions from the definition of an investment company are allowed for companies who sell their shares only to qualified purchasers.

Qualified retirement plan: A pension, profit sharing, or stock bonus plan set up by an employer to provide retirement benefits for employees that qualifies for special tax treatment. In general, a plan qualifies if participation in the plan and benefits do not discriminate in favor of the employer's key employees.

Quick assets: Assets that can readily be converted to cash, including marketable securities, accounts receivable, and checking accounts.

Quick ratio: The ratio between quick assets and current liabilities. This is a measure of the liquidity of the company.

Quotation: A bid price or asked price given by a dealer. A two-sided quotation would include both a bid and asked price.

RAN: See Revenue Anticipation Note.

Random walk theory: An investment theory holding that all that can be known about a stock is incorporated into its price. It is, therefore, impossible to outperform market averages in the long run. It suggests that stock prices move in a random way that cannot be foreseen.

Real Estate Investment Trust: A closed-end investment company that invests in real estate, either directly or through real estate loans, commonly referred to as a REIT.

Real Estate Mortgage Investment Conduit: Mortgages pooled to sell to investors, commonly called a REMIC.

Reallowance: In a corporate underwriting, the compensation of a firm that is not a member of the syndicate or the selling group for selling shares to the public.

Recession: A mild form of depression, identified by two consecutive calendar quarters of economic decline.

Record date: The date determining shareholders of record (those who own the stock) who are entitled to receive a dividend.

Recourse loan: In a limited partnership, a loan for which the limited partners are personally liable.

Recovery: The phase of the business cycle when economic activity begins to improve from a recession or depression.

Redeemable security: Security that entitles the holder to receive approximately his proportionate share of the issuer's current net assets (or its cash equivalent) upon presentation of the security to the issuer or its designated representative.

Redemption fee: A fee charged some mutual funds upon sale of shares back to the fund, generally not exceeding 1% of the sale proceeds.

Redemption price: Price the issuer must pay if they wish to redeem bonds before maturity or retire preferred stock shares. Also known as call price.

Red Herring: See Preliminary Prospectus.

Reference security: Security X is a reference security for another security, Y, if Y may be converted into, exchanged for, or exercised to purchase or sell X, or if X in whole or part determines the value of Y. For example, if a convertible bond is convertible into common stock, the common stock would be a reference security for the bond, but the bond would not be a reference security for the stock.

Refunding: Selling a new bond issue and using the proceeds to call an outstanding issue (usually done to decrease interest costs or extend maturity). Also called refinancing.

Regional exchanges: The traditional exchanges outside of New York city: the Midwest, Pacific, Philadelphia, Boston, and Cincinnati exchanges.

Registered bond: A bond whose ownership is recorded on the books of the issuing corporation. A registered bond must be endorsed by the registered owner before it is transferrable (as opposed to a bearer bond).

Registered Options Principal: A person who is in charge of supervising options trading, commonly referred to as a ROP. Most branch managers perform this function.

Registered Options Trader: A person on the floor of an options exchange who buys and sells options for his own account, also known as a Market Maker or ROT. He performs the dealer functions of the specialist on the floor of the NYSE.

Registered representative: An employee of a broker/dealer that is a member of the NASD or a stock exchange who is registered with the SEC and performs the duties of an account executive.

Registrar: The company official who maintains the list of corporate shareholders, and ascertains the correct number of outstanding shares.

Registration: Process by which securities must be filed with the SEC. Registration of new issues is covered under the Securities Act of 1933. Registration of securities admitted to trading on a national securities exchange is covered under the Securities Exchange Act of 1934.

Regressive tax: A tax the rate of which increases as the taxpayer's income decreases.

Regular way settlement: For corporate and municipal securities, settlement three business days after the trade date. For U.S. government securities, the next business day. The word "settlement" applies only to broker/dealers, not customers.

Regulated investment companies: Investment companies that qualify for special tax treatment, avoiding the double income taxation on dividends.

Regulation A offerings: Offerings of $1,500,000 or less that do not have to be fully registered with the SEC.

Regulation D: The federal regulation pertaining to private placements of offerings to a limited number of people meeting certain suitability standards. Private placements need not register with the SEC.

Regulation M: Regulation that restricts the trading of an existing security by participants in a public offering of that security.

Regulation S: Safe harbor that allows both domestic and foreign issuers to distribute and resell securities outside the U.S. without registering them in the U.S.

Regulation T: The federal regulation governing extension of credit by broker/dealers to customers for trading securities. Regulation T mandates payment conditions and governs margin accounts.

Regulation U: The federal regulation of bank loans collateralized by securities, including broker/dealer hypothecation of stock.

REIT: See Real Estate Investment Trust.

REMIC: See Real Estate Mortgage Investment Conduit.

Re-offering scale: In a municipal bond underwriting, the initial yields at which the bonds are offered to the public.

Representative: Any associate of an NASD member firm who is engaged in the investment banking or securities business for the member but is not a principal. Representatives can include assistant officers, people who supervise or train employees, and people who solicit or conduct business in securities. Member firms must register all representatives with the NASD.

Repurchase agreement: A contract committing a U.S. government securities dealer to sell U.S. government securities to a purchaser (often to a municipality or institutional investor), with a provision that he repurchase the securities at a set price at a specified time, usually the next day. This is a money market instrument.

Reserve requirements: A specified percentage of customers' deposits which a bank must keep on deposit with the Federal Reserve System. The reserve requirements vary according to whether the deposits are time deposits or demand deposits.

Resistance: A charting pattern where a stock price tops out or levels off. Breaking the resistance level is a buy signal for a technical analyst.

Restricted account: A margin account with a balance below 50% equity.

Restricted securities: Securities that have been purchased directly from the issuer or an affiliate of the issuer rather than through a public offering. Affiliated persons might obtain restricted securities by exercising stock options included in the person's compensation plan. Nonaffiliated persons would normally purchase restricted stock through a Regulation D offering or in a transaction subject to Rule 144A, Private Resales of Securities to Institutions. Subject to holding periods before resale.

Retention: 1) When securities are sold in a restricted margin account, at least 50% of the sale proceeds must remain in the account and be applied to reduce the debit balance. 2) In an underwriting, the number of shares sold on a retail basis by a syndicate member. This is the syndicate member's allotment, less any shares held in "the pot" for sale to institutional investors, and any shares given up to the selling group.

Revenue Anticipation Note: A short-term municipal note sold when the issuer is expecting to receive a large sum of money, usually from the federal government, commonly referred to as a RAN. When the funds are received, the RAN is repaid.

Revenue bond: A municipal bond that is to be paid from the revenues of a specific project, such as a stadium. If the revenues are insufficient to support the debt, the bond goes into default. The issuer is not required to use other revenues to redeem the bond.

Reverse split: Combine multiple stock shares into one share such that the stockholder's equity (both in total and for the individual stockholder) remains unchanged, but each stockholder holds fewer shares worth more each. For example, in a one-for-two reverse split, each stockholder receives one share for every two shares held. The new shares are worth twice as much as the old shares, but since the stockholder has half as many shares, his investment remains unchanged.

Reversionary working interest: In oil and gas programs, a sharing arrangement whereby the general partner does not share in revenues until the limited partners have recouped their initial investment.

Rights: Certificates allowing shareholders to purchase enough new shares to maintain their percentage of ownership in the corporation.

Rights of accumulation: In mutual funds, the right to reduce sales charges when a shareholder's total purchases exceed a breakpoint. There is no time limit for rights of accumulation.

Rights offering: A rights offering occurs when a corporation makes new shares (called "rights") available to its existing shareholders, thus allowing them to maintain their existing proportion of ownership in the corporation.

Riskless transaction: A transaction by a broker/dealer who, upon a customer's request, buys a security for its own account first, then sells it to the customer as a dealer, and charges a markup. Riskless transactions are also known as simultaneous transactions.

Rollover: Distribution from an employer's qualified pension plan into an IRA or the direct and immediate transfer of funds from one IRA to another (such as switching between funds). Usually does not generate a penalty or tax on the withdrawal.

Rollup of a DPP: A transaction where a direct participation program not listed on an exchange or Nasdaq® is "rolled up" into another public DPP, a public trust, or a public corporation. The form of the rollup could be an acquisition, merger, or consolidation.

ROP: See Registered Options Principal.

ROT: See Registered Options Trader.

Roth IRA: Individual retirement account for which contributions are taxed but qualified distributions are not.

Round lot: The normal trading unit of a security: 100 shares of stock or 5 bonds in the OTC market (1 bond on the NYSE).

Royalty: In oil and gas programs, a percentage of revenues paid to the owner of the mineral rights in return for allowing the partnership to drill on the property.

Rule 134 Communication: Tombstone advertisement or other purely factual communication about an offering that is not a solicitation.

Rule 144: The federal law regarding resale of securities without registration if the securities are owned by affiliated persons or the securities are restricted.

Rule 144A: Rule that exempts private placements of some issuers from the SEC registration and disclosure requirements, and allows qualified institutional investors (insurance companies, investment companies, pension plans, investment advisers, etc.) to trade these securities among themselves without some of the restrictions imposed to protect the public. Securities must not be of the same class as securities listed on a registered national securities exchange or quoted on a U.S. automated inter-dealer quotation system (or be convertible or exchangeable into a class thus listed or quoted). Issues of foreign securities are sometimes traded in this fashion.

Rule 147: An exemption from federal registration for securities offered within a single state and thus regulated by that state. The issuer and the purchasers must meet certain requirements. Limitations on resales apply.

Rules of Fair Practice: See Conduct Rules.

Sallie Mae: See Student Loan Marketing Agency

Sales charges: Any charges or fees paid by the investor and used by the investment company to cover sales or promotional expenses, regardless of whether they are paid up-front, deferred, or assessed against the assets of the fund. Also called sales load.

Sales literature: All promotional items with a controlled distribution, meaning the firm knows in advance who will see the item. Examples include reports given to customers, circulars, market letters, performance reports or summaries, telemarketing scripts, seminar texts, research reports, form letters, or reprints or excerpts of any other advertisement, sales literature, or published article. Does not include communications that are neither advertising or sales literature.

Savings Incentive Matching Plan for Employees (SIMPLE): Plan created to give small business owners (including self-employed individuals) the ability to offer retirement plans to employees without incurring excessive costs or administrative burdens. To be eligible, companies must have 100 or fewer employees. The plan must normally be the only retirement plan of the employer.

SEC: See Securities and Exchange Commission.

Secondary distribution: In underwritings, the sale of previously issued shares, such as treasury stock or shares held by insiders. Large block trades may also be called secondary distributions.

Secondary market: The market in which previously issued securities are traded among public investors. Most securities transactions occur in the secondary market.

Securities Act of 1933: The federal law regulating new issues, requiring their registration with the SEC.

Securities and Exchange Commission: The federal agency that regulates the securities markets and administers federal securities laws. Commonly known as the SEC.

Securities differences: Differences in securities positions between what is on the books of the firm and what certificates are actually held by the firm.

Securities Exchange Act of 1934: The federal law regulating the markets for existing securities, and governing public companies, broker/dealers, and exchanges. It allowed for the creation of self-regulatory organizations, such as the NASD.

Securities Information Center: The agency that takes reports on lost, stolen, or counterfeit securities. Commonly known as the SIC.

Securities Investor's Protection Corporation (SIPC): Organization that insures customers of brokerage firms in the event of the bankruptcy of a brokerage firm, much the same way the FDIC insures customers of banks. The SIPC is a nonprofit corporation that is not an agency of the U.S. government. The NASD requires virtually all brokerage firms to be members of the SIPC. The only exception is firms that deal only in mutual funds and variable annuities. The SIPC is funded by assessments on member firms. The SIPC insures customers for up to $500,000 of cash and securities on deposit with a member firm. Of the $500,000, no more than $100,000 may be cash on deposit with the member.

Security: SEC definition includes: investment notes, stocks, treasury stocks, bonds, or debentures; certificates of interest or participation in a profit-sharing agreement or in oil, gas, or other mineral royalty or lease; collateral-trust certificates or voting-trust certificates; investment contracts; certificates of deposit for one of the above; options, rights or warrants on one of the above or on any group or index of the above; or foreign currency options or rights. Includes temporary securities but does not include currency, or any note, draft, bill of exchange, or banker's acceptance with a maturity of less than nine months. Commodity futures contracts or commodity options are not generally considered securities, but fall under the jurisdiction of the Commodities Futures Trading Commission. While whole life, term, and universal life insurance are not considered securities, even though they may include some investment risk, variable life insurance is considered a security.

Self-regulatory organizations (SROs): Private organizations owned and operated by their members and to whom the SEC delegates much of its authority to oversee both securities markets and participants in those markets. All SRO rules and regulations must be approved by the SEC. An SRO may be either a national exchange, such as the New York Stock Exchange (NYSE), or a national securities association such as the NASD.

Seller's option: The seller chooses the date on which the trade is settled. The date must be no less than six business days, but no more than sixty calendar days after trade date.

Selling away: See Private Securities Transactions.

Selling dividends: Inducing a customer to buy mutual fund shares just prior to an exdividend date, so that he receives the dividend. Because the price of the shares is likely to drop by the amount of the dividend, the customer is effectively getting his own money back, and is taxed on the dividend, besides.

Selling group: A select group of broker/dealers who assist the syndicate in selling the new issue in a corporate underwriting.

Selling group agreement: Agreement between members of the selling group and the managing underwriter, signed when the offering has been released by the Securities and Exchange Commission.

Selling group concession: In a corporate underwriting, the compensation paid to the selling group members.

Selling short: Selling a security or future that the seller does not own, either to lock in a gain on a long position or to make a gain on an anticipated decline in the market.

Sell stop: An order to sell a stock if the price falls to or below a specified price. It is often called a "stop loss" order.

Semi-fixed unit investment trust: A contractual plan investment company that creates its own portfolio, consisting solely of shares in an underlying mutual fund. The plan sells shares of its portfolio to investors on a contractual basis. See participating trust.

Separate account: In a variable annuity, the investment account into which the annuitant's funds are deposited. The account is segregated from the insurance company's other investments, and registered as an investment company under the Investment Company Act of 1940.

Serial bond: An issue with bonds of different maturities.

Series bond: A bond offering that took place over a period of time.

Series of options: Options of the same type (put or call) on the same security, with the same exercise month and strike price.

Service fees: Fees and charges assessed against an investment company's assets that cover ministerial, recordkeeping, or administrative activities.

Settlement: In a trade, the exchange of money and the security. Regular way settlement takes place three business days after trade date.

Shelf distribution: Method of distributing shares in which the seller registers the shares with the SEC, but does not immediately sell them to the public . The shares are "put on the shelf" and held for later sale at any time within two years of the registration that market conditions seem appropriate. Originally designed for use by insiders of the issuer, such as major shareholders who own unregistered shares acquired directly from the issuer, but now expanded to allow issuers to use the process.

Short: In options, the position of the writer of an option. In securities, the position of a seller of stock he does not own, but hopes to buy later.

Short against the box: A position of an investor who is long and short the same security, usually for tax purposes, to lock in a sales price, but defer the gain into the year the short position is covered.

Short interest theory: An investment theory according to which a large volume of short sales constitutes a buy signal.

Short sale: The sale of a borrowed security. If the seller can buy back the security at a lower price, he reaps a profit.

Short straddle: An options position in which the investor sells both a call and a put on the same security. The position is profitable if the stock price remains between the two breakeven points.

Shortswing profit rule: A federal law that forces insiders who sell securities of their company and take a short-term profit to pay that profit to the company.

SIC: See Securities Information Center.

Side of market: Description of an options position referring to whether a person would buy or sell the stock upon exercise of an option. Long call positions are added to short put positions to arrive at the buy side of the market. Long put positions are added to short call positions to determine the sell side of the market.

Simplified Arbitration: Arbitration procedure of the NASD that must be used for disputes of less than $25,000, which either involve public customers or are employment disputes that qualify for this type of arbitration. Usually only one public arbitrator handles such disputes.

Simplified Employee Pension (SEP) plan or SEP-IRA: Essentially an IRA with more liberal contribution limits, established and financed by an employer for all its eligible employees. The employer may set up a SEP even if it has already established a qualified pension or profit sharing plan. The company may or may not be incorporated.

Simplified Industry Arbitration: Arbitration procedure of the NASD that must be used for disputes of less than $25,000 that do not involve a public customer and are not employment disputes that qualify for Simplified Arbitration. One to three securities industry arbitrators arbitrate the dispute. Unless one of the parties requests a hearing or a majority of the panel call for a hearing, the matter is decided solely on the pleadings and evidence filed.

Simultaneous transaction: See Riskless Transaction.

Sinking fund: A fund established to accumulate resources for the retirement of bonds.

Sinking fund call: A repurchase of bonds by the issuer in which the money used to refund the bonds comes from a fund established for that specific purpose.

SIPC: See Securities Investors Protection Corporation.

SMA: Special Memorandum Account. In a margin account, SMA is a line of credit that is granted when the account generates equity in excess of 50%.

Sole proprietorship: A business entity that is owned and operated by a single individual.

Special assessment bond: A municipal bond that is backed by tax assessments levied on the property of residents who benefit from the facility being financed, such as an improved sewer system.

Special bid: A bid for a large number of shares. Announcement is made on the consolidated tape that a firm is bidding to purchase a number of shares.

Specialist: An exchange member who makes the market in a particular security. He must maintain a "fair and orderly" market.

Specialist's bid: A specialist's bid for a block of stock owned by a customer. The purchase is a negotiated transaction.

Specialist's offer: A specialist's sale of a block of stock to a customer in a negotiated transaction.

Special offer: An offer for a block of stock that is reported on the consolidated tape.

Special Reserve Account for the Exclusive Benefit of Customers (SRA): Account required for all brokerage firms that hold customers' cash and securities for the protection of customers. May be maintained in one or more banks. Must be kept separate from the firm's other bank accounts. Assets in the account may not be used by the bank as collateral and the bank may not attach any claim to the account. The amount of cash or qualified securities the firm must deposit in the SRA is calculated either weekly or monthly based on the excess of customer credits over customer debits (i.e., the net credits).

Special situation: Circumstances that may cause a company to buy or sell its securities other than the fundamental prospects of the corporation. An example is a company that has received a tender offer by someone trying to buy all outstanding shares. The decision to buy or sell stock is made more on the basis of the likely success or failure of the tender offer than on the long-term prospects of the company.

Special tax bond: A municipal bond that is supported only by the revenues from a specific tax. It is considered to be a revenue bond; for example, a state pledging its gasoline taxes to finance construction of roads.

Split: Divide stock shares into multiple shares such that the stockholder's equity (both in total and for the individual stockholder) remains unchanged, but each stockholder holds more shares worth less each. For example, in a two-for-one split each stockholder receives two shares for every share held. The new shares are worth half as much as the old shares, but since the stockholder has twice as many shares, his investment remains unchanged.

Spousal IRA: An individual retirement account that may be established for one of a pair of married persons filing a joint return, even if the individual has either no income or a small amount of income.

Spread: An option position in which the investor is long an option and short another option of the same type. For example, he is long 1 ABC July 50 Call and short 1 ABC July 55 Call. Also the difference in price between what the principal who offers an IPO pays and what the investor pays for the newly offered securities.

Stabilizing bid: In a corporate underwriting, a bid by the managing underwriter to buy outstanding shares of the issuer's stock. This is done to support the stock price so the new issue can be distributed. For example, if a company offers a new issue at $30 per share, and the price of the old shares falls below $30, the managing underwriter may enter a stabilizing bid at $30 or slightly less to support the price.

Standard & Poor's 100 Index: An index of 100 stocks published by Standard & Poor's Corporation; the index on which OEX options are based.

Standard & Poor's 500 Index: An index of 500 stocks published by Standard & Poor's and considered representative of the overall stock market.

Standby underwriting: A corporate underwriting related to a rights offering. The syndicate agrees to underwrite any shares not sold through the rights offering. Standby underwritings apply only to offerings of common stock.

Standardized yield: For a mutual fund, the annualized net investment income for a period as a percent of the net asset value for the fund.

Statutory disqualification: Status when a person is restricted by the SEC from being either a member in a self-regulatory organization such as the NYSE or the NASD, or an associate of a member.

Staying power: An investor's ability to maintain his or her positions by meeting margin calls and/or holding onto his or her investments through down markets rather than having to liquidate at a disadvantageous time.

Sticky offering: Offering in which underwriters have set the price too high, making shares difficult to sell to the public.

Stock dividend: A dividend in the form of stock. Shareholders are given additional shares of stock, rather than being paid cash. Stock dividends are stated as a percentage. For example, if a 10% stock dividend is paid, the owner of 100 shares receives an additional 10 shares.

Stock exchange: An organized marketplace for securities.

Stockholder of record: The owner of a company's stock that is recorded on the books of the company.

Stockholders' equity: The dollar value of all holdings of preferred and common stock, including any Paid-In Surplus, plus retained earnings.

Stock Index Futures: Futures contracts based on an index of securities prices. Settlement is made in cash.

Stock power: Instead of endorsing the back of a stock certificate, a customer may sign a separate form, called a stock power, which then is attached to the certificate to make it negotiable.

Stock split: Issuing additional new shares for those now outstanding. For example, a 2 for 1 stock split doubles the number of shares outstanding. The price is likely to fall to one-half the previous price.

Stop limit order: An order activated when the stock price trades at or through a trigger price. The order then becomes a limit order.

Stop loss order: Another name for a stop order.

Stop order: An order that is activated if the stock price trades at or through a trigger price. The order then becomes a market order. See also Buy Stops and Sell Stops.

Stopping stock: An execution guaranteed by a specialist to a floor broker for customer orders. The specialist guarantees the order will be filled at a specified price or better.

Straddle: An options position in which the investor either buys a call and a put on the same security (a long straddle), or sells a call and a put on the same security (a short straddle).

Street name: Form of registration for a security where it is held in the name of the broker/dealer carrying the account rather than in the name of the customer owning the security.

Strike price: The price at which the stock trade will take place if an option is exercised. Also known as the exercise price.

Student Loan Marketing Agency ("Sallie Mae"): Agency issuing non-guaranteed securities based on student loans.

Subchapter M: A tax code provision favoring investment companies, avoiding double taxation of income. Investment companies qualifying for this treatment are called "Regulated Investment Companies."

Subject quotes: A quote subject to confirmation by someone else. It is not a firm quote, but a nominal quote.

Subordination agreement: Agreements that the firm makes with a lender in which the lender agrees to subordinate itself to all other creditors of the firm, present or future. In other words, if the firm went out of business, all other creditors would be paid before the lender on the subordination agreement.

Subscription agreement: In a limited partnership, the document a limited partner signs when he joins the partnership. It typically asks many questions regarding the investor's suitability for the program.

Summary complaint procedure: An NASD procedure investigating possible violation of the rules. If the violation is not severe, and the facts are not in dispute, NASD may offer Summary Complaint Procedure. If accepted, the maximum penalty is censure and a fine up to $2,500.

Summary prospectus: A document for use by most issuers that are not investment companies which summarizes information in the registration statement and can be used as a prospectus to solicit orders. The summary prospectus must be labeled at the beginning or end with the words "Copies of a more complete prospectus may be obtained from (insert name(s), address(es) and telephone number(s)."

SuperDot: An electronic order-routing and execution-reporting system used by the NYSE.

Support: A charting pattern indicating buying pressure. If the stock price declines below the support level, a technical analyst views the decline as a sell signal.

Syndicate: In an underwriting, a group of firms acting together to market a stock or bond issue. They are required to buy unsold shares for their own accounts if they fail to sell them to their customers.

Syndicate letter: In a competitive bid underwriting, the contract governing the syndicate.

Systematic risk: The portion of an investment's risk that is coincident with the market and thus cannot be eliminated by diversification. Measured by the security's beta coefficient. Also called market risk.

Tail fee: An amount paid to an underwriter when the offering is not completed as agreed and then the issuer subsequently makes a similar distribution.

Takedown: In a municipal underwriting, the profit of a syndicate member selling bonds to a customer.

TAN: See Tax Anticipation Note.

Tax Anticipation Note: A short-term municipal note offered before receiving tax revenues, commonly referred to as a TAN. It may be issued three to six months before property tax bills are sent out. They are general obligation issues, and are repaid from property taxes.

Tax-qualified annuities: Plans available only to employees of nonprofit organizations, such as schools, churches, and charities, also known as 403(b) plans. When the employee makes the contribution to the annuity, it is tax-deductible. When the contract is annuitized, the entire payment is taxable as ordinary income.

Tax swap: See Bond Swap.

Technical analysis: Analysis of investments based on technical factors, primarily on charting. This is the practice of determining investment strategies based on chart patterns.

Tenants-in-common: A joint account in which, if one party to the account dies, his or her share goes to his or her estate, not to the surviving tenant(s)-in-common.

Tender offer: An offer to buy all or a large block of the securities of a particular company. The offer must be made to all shareholders.

Term bond: A corporate or municipal bond issue with all the bonds maturing at the same time. Municipal term bonds are called dollar bonds, and are quoted in the same manner as corporate bonds.

Third market: Over-the-counter market trades in securities listed on an exchange.

Tight money: A reduced rate of money creation by the Federal Reserve System.

Time spread: An options spread position in which the strike prices are the same, but the expiration months are different.

Time value: In an option contract, the premium minus the intrinsic value (the in-the-money amount).

Tippee: Person who is given material secret information by an insider to a corporation and buys or sells a security while in possession of such information. The possession of such information gives the holder an unfair (and illegal) advantage over the investor on the other side of the trade who does not have the information. Both the tippee and the tipper may be prosecuted.

Tombstone advertisement: For a new issue, an advertisement showing the security being sold, the price, and the names of the broker/dealers from whom a prospectus can be obtained.

Total capital: Owners' equity, adjusted for unrealized profits and losses, plus subordination agreements.

Total contract price: In a bond trade, the price of a bond plus the accrued interest.

Total return: On a mutual fund, the increase in value of an investment in the fund over a given period, assuming reinvestment of distributions. Includes capital gains and unrealized appreciation and depreciation in value of the fund's assets in addition to net investment income. The total return is the appreciation in investment value an investor who reinvested all distributions would have achieved over the period described. Does not take into account taxes the investor would have had to pay on dividends and does not consider the sales load for the initial purchase of the fund shares.

Trade date: The date a firm accepts a bid or offer for a security, even if time differences mean that the acceptance may not reach the firm making the bid or offer until the next day. The trade date may be different than the day the order was placed with a firm.

Trader: An individual who either buys and sells from his own account for profit or handles trades for a brokerage firm and its clients.

Trading authorization: A power of authority given to someone outside the firm, such as an investment adviser. The person holding this power is said to have trading authority in the account. The trading authorization will typically be given in the investment adviser contract.

Trading flat: Bonds trading without accrued interest, such as income bonds, bonds in default, and zero coupon bonds.

Transfer agent: The person or firm that cancels the shares in the name of the seller and reissues shares in the name of the buyer.

Treasury bill: A U.S. government security maturing in less than one year. It is issued at a discount, and matures at par.

Treasury bond: A U.S. government security maturing in more than ten years. It is issued with a coupon rate, and is quoted in 32nds.

Treasury note: A U.S. government security maturing in one to ten years. It is issued with a coupon rate, and is quoted in 32nds.

Treasury receipt: A type of zero coupon bond representing only the principal payment on a Treasury Bond with twenty years to maturity. Since there are no interest payments, they trade at a steep discount.

Treasury stock: Stock that has been repurchased by the issuing corporation. It has no voting rights, does not receive dividends, and is not used in calculating earnings per share.

Treasury strip: When a Treasury Receipt is created by stripping the coupons from a twenty-year Treasury Bond, the forty interest coupons for the bond are sold separately as Treasury Strips.

Triple-exempt bond: A bond exempt from federal, state, and local taxation.

True interest cost: In a competitive bid municipal bond offering, a method of calculating the interest cost that takes into account the time value of money. The calculation is done in constant dollars, considering not only what payments are made, but also when they are made. The other method of determining the bid is the Net Interest Cost, which does not involve any net present value computation. True Interest Cost is also referred to as Canadian Interest Cost.

Trust Indenture Act of 1939: The federal law requiring all bond issuers to create a trust indenture, which is the contract between the issuer and the bondholders. The trust indenture appoints a company (usually a bank) to act as trustee on behalf of the bondholders.

Turnover rate: The number of shares traded in a year as a percentage of the total shares outstanding. May be calculated for a particular security, a portfolio (such as a mutual fund), or a securities exchange.

Two-dollar broker: An independent floor broker on the floor of an exchange who assists other members in executing their orders.

Type of option: There are two: puts and calls.

UGMA: See Uniform Gift to Minors Act.

Uncovered options: A short options position in which the writer has no obvious means of fulfilling the exercise requirement. For example, a person who is short a call option and does not own the stock. They are also called naked options.

Underlying security: For any given option contract, the security that the holder of an option has a right to buy or sell.

Underwriter: A syndicate member in a firm commitment underwriting. The term is usually only given to those who have a financial commitment to buy the stock for their own account.

Underwriter's book: Place where the syndicate manger in an underwriting records indications of interest in order to determine how well the offering is being received. This information is used to price the issue and determine the share of each member of the syndicate.

Underwriter's concession: In a corporate underwriting, the profit of a syndicate member selling securities to a customer.

Underwriting: The process in which broker/dealers form a syndicate to sell a new issue of securities.

Underwriting spread: The amount the underwriters retain for distributing an offering. Composed of the management fee paid to the syndicate manager for management services and the underwriter's concession paid to each member of the syndicate (including the manager) for the shares they are allotted. The selling group concession paid to the selling group members for their assistance in distributing the securities comes out of the underwriter's concession.

Undesignated order: In a municipal underwriting, an order in which the entire syndicate shares proportionately in the compensation. They are also called Group Orders or Group Net Orders.

Undivided interest: Form of ownership such as a shareholder has in a mutual fund in which he owns a proportionate share of each of the fund's holdings rather than a particular piece of the fund's holdings.

Uniform Gift to Minors Act: The law governing gifts of money or securities to a minor, commonly referred to as UGMA. The donor must appoint a custodian (frequently the donor) to manage the account.

Uniform Practice Code (UPC): NASD rules governing members' dealings with each other.

Uniform Securities Act: A model developed by the National Conference of Commissioners on Uniform State Law that serves as a basis for most state securities laws. The model makes it easier for securities professionals to do business across state lines. However, individual states, even those that adopted a version of the Act, might have individual variances.

Unit Investment Trust: An investment company that creates a portfolio of securities, often municipal bonds, and then sells the portfolio to investors.

Unlisted stock: A security that is not listed on a stock exchange.

Unsecured liabilities: Loans or other obligations not collateralized by either fixed assets such as real estate or by the firm's securities. Could be payable to customers, banks or other lenders, suppliers, other broker/dealers, employees or anyone else having a business relationship with the firm.

Uptick: A higher price than the previous trade.

Uptick rule: A federal law requiring that short sales be executed on an uptick or a zero plus tick.

Variable annuity: A type of annuity that assigns the investment risk to the annuitant. If the investments perform well, the monthly payment increases, and vice versa. Variable annuities must be registered as investment companies with the SEC.

Venture capital: Equity investment for a company not large enough to go public that is supplied by partnerships set up to pool funds and invest in untried companies, by wealthy individuals, or by large institutional investors. Venture capitalists take on high risks in hopes of making extraordinary returns on some of their investments.

Vertical spread: An options spread position in which the expiration months are the same, but the strike prices differ. They are also called Money Spreads.

Warrant: A security that gives the holder the right to buy the common stock of the issuer at a specified price for a period of time, usually years. Warrants resemble rights, except warrants are long-term.

Wash sale: 1) Buying and selling the same security, usually through different brokerage firms, in an attempt to manipulate the price and inflate the trading volume without actually taking a position in the market. 2) In tax law, selling a security at a loss, and repurchasing the same or similar security within thirty days before or after the sale; the loss is not tax deductible.

Western underwriting agreement: In a firm commitment underwriting, an agreement that makes syndicate members liable severally, but not jointly. If one syndicate member cannot sell its entire allotment, only it must buy the unsold securities. Usually used in corporate underwritings.

When, as, and if issued: Settlement does not take place until the certificates are printed. New issues trade "when, as, and if issued."

White's ratings: A bond rating measuring the marketability of a bond, rather than its credit risk.

Without recall: In the municipal bond market, a dealer quote with an option to buy the bond at a guaranteed price for some period of time (often one hour). The dealer cannot recall the bond and cancel the option.

With recall: In the municipal bond market, a dealer quote with an option to buy the bond at a guaranteed price for some period of time (often one hour); the dealer retains the right to recall the bonds and cancel the option.

Workable indication: In the municipal bond market, a nominal quote of an approximate price. It is usually a one-sided quote; that is, either a bid price or an asked price.

Working capital: A corporation's current assets less its current liabilities.

Workout quote: In the over-the-counter market, a nominal quote. The actual price is subject to negotiation.

Wrap Fee: A wrap fee is an amount charged to a client of an investment advisor for several services wrapped together, such as portfolio management, asset allocation, custodial services, execution of transactions, and preparation of quarterly performance reports. The wrap fee is calculated as a percentage of net assets in the clients account rather than on transactions. Traditional wrap programs typically charge wrap fees of 1-3%.

Wrap Fee Brochure: A written disclosure statement or brochure that includes at least the information designated in Schedule H to Form ADV for a wrap program, including the fees, services, and policies of the wrap program, and any restrictions on clients. One sponsor of each wrap fee program must prepare the wrap fee brochure. Advisers must deliver the wrap fee brochure to potential wrap fee clients and also offer it annually to any existing wrap fee client in lieu of the standard adviser brochure.

Wrap Program (Wrap): Program offered by an investment adviser that wraps several services together for a fee based on the size of the client's account. Traditional wrap programs are based on the original model developed by E.F. Hutton in 1975, with minimum investments between $100,000 and $200,000, fees between 1% and 3% of the net assets in the account, and "wrapped" services that include portfolio management, asset allocation, custodial services, execution of transactions, and preparation of quarterly performance reports. In one variation (with smaller minimum investments), the adviser selects a mixture of mutual funds for the client. Wrap programs, unlike a registered investment companies, are tailored to the individual investor. Wrap fee programs that offer similar advise to a number of clients must be carefully structured to conform to the safe harbor provisions in Rule 3a-4 of the Investment Company Act of 1940.

Wrap Program Sponsor: A person or entity is a sponsor of a wrap fee program if he receives compensation for sponsoring, organizing, or administering the wrap fee program, selecting investment advisers in the program, or for giving advice to clients about selecting advisers in the program. The sponsor typically manages the client's account using discretion and previously determined investment objectives.

Yellow sheets: A listing of corporate bonds traded in the OTC market, showing the market makers and their quotes.

Yield curve: A chart showing yields of bonds with various maturities. Short-term debt normally has a lower yield than long-term debt.

Yield to call: The yield of a bond to its call date. The calculation is similar to a yield to maturity calculation, except the bond is assumed to mature on the call date at the call price.

Yield to maturity: The yield of a bond, taking into account the gain or loss at maturity.

Zero coupon bond: A bond without interest payments. Because they pay no interest, they trade at a steep discount from par.

Zero plus tick: A trade that was preceded by a trade at the same price, but the prior change in price was an up-tick.


Copyright © 2002 Center for Financial Education. All rights reserved. P.O. Box 309 Grove City, Pennsylvania 16127 E-Mail: info@thectr.com Phone: (724) 458-5860 Fax: (724) 458-5962