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Accretion (of a
In portfolio accounting, a straight-line accumulation of capital
gains on a discount bond in anticipation of receipt of par at maturity.
Applies mainly to convertible securities.
Interest that has accumulated between the most recent payment and
the sale of a bond or other fixed-income security. At the time of
sale, the buyer pays the seller the bond's price plus "accrued
interest," calculated by multiplying the coupon rate by the
fraction of the coupon period that has elapsed since the last payment.
(If a bondholder receives $40 in coupon payments per bond semiannually
and sells the bond one-quarter of the way into the coupon period,
the buyer pays the seller $10 as the latter's proportion of interest
The acquiring of control of one corporation by another. In "unfriendly"
takeover attempts, the potential buying company may offer a price
well above current market values, new securities and other inducements
to stockholders. The management of the subject company might ask
for a better price or try to join up with a third company.
American Depositary Receipt (ADR)
A security issued by a U.S. bank in place of the foreign shares
held in trust by that bank, thereby facilitating the trading of
foreign shares in U.S. markets.
American Stock Exchange (AMEX)
Stock exchange with the third highest volume of trading in the US.
Located at 86 Trinity Place in downtown Manhattan. The bulk of trading
on AMEX consists of index options (computer technology index, institutional
index, major market index) and shares of small to medium-sized companies
are predominant. Recently merged with Nasdaq
Accounting for expenses or charges as applicable rather than as
paid. Includes such practices as depreciation, depletion, write-off
of intangibles, prepaid expenses and deferred charges.
The formal financial statement issued yearly by a corporation. The
annual report shows assets, liabilities, revenues, expenses and
earnings - how the company stood at the close of the business year,
how it fared profit-wise during the year, as well as other information
of interest to shareholders.
Annual percentage rate (APR)
The periodic rate times the number of periods in a year. For example,
a 5% quarterly return has an APR of 20%.
Annual percentage yield (APY)
The effective, or true annual rate of return. The APY is the rate
actually earned or paid in one year, taking into account the effect
of compounding. The APY is calculated by taking one plus the periodic
rate and raising it to the number of periods in a year. For example,
a 1% per month rate has an APY of 12.68% (1.01^12 -1).
Annual rate of return
There are many ways of calculating the annual rate of return. If
the rate of return is calculated on a monthly basis, we sometimes
multiply this by 12 to express an annual rate of return. This is
often called the annual percentage rate (APR). The annual percentage
yield (APY), includes the effect of compounding interest.
A technique employed to take advantage of differences in price.
If, for example, ABC stock can be bought in New York for $10 a share
and sold in London at $10.50, an arbitrageur may simultaneously
purchase ABC stock here and sell the same amount in London, making
a profit of $.50 a share, less expenses. Arbitrage may also involve
the purchase of rights to subscribe to a security, or the purchase
of a convertible security - and the sale at or about the same time
of the security obtainable through exercise of the rights or of
the security obtainable through conversion.
This is the quoted ask, or the lowest price an investor will accept
to sell a stock. Practically speaking, this is the quoted offer
at which an investor can buy shares of stock; also called the offer
In context of general equities, price at which a security or commodity
is offered for sale on an exchange or in the OTC Market.
Asked to bid/offer
Used in context of general equities. Usually a seller (buyer) looking
to aggressively sell (buy) stock, usually asking for a capital commitment
from an investment bank.
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A condensed financial statement showing the nature and amount of
a company's assets, liabilities and capital on a given date. In
dollar amounts, the balance sheet shows what the company owned,
what it owed and the ownership interest in the company of its stockholders.
One gradation on a 100-point scale representing 1%; used especially
in expressing variations in the yields of bonds. Fixed income yields
vary often and slightly within one percent and the basis point scale
easily expresses these changes in hundredths of 1%. For example,
the difference between 12.83% and 12.88% is 5 basis points.
Someone who believes the market will decline.
A declining market.
The price a potential buyer is willing to pay for a security. Sometimes
also used in the context of takeovers where one corporation is bidding
for (trying to buy) another corporation. In trading, we have the
bid-ask spread which is the difference between what buyers are willing
to pay and what sellers are asking for in terms of price.
The difference between the bid and the asked prices.
This is the quoted bid, or the highest price an investor is willing
to pay to buy a security. Practically speaking, this is the available
price at which an investor can sell shares of stock.
Used in the context of general equities. Large and creditworthy
company. Company renowned for the quality and wide acceptance of
its products or services, and for its ability to make money and pay
dividends. Gilt-edged security.
Blue chip stocks
Common stock of well-known companies with a history of growth and
State laws covering the issue and trading of securities.
Bonds are debt and are issued for a period of more than one year.
The US government, local governments, water districts, companies
and many other types of institutions sell bonds. When an investor
buys bonds, he or she is lending money. The seller of the bond agrees
to repay the principal amount of the loan at a specified time. Interest-bearing
bonds pay interest periodically.
An individual who is paid a commission for executing customer orders.
Either a floor broker who executes orders on the floor of the exchange,
or an upstairs broker who handles retail customers and their orders.
Also, person who acts as an intermediary between a buyer and seller,
usually charging a commission. A "broker" who specializes
in stocks, bonds, commodities, or options acts as an agent and must
be registered with the exchange where the securities are traded.
Antithesis of dealer.
Any person, other than a bank, engaged in the business of buying
or selling securities on its own behalf or for others.
To purchase an asset; taking a long position.
To cover, offset, or close out a short position.
Buy limit order
A conditional trading order that indicates a security may be purchased
only at the designated price or lower.
An order to a broker to purchase a specific quantity of a security.
Buy stop order
A buy order not to be executed until the market price rises to the
stop price. Once the security has broken through that price, the
order is then treated as a market order. Also known as a suspended
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An option that gives the holder the right to buy the underlying
A date before maturity, specified at issuance, when the issuer of
a bond may retire part of the bond for a specified call price.
An option contract that gives its holder the right (but not the
obligation) to purchase a specified number of shares of the underlying
stock at the given strike price, on or before the expiration date
of the contract.
Call an option
To exercise a call option.
Premium in price above the par value of a bond or share of preferred
stock that must be paid to holders to redeem the bond or share of
preferred stock before its scheduled maturity date.
The price, specified at issuance, at which the issuer of a bond
may retire part of the bond at a specified call date.
Capital gain or capital loss
When a stock is sold for a profit, the capital gain is the difference
between the net sales price of the securities and their net cost,
or original basis. If a stock is sold below cost, the difference
is a capital loss.
Capital gains distribution
A distribution to the shareholders of a mutual fund out of profits
from selling stocks or bonds, that is subject to capital gains taxes
for the shareholders.
Capital gains tax
The tax levied on profits from the sale of capital assets. A long-term
capital gain, which is achieved once an asset is held for at least
12 months, is taxed at a maximum rate of 20% (taxpayers in 28% tax
bracket) and 10% (taxpayers in 15% tax bracket). Assets held for
less than 12 months are taxed at regular income tax levels, and,
since January 1, 2000, assets held for at least five years are taxed
at 18% and 8%.
Capital gains yield
The price change portion of a stock's return.
A dividend paid in cash to a company's shareholders. The amount
is normally based on profitability and is taxable as income. A cash
distribution may include capital gains and return of capital in
addition to the dividend.
Chicago Board Options Exchange (CBOE)
A securities exchange created in the early 1970s for the public
trading of standardized option contracts. Primary place stock options,
foreign currency options, and index options (S&P 100, 500, and
OTC 250 index)
Chicago Board of Trade (CBOT)
The second largest futures exchange in the US, and was a pioneer
in the development of financial futures and options.
An investment company that sells shares like any other corporation
and usually does not redeem its shares. A publicly traded fund sold
on stock exchanges or over the counter that may trade above or below
its net asset value.
The net of the number of stocks whose closing prices are higher
than their previous trades (uptick) against the number of stocks
whose closing prices were lower than their previous trades (downtick).
A positive closing tick indicates "buying at the close",
or a bullish market; a negative closing tick indicates "selling
at the close," or a bearish market.
A very risky type of Real Estate Investment Trust investing in the
residual cash flows of Collateralized Mortgage Obligation (CMOs).
CMO cash flows are derived from the difference between the rates
paid by the mortgage loan holders and the lower, shorter-term rates
paid to CMO investors.
Collateralized Bond Obligation (CBO)
Investment-grade bonds backed by a collection of junk bonds with
different levels of risk, called tiers, that are determined by the
quality of junk bond involved. CBOs backed by highly risky junk
bonds receive higher interest rates than other CBOs.
Collateralized mortgage obligation
A security backed by a pool of pass-through rates, structured so
that there are several classes of bondholders with varying maturities,
called tranches. The principal payments from the underlying pool
of pass-through securities are used to retire the bonds on a priority
basis as specified in the prospectus. Related: mortgage pass-through
Securities that represent equity ownership in a company. Common
shares let an investor vote on such matters as the election of directors.
They also give the holder a share in a company's profits via dividend
payments or the capital appreciation of the security. Units of ownership
of a public corporation with junior status to the claims of secured/unsecured
creditors, bondholders and preferred shareholders in the event of
The original price of an asset, used to determine capital gains.
A written option is considered to be covered if the writer also
has an opposing market position on a share-for-share basis in the
underlying security. That is, a short call is covered if the underlying
stock is owned, and a short put is covered (for margin purposes)
if the underlying stock is also short in the account. In addition,
a short call is covered if the account is also long another call
on the same security, with a striking price equal to or less than
the striking price of the short call. A short put is covered if
there is also a long put in the account with a striking price equal
to or greater than the striking price of the short put.
A short call option position in which the writer owns the number
of shares of the underlying stock represented by the option contracts.
Covered calls generally limit the risk the writer takes because
the stock does not have to be bought at the market price, if the
holder of that option decides to exercise it.
Covered call writing strategy
A strategy that involves writing a call option on securities that
the investor owns.
Covered or hedge option strategies
Strategies that involve a position in an option as well as a position
in the underlying stock, designed so that one position will help
offset any unfavorable price movement in the other, including covered
call writing and protective put buying. Related: Naked strategies
Option position that is offset by an equal and opposite position
in the underlying security. Antithesis of naked option.
Use of an option in a trading strategy in the underlying asset is
A put option position in which the option writer also is short the
corresponding stock or has deposited, in a cash account, cash or
cash equivalents equal to the exercise of the option. This limits
the option writer's risk because money or stock is already set aside.
In the event that the holder of the put option decides to exercise
the option, the writer's risk is more limited than it would be on
an uncovered or naked put option.
Cumulative dividend feature
A requirement that any missed preferred or preference stock dividends
be paid in full before any dividend payment is made.
Cumulative preferred stock
Preferred stock whose dividends accrue, should the issuer not make
timely dividend payments.
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Date on which holders of record in a firm's stock ledger are designated
as the recipients of either dividends or stock rights.
Day around order
A day order that supersedes (cancels and replaces) the previous
order by altering its size or price limit.
In the context of general equities, request from a customer to either
buy or sell stock, that, if not canceled or executed the day it
is placed, expires automatically. All orders are day orders unless
otherwise specified. Traders often make calls before the opening
to check for renewals.
Also known as a "daylight trade." The purchase and sale
or the short sale and cover of the same security in a margin account
on the same day.
An entity that stands ready and willing to buy a security for its
own account (at its bid price) or sell from its own account (at
its ask price). Individual or firm acting as a principal in a securities
transaction. Principals are market makers in securities, and thus
trade for their own account and risk. Antithesis of broker.
Any debt obligation backed strictly by the borrower's integrity,
e.g. an unsecured bond. A debenture is documented in an indenture.
An unsecured bond whose holder has the claim of a general creditor
on all assets of the issuer not pledged specifically to secure other
debt. Compare subordinated debenture bond and collateral trust bonds.
IOUs created through loan-type transactions-commercial paper, bank
CDs, bills, bonds, and other instruments.
A bond issued with a very low coupon or no coupon that sell at a
price far below par value. A bond that has no coupon is called a
Low-risk stocks or bonds that will provide a predictable and safe
return on an investor's money.
Units of interest in the diamonds trust, a unit investment trust
that serves as an index to the Dow Jones Industrial Average in that
its holdings consist of the 30 component stocks of the Dow.
Interest at a beginning of the loan. For example if you take out
a one-year loan of $100 at a discount interest rate of 10%, you
would receive $90 at the outset.
Movement of tax-deferred retirement plan money from one qualified
plan or custodian to another. No immediate tax liabilities or penalties
are incurred, but there is an IRS reporting requirement.
Debt sold for less than its principal value. If a discount bond
pays no coupon, it is called a zero coupon bond.
A brokerage house featuring relatively low commission rates in comparison
to a full-service broker.
The yield or annual interest rate on a security sold to an investor
at a discount. A bond that is sold at $4875 that matures to $5000
has a discount of $125. To calculate the discount yield: (discount
divided by the face value of the security) multiplied by the (number
of days in the year divided by the number of days to maturity).
A portion of a company's profit paid to common and preferred shareholders.
A stock selling for $20 a share with an annual dividend of $1 a
share yields the investor 5%.
Dividend yield (Stocks)
Indicated yield represents annual dividends divided by current stock
Dollar-weighted rate of return
Also called the internal rate of return; the interest rate that
makes the present value of the cash flows from all the subperiods
in an evaluation period plus the terminal market value of the portfolio
equal to the initial market value of the portfolio.
Don't know (DK, DKed)
"Don't know the trade." A Street expression used whenever
one party lacks knowledge of a trade or receives conflicting instructions
from the other party.
Dow Jones Industrial Average
The best known U.S. index of stocks. A price-weighted average of
30 actively traded blue-chip stocks, primarily industrials including,
stocks that trade on the New York Stock Exchange. The Dow, as it
is called, is a barometer of how shares of the largest US companies
are performing. There are hundreds of investment indexes around
the world for stocks, bonds, currencies, and commodities.
Move down in a particular stock. On U.S. stock exchanges, you cannot
sell a stock short on a downtick.
Listing of a security on more than one exchange, thus increasing
the competition for bid and offer prices, the liquidity of the securities,
and the length time the stock can be traded daily (if listed on
both the east and west coasts.)
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per share (EPS)
A company's profit divided by its number of outstanding shares.
If a company earning $2 million in one year had 2 million shares
of stock outstanding, its EPS would be $1 per share. In calculating
EPS, the company often uses a weighted average of shares outstanding
over the reporting term. The one-year (historical or trailing) EPS
growth rate is calculated as the percentage change in earnings per
share. The prospective EPS growth rate is calculated as the percentage
change in this year's earnings and the consensus forecast earnings
for next year.
Effective annual interest rate
An annual measure of the time value of money that fully reflects
the effects of compounding.
Effective annual yield
Annualized interest rate on a security computed using compound interest
A Real Estate Investment Trust that assumes ownership status in
the property it invests in enabling investors of the REIT to earn
dividends on rental income from the property and appreciation in
Federal funds rate
The interest rate that banks with excess reserves at a Federal Reserve
district bank charge other banks that need overnight loans. The
Fed funds rate, as it is called, often points to the direction of
US interest rates. The most sensitive indicator of the direction
of interest rates, since it is set daily by the market, unlike the
prime rate and the discount rate.
Investments that have specific interest rates, such as bonds.
Interest rate that is reset periodically, usually every couple of
months or sometimes daily.
The huge trading area - about the size of a football field - where
stocks, bonds and options are bought and sold on the New York Stock
A member of the stock exchange who executes orders on the floor
of the Exchange to buy or sell any listed securities.
A broker who provides clients an all-inclusive selection of services
such as advice on security selection and financial planning.
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Mortgage-backed securities (M.B.S.) on which registered holders
receive separate principal and interest payments on each of their
certificates, usually directly from the servicer of the M.B.S. pool.
GNMA-I mortgage-backed securities are single-issuer pools.
Mortgage-backed securities (M.B.S.) on which registered holders
receive an aggregate principal and interest payment from a central
paying agent on all their certificates. Principal and interest payments
are disbursed on the 20th day of the month. GNMA-II M.B.S. are backed
by multiple-issuer pools or custom pools (one issuer but different
interest rates that may vary within one percentage point). Multiple-issuer
pools are known as "jumbos." Jumbo pools are generally
longer and offer certain mortgages that are more geographically
diverse than single-issuer pools. Jumbo pool mortgage interest rates
may vary within one percentage point.
A GNMA pass-through certificate backed by fixed-rate mortgages with
a 15-year maturity. GNMA Midget is a dealer term and is not used
by GNMA in the formal description of its programs.
Good-this-Month order (GTM)
An order to buy or sell securities that continues to be a valid
order until the end of the current month.
Good through/until date order
Used in the context of general equities. Market or limited price
order that remains viable for a stated period of time unless cancelled,
executed, or changed, after which such order or the portion thereof
not executed is to be treated as cancelled.
Good 'til cancelled order (GTC)
An order to buy or sell stock that is good until you execute or
cancel it. Brokerages usually set a limit of 30-60 days, at which
the G.T.C. order expires if not restated. (Different from a day
Government National Mortgage Association
A wholly owned U.S. government corporation within the Department
of Housing & Urban Development. Ginnie Mae guarantees the timely
payment of principal and interest on securities issued by approved
servicers that are collateralized by FHA-issued, VA-guaranteed,
or Farmers Home Administration (FmHA)-guaranteed mortgages.
Common stock of a company that has an opportunity to invest money
and earn more than the opportunity cost of capital.
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A transaction that reduces the risk of an investment.
A portfolio consisting of a long position in the stock and a long
position in the put option on the stock, so as to be riskless and
produce a return that equals the risk-free interest rate.
A strategy designed to reduce investment risk using call options,
put options, short-selling, or futures contracts. A hedge can help
lock in profits. Its purpose is to reduce the volatility of a portfolio
by reducing the risk of loss.
Credit quality of AAA or AA.
In the context of hedge funds, a style of management that focuses
on low rated fixed income securities.
A statistical yardstick expressed in terms of percentages of a base
year or years. For instance, the NYSE Composite Index of all NYSE
common stocks is based on 1965 as 50. An index is not an average.
Individual Retirement Account (IRA)
A retirement account that may be established by an employed person.
IRA contributions are tax deductible according to certain guidelines,
and the gains in the account are tax-deferred.
Individual Retirement Account (IRA)
A provision of the law governing IRA's that enables a retiree or
anyone receiving a lump-sum payment from a pension, profit-sharing,
or salary reduction plan to transfer the amount into an IRA.
An option that has value.
Also known as an underwriter. The middleman between the corporation
issuing new securities and the public. The usual practice is for
one or more investment bankers to buy outright from a corporation
a new issue of stocks or bonds. The group forms a syndicate to sell
the securities to individuals and institutions. Investment bankers
also distribute very large blocks of stocks or bonds - perhaps held
by an estate
A strategy, or plan of attack, an investor uses when deciding how
to allocate capital among several options including stocks, bonds,
cash equivalents, commodities, and real estate. The strategy should
take into account the investor's tolerance for risk as well as future
needs for capital.
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A bond with a speculative credit rating of BB (S&P) or BA (Moody's)
or lower. Junk or high-yield bonds offer investors higher yields
than bonds of financially sound companies. Two agencies, Standard
& Poors and Moody's Investor Services, provide the rating systems
for companies' credit.
Know your customer
An ethical foundation of securities brokers that an adviser who
recommends the purchase or sale of any security to a customer, must
believe that the recommendation is suitable for the customer, given
the customer's financial situation.
Limit on close order
An order to buy or sell stock at the closing price only if the price
is at a predetermined level or better.
An order to buy a stock at or below a specified price, or to sell
a stock at or above a specified price. For instance, you could tell
a broker "buy me 100 shares of XYZ Corp at $8 or less"
or "sell 100 shares of XYZ at $10 or better" The customer
specifies a price, and the order can be executed only if the market
reaches or betters that price. A conditional trading order designed
to avoid the danger of adverse unexpected price changes.
Stock or bond that has been accepted for trading by one of the organized
and registered securities exchanges in the United States. Generally,
the advantages of being listed are that exchanges provide: (1) an
orderly marketplace; (2) liquidity; (3) fair price determination;
(4) accurate and continuous reporting on sales and quotations; (5)
information on listed companies; and (6) strict regulation for the
protection of securityholders.
Stocks that are traded on an exchange.
Owning or holding options (i.e., the number of contracts bought
exceeds the number of contracts sold). For equities, a long position
occurs when an individual owns securities. An owner of 1,000 shares
of stock is said to be "Long the stock.
A profit on the sale of a capital assets held longer than 12 months,
and eligible for long-term capital gains tax treatment.
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Allows investors to buy securities by borrowing money from a broker.
The margin is the difference between the market value of a stock
and the loan a broker makes. Related: Security deposit (initial).
In the context of hedging and futures contracts, the cash collateral
deposited with a trader or exchanged as insurance against default.
Margin account (stocks)
A leverageable account in which stocks can be purchased for a combination
of cash and a loan. The loan in the margin account is collateralized
by the stock; if the value of the stock drops sufficiently, the
owner will be asked to either put in more cash, or sell a portion
of the stock. Margin rules are federally regulated, but margin requirements
and interest may vary among broker/dealers.
A demand for additional funds because of adverse price movement.
Maintenance margin requirement, security deposit maintenance.
Any stock listed on a national securities exchange, any over-the-counter
security approved by the SEC for trading in the national market
system, or appearing on the Board's list of over-the-counter margin
stock and most mutual funds.
Buying securities, in part, with borrowed money.
SEC Rule 605 to include any exchange market maker, OTC market maker, alternative trading system, national securities exchange, or national securities association. However, market center does not include any of the option exchanges.
Used in the context of general equities. Order to buy or sell a
stated amount of a security at the most advantageous price obtainable
after the order is represented in the trading crowd. You cannot
specify special restrictions such as all or none (AON) or good 'til
canceled order (GTC) on market orders.
The last reported price at which a security was traded on an exchange.
The amount of money that a willing buyer pays to acquire something
from a willing seller, when a buyer and seller are independent and
when such an exchange is motivated by only commercial consideration.
(1) The price at which a security is trading and could presumably
be purchased or sold. (2) What investors believe a firm is worth;
calculated by multiplying the number of shares outstanding by the
current market price of a firm's shares.
Adjustment of the book value or collateral value of a security to
reflect current market value.
Medallion Stamp Program
A program approved by the Securities Transfer Association that enables
participating financial institutions to guarantee signatures. The
Medallion programs ensure that the individual signing the certificate
or stock, power is in fact the registered owner as it appears on
the stock certificate or stock power. Any U.S. financial institution
that belongs to a Medallion Stamp Program can provide Medallion
guarantees. Such institutions include banks, savings and loans,
credit unions and U.S. brokerages.
A bond maturing in two to ten years.
A corporate debt instrument that is continuously offered to investors
over a period of time by an agent of the issuer. Investors can select
from maturity bands of: 9 months to 1 year, more than 1 year to
18 months, more than 18 months to 2 years, etc., up to 30 years.
(1) Acquisition in which all assets and liabilities are absorbed
by the buyer. (2) More generally, any combination of two companies.
The firm's activity in this respect is sometimes called M&A
(Merger and Acquisition)
In the context of hedge funds, a style of management that involves
the simultaneous purchase of stock in a company being acquired and
the sale of stock in its acquirer.
A stock with a capitalization usually between $1 billion and $5
This is the same as a SPDR except the index it tracks is Standard&Poor's
Mid-cap 400. This SPDR also trades on the AMEX, under the symbol
Moody's investment grade
A rating of one through four assigned by Moody's Investors Service
Moody's Investors Service
A leading global credit rating, research and risk analysis firm.
Morningstar rating system
A system used in rating mutual funds and annuity by Morningstar
Incorporated of Chicago.
Mortgage-Backed Securities Clearing Corporation
"Founded" in 1979, MBSCC is the sole provider of automated
post-trade comparison, netting, risk management and pool notification
services to the mortgage-backed securities market. The organization
is a registered clearing agency with the Securities and Exchange
Commission and majority-owned by its members -- MBS dealers, inter-dealer
brokers and other non-broker/dealers. MBSCC provides its specialized
services to major market participants active in various Government
National Mortgage Association (GNMA), Fannie Mae(FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) MBS programs.
Mortgage-backed securities (MBSs)
Securities backed by a pool of mortgage loans.
Mortgage pass-through security
Also called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages and sells shares or
participation certificates in the pool. The cash flow from the collateral
pool is "passed through" to the security holder as monthly
payments of principal, interest, and prepayments. This is the predominant
type of MBS traded in the secondary market.
An REIT that invests in loans secured by real estate which derive
income from mortgage interest and fees.
In the context of hedge funds, a style of management where by the
fund employs more than one arbitrage strategy. Portfolio manager
opportunistically allocates capital among the various strategies
in order to create the best risk/reward profile for the overall
fund. Common strategies include merger arbitrage, convertible arbitrage,
fixed income arbitrage, long/short equities pairs trading, and volatility
arbitrage. In the context of equity and private equity investment,
this refers to an investment in a firm where by standard multiples
(earnings/price, book/price) indicate the price is far cheaper than
Mutual funds are pools of money that are managed by an investment
company. They offer investors a variety of goals, depending on the
fund and its investment charter. Some funds, for example, seek to
generate income on a regular basis. Others seek to preserve an investor's
money. Still others seek to invest in companies that are growing
at a rapid pace. Funds can impose a sales charge, or load, on investors
when they buy or sell shares. Many funds these days are no load
and impose no sales charge. Mutual funds are investment companies
regulated by the Investment Company Act of 1940.
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Naked option strategies
An unhedged strategy making exclusive use of one of the following:
Short call strategy (selling or writing call options), and short
put strategy (selling or writing put options). By themselves, these
positions are called naked strategies because they do not involve
an offsetting or risk-reducing position in another option or the
underlying security. Related: Covered option strategies.
National Association of Securities Dealers
Nonprofit organization formed under the joint sponsorship of the
investment bankers' conference and the SEC to comply with the Maloney
Act, which provides for the regulation of the OTC market.
National Association of Securities Dealers
Automatic Quotation System (Nasdaq)
An electronic quotation system that provides price quotations to
market participants about the more actively traded common stock
issues in the OTC market. About 4000 common stock issues are included
in the Nasdaq system.
National Market System (NMS)
Refers to over-the-counter trading. System of trading OTC stocks
under the sponsorship of the NASD. Must meet certain criteria for
size, profitability and trading activity. More comprehensive information
is available for NMS stocks than for non-NMS stocks traded OTC (high,
low, and last-sale prices, cumulative volume figures, and bid and
ask quotations throughout the day). This is due to the fact that
market makers must report the actual price and number of shares
in each transaction within 90 seconds verses non-real-time reporting
for non-NMS stocks (thus, last sales prices and minute-to-minute
volume updates are not possible).
National Securities Clearing Corporation
A clearing corporation that facilitates the settlement of accounts
among brokerage firms, exchanges, and other clearing corporations.
Negative yield curve
When the yield on a short-term security is higher than the yield
on a long-term security, partially because high interest rates are
creating a greater demand for short-term borrowing.
Hedge that is expected to yield a dollar-neutral result of the combined
position, regardless of price change in any part of the hedge securities.
For any convertible trading at a premium, this ratio is less than
100%. The higher the convertible premium, the lower a ratio must
be to be neutral.
New York Stock Exchange (NYSE)
Also known as the Big Board or the Exchange.
NYSE composite index
Composite index covering price movements of all new world common
stocks listed on the New York Stock Exchange. It is based on the
close of the market on December 31, 1965, at a level of 50.00, and
is weighted according to the number of shares listed for each issue.
Print changes in the index are converted to dollars and cents so
as to provide a meaningful measure of changes in the average price
of listed stocks. The composite index is supplemented by separate
indexes for four industry groups: industrial, transportation, utility,
A name that is used by the corporation as a generic registered owner
on a stock or bond certificate. The use of nominee names makes the
processing of security transfers easier.
Offer by an investor to purchase Treasury securities at a price
equivalent to the weighted average discount rate or yield of accepted
competitive bids in a Treasury auction. Noncompetitive tenders are
always accepted in full.
Applies mainly to convertible securities. Type of preferred stock
on which unpaid or Omitted dividends do not accrue. Omitted dividends
are, as a rule, gone forever.
Noncumulative preferred stock
Preferred stock whose holders must forgo dividend payments when
the company misses a dividend payment.
SEC Rule 606 to include any order where the customer has not specifically instructed the broker dealer to route the order to a particular venue for execution.
A security that does not entitle the holder to vote on the corporation's
resolutions or elections.
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A trading order for less than 100 shares of stock.
Office of Thrift Supervision (OTS)
An agency of the U.S. Treasury department responsible for the U.S.
savings and loan industry.
Options Clearing Corporation (OCC)
Applies to derivative products. Financial institution that is the
actual issuer and guarantor of all listed option contracts.
A contract that, in exchange for the option price, gives the option
buyer the right, but not the obligation, to buy (or sell) a financial
asset at the exercise price from (or to) the option seller within
a specified time period, or on a specified date (expiration date).
Instruction to a broker/dealer to buy, sell, deliver, or receive
securities or commodities that commits the issuer of the "order"
to the terms specified. See: indication, inquiry, bid wanted, offer
Original issue discount debt (OID debt)
Debt that is initially offered at a price below par.
Original Issue Discount securities (OIDS)
Bonds on which the coupon rate is set considerably below the yield
to maturity at the time of issuance so that the bonds are issued
at a discount from a par value.
OTC Bulletin Board
An electronic quotation listing of the bid and asked prices of OTC
stocks that do not meet the requirements to be listed on the NASDAQ
OTC margin stock
Shares traded over-the-counter that can be used as margin securities
under Regulation T.
A call option is "out of the money" if the strike price
is greater than the market price of the underlying security. That
is, you have the right to purchase a security at a price higher
than the market price, which is not valuable. A put option is out
of the money if the strike price is lower than the market price
of the underlying security.
A decentralized market (as opposed to an exchange market) where
geographically dispersed dealers are linked by telephones and computer
screens. The market is for securities not listed on a stock or bond
exchange. The NASDAQ market is an OTC market for US stocks.
An option traded off-exchange, as opposed to a listed stock option.
The OTC option has a direct link between buyer and seller, has no
secondary market, and has no standardization of striking prices
and expiration dates.
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Pacific Stock Exchange
Used for listed equity securities. Regional exchange located in
Los Angeles and San Francisco; only U.S. exchange open between 4:00
A buyback to offset and effectively liquidate a prior sale of securities.
Paper gain (loss)
Unrealized capital gain (loss) on securities held in a portfolio
based on a comparison of current market price to original cost.
A pool of fixed income securities backed by a package of assets
(i.e., mortgages) where the holder receives the principal and interest
Passive portfolio strategy
A strategy that involves minimal expectational input, and instead
relies on diversification to match the performance of some market
index. A passive strategy assumes that the marketplace will reflect
all available information in the price paid for securities, and
therefore, does not attempt to find mispriced securities. Related:
A situation in which the profit and loss from the underlying asset
and the hedge position are equal.
An annuity that provides guaranteed payments to an annuitant for
a specified period of time.
Philadelphia Board of Trade (PBOT)
A subsidiary of the Philadelphia Stock Exchange that trades currency
Philadelphia Stock Exchange (PHLX)
A securities exchange trading American and European foreign currency
options on spot exchange rates.
Portfolio asset allocation
The distribution, by type of asset, of a portfolio's holdings.
Used in the context of general equities. The beta of a portfolio
is the weighted sum of the individual asset betas, According to
the proportions of the investments in the portfolio. E.g., if 50%
of the money is in stock A with a beta of 2.00, and 50% of the money
is in stock B with a beta of 1.00,the portfolio beta is 1.50. Portfolio
beta describes relative volatility of an individual securities portfolio,
taken as a whole, as measured by the individual stock betas of the
securities making it up. A beta of 1.05 relative to the S&P
500 implies that if the S&P's excess return increases by 10%
the portfolio is expected to increase by 10.5%.
Investing in different asset classes and in securities of many issuers
in an attempt to reduce overall investment risk and to avoid damaging
a portfolio's performance by the poor performance of a single security,
industry, (or country).
Portfolio expected return
A weighted average of individual assets' expected returns.
A security that shows ownership in a corporation and gives the holder
a claim, prior to the claim of common stockholders, on earnings
and also generally on assets in the event of liquidation. Most preferred
stock pays a fixed dividend that is paid prior to the common stock
dividend, stated in a dollar amount or as a percentage of par value.
This stock does not usually carry voting rights. Preferred stock
has characteristics of both common stock and debt.
A mortgage-backed security (MBS) whose holder receives only principal
cash flows on the underlying mortgage pool. All the principal distribution
due from the underlying collateral pool is paid to the registered
holder of the stripped MBS on the basis of the current face value
of the underlying collateral pool.
Authorization, whether written or electronic, that shareholders'
votes may be cast by others. Shareholders can and often do give
management their proxies, delegating the right and responsibility
to vote their shares as specified.
Document intended to provide shareholders with information necessary
to vote in an informed manner on matters to be brought up at a stockholders'
meeting. Includes information on closely held shares. Information
required by the SEC that must be provided to shareholders who wish
to vote for directors and on other company decisions by proxy.
Vote cast by one person or entity on behalf of another.
A common law standard against which those investing the money of
others fiduciaries are judged.
A bond that the holder may choose either to exchange for par value
at some date or to extend for a given number of years. If the price
is above par, the put is a "premium put."
Applies to derivative products. Option pricing principle that says,
given a stock's price, a put and call of the same class must have
a static price relationship because arbitrage opportunities or activities
will always reestablish such a relationship.
Put-call parity relationship
The relationship between the price of a put and the price of a call
on the same underlying security with the same expiration date, which
prevents arbitrage opportunities. Holding the underlying stock and
buying a put will deliver the exact payoff as buying one call and
investing the present value (PV) of the exercise price. The call
value equals C = S + P - PV(k).
The ratio of the volume of put options traded to the volume of call
options traded, which is used as an indicator of investor sentiment
(bullish or bearish).
This security gives investors the right to sell (or put) a fixed
number of shares at a fixed price within a given period. An investor,
for example, might wish to have the right to sell shares of a stock
at a certain price by a certain time in order to protect, or hedge,
an existing investment.
Put an option
To exercise a put option.
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Quid pro quo
An arrangement allowing a firm to use research from another firm
at no cost in exchange for executing all of its trades with the
firm that provides the research.
The price at which the last trade of a particular security or commodity
Rate of return
Calculated as the (value now minus value at time of purchase) divided
by value at time of purchase. For equities, we often include dividends
with the value now.
Rate of return ratios
Ratios that measure the profitability of a firm in relation to various
measures of investment in the firm.
Real Estate Investment Trust (REIT)
REITs invest in real estate or loans secured by real estate and
issue shares in such investments. A REIT is similar to a closed-end
Real gain or loss
A gain or loss adjusted for increasing prices by an inflation index
such as the CPI.
Realized compound yield
Yield assuming that coupon payments are invested at the going market
interest rate at the time of their receipt and held thus until the
Realized profit (or loss)
A capital gain or loss on securities held in a portfolio that has
become actual by the sale or other type of surrender of one or many
The return that is actually earned over a given time period.
The holding-period return actually generated from an investment
in a bond.
An exemption from the Securities Act of 1933 that exempts small
public offerings, valued at less than $1.5MM from most registration
requirements with the SEC.
There are two Regulation Ds. First, it refers to the exemption from
the Securities Act of 1933 for Private Placements. These placements
are exempt from registration and prospectus delivery requirements.
Second, it refers to a Federal Reserve Board regulation that currently
requires member banks to hold reserves against their net borrowings
from foreign offices of other banks over a 28-day averaging period.
Regulation D has been merged with Regulation M.
Regulation FD (fair disclosure)
U.S. S.E.C. regulation whose purpose is to ensure that select groups
of investors are not privy to firm-specific information before other
investors. Executives are not allowed to reveal nonpublic information
during their communications with analysts and select shareholders.
If information is inadvertently released, they must take steps to
broaden the dissemination of the information within 24 hours of
discovering the disclosure.
Federal Reserve Board regulation of lenders other than commercial
banks, brokers, or dealers that provide credit for the purchase
of or carrying of securities. This regulation was discontinued by
a 1998 amendment.
Federal Reserve Board regulation that currently requires member
banks to hold reserves against their net borrowings from their foreign
branches over a 28-day averaging period. Reg M has also required
member banks to hold reserves against Eurodollars lent by their
foreign branches to domestic corporations for domestic purposes.
Federal Reserve Board regulation imposing caps on the rates that
banks may pay on savings and time deposits. Currently time deposits
with a denomination of $100,000 or more are exempt from Reg Q.
Federal Reserve Board regulation that deals with granting credit
to customers by securities brokers, dealers, and exchange member
as far as initial margin requirements and securities that are covered
under the rules.
Regulation T Calls
Federal Reserve Board Regulation T margin calls are issued when
a customer makes a transaction in a margin account and does not
meet the minimum initial requirement of 50% cash or loan available.
This margin call is referred to as a Fed Call. The customer must
increase the equity in the account by depositing additional funds
and/or marginable securities. If the necessary amount of cash or
securities is not deposited into the account within the specified
time period, securities may be sold to meet the call, and the account
may become restricted.
Federal Reserve Board limit on how much credit a bank can allow
a customer for the purchase and carrying of margin securities.
Rules specifying the appropriate behavior of agencies, organizations
or individuals in the securities industry.
Required minimum distribution (RMD)
The minimum amount that the IRS requires must be withdrawn each
year from all tax-advantaged retirement plans starting in the calendar
year following the year in which the plan holder reaches age 70-1/2.
Roth IRAs are exempt from this rule.
The term used under Rule 144 for securities issued privately by
the company, without the benefit of a registration statement. Restricted
securities are subject to a holding period before they can be sold
under Rule 144.
Stock that must be traded in compliance with special SEC regulations
concerning its purchase and resale. These restrictions generally
result from affiliate ownership, M&A activity, and underwriting
Often we subtract from the rate of return on an asset a rate of
return from another asset that has similar risk. This gives an abnormal
rate of return that shows how the asset performed over and above
a benchmark asset with the same risk. We can also use the beta against
the benchmark to calculate an alpha, which is also risk-adjusted
Traditionally, the simultaneous purchase of stock in a company being
acquired and the sale of stock of the acquirer. Modern risk arbitrage
focuses on capturing the spreads between the market value of an
announced takeover target and the eventual price at which the acquirer
will buy the target's shares.
Individual Retirement Account that allows contributors to make annual
contributions and to withdraw the principal and earnings tax-free
under certain conditions. Maximum annual contributions are $3,000
per year (phasing up to $4,000 per year in 2005 and $5,000 per year
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An agreement between a buyer and a seller on the price to be paid
for a security, followed by delivery.
Standard & Poor's Corporation.
S&P 500 Composite Index
Index of 500 widely held common stocks that measures the general
performance of the market.
Securities & Exchange Commission (SEC)
A federal agency that regulates the US financial markets. The SEC
also oversees the securities industry and promotes full disclosure
in order to protect the investing public against malpractice in
the securities markets.
Securities and Exchange Commission Rules
Rules enacted by the SEC to assist in the regulation of US financial
Securities Exchange Act of 1934
Legislation that created the SEC, outlawing dishonest practices
in the trading of securities.
Securities Investor Protection Corporation
A nonprofit corporation that insures customers' securities and cash
held by member brokerage firms against the failure of those firms.
An IRA that the account holder can after appointing a custodian
manager to carry out investment instructions.
Self-regulatory organization (SRO)
Organizations that enforce fair, ethical, and efficient practices
in the securities and commodity futures industries, including all
national securities and commodities exchanges and the NASD.
Sell limit order
Conditional trading order that indicates that a security may be
sold at the designated price or higher.
An order that may take many different forms by an investor to a
broker to sell a particular stock, bond, option, future, mutual
fund, or other holding.
Liquidation of a margin account after a customer has failed to bring
an account to a required level by producing additional equity after
a margin call.
The selling of securities by a broker when a customer fails to pay
The complete sale of all securities in a new issue.
Sell plus order
Market or limit order to sell a stated amount of stock provided
that the price to be obtained is not lower than the last sale if
the last sale was a plus, or zero plus tick, and is not lower than
the last sale plus the minimum fractional change in the stock if
the last sale was a minimum or zero minimum tick. (In a limit order,
sale cannot be lower than the limit, regardless of tick.)
Selling a stock not actually owned. If an investor thinks the price
of a stock is going down, the investor could borrow the stock from
a broker and sell it. Eventually, the investor must buy the stock
back on the open market. For instance, you borrow 1000 shares of
XYZ on July 1 and sell it for $8 per share. Then, on Aug. 1, you
purchase 1000 shares of XYZ at $7 per share. You've made $1000 (less
commissions and other fees) by selling short.
Selling short against the box
Selling short stock that is actually owned by the seller but held
in the box, meaning it is held in safekeeping. The seller borrows
securities needed to cover as the stock in the box may be inaccessible,
or the seller may not wish to disclose ownership.
Debt whose terms in the event of bankruptcy, require it to be repaid
before subordinated debt receives any payment.
Senior mortgage bond
A bond that, in the event of bankruptcy, will be redeemed before
any other bonds are repaid.
Replacement by the issuer of securities with 5-to 12-year maturities
with securities of 15-year or longer maturities, in order to delay,
reduce, or consolidate payment.
A security that, in the event of bankruptcy, will be redeemed before
any other securities.
When payment is made for a trade.
The date on which payment is made to settle a trade. For stocks
traded on US exchanges, settlement is currently three business days
after the trade. For mutual funds, settlement usually occurs in
the US the day following the trade. In some regional markets, foreign
shares may require months to settle.
A bond payment covering less than six-months' interest, because
the original issue date is less than six months from the first scheduled
interest payment. A bond with a short time to maturity, usually
two years or less.
Total number of shares of a security that investors have sold short
and that have not been repurchased to close out the short position.
Usually, investors sell short to profit from price declines. As
a result, the short interest is often an indicator of the amount
of pessimism in the market about a particular security, although
there are other reasons to short that are not related to pessimism.
For example, hedging strategies for mergers and acquisition as well
as derivative positions may involve short sales.
Short-term gain (or loss)
A profit or loss realized from the sale of securities held for less
than a year that is taxed at normal income tax rates if the net
total is positive.
The authentication of a signature in the form of a stamp, seal,
or written confirmation by a bank or member of a domestic stock
exchange (or other acceptable guarantor). A notary public cannot
provide a signature guarantee. A signature guarantee is a common
requirement when transferring or redeeming shares or changing the
ownership of an account.
A salary deduction plan for retirement benefits provided by some
small companies with no more than 100 employees.
Simple rate of return
The return from investments figured by dividing income plus capital
gains by the amount of capital invested. The effect of compounding
is not taken into account.
Simplified Employee Pension (SEP) plan
A pension plan in which both the employee and the employer contribute
to an individual retirement account. Also available to the self-employed.
A stock with a small capitalization, meaning a total equity value
of less than $500 million.
Small-capitalization (small-cap) fund
A mutual fund that invests primarily in stocks of companies whose
market value is less than $1 billion. Small-cap stocks historically
have been more volatile than large-cap stocks, and often perform
differently from the overall market.
Small-capitalization (small cap) stocks
The stocks of companies whose market value is less than $1 billion.
Small-cap companies tend to grow faster than large-cap companies
and typically use any profits for expansion rather to pay dividends.
They also are more volatile than large-cap companies, and have a
higher failure rate.
On an exchange, the member firm that is designated as the market
maker (or dealer for a listed common stock). Member of a stock exchange
who maintains a "fair and orderly market" in one or more
securities. Only one specialist can be designated for a given stock,
but dealers may be specialists for several stocks. In contrast,
there can be multiple market makers in the OTC market. Major functions
include executing limit orders on behalf of other exchange members
for a portion of the floor broker's commission, and buying or selling
for the specialist's own account to counteract temporary imbalances
in supply and demand and thus prevent wide swings in stock prices.
A large securities transaction that is divided into smaller orders
that are spread out over some period of time to avoid large fluctuations
in the market price.
Payment of a corporate dividend in the form of stock rather than
cash. The stock dividend may be additional shares in the company,
or it may be shares in a subsidiary being spun off to shareholders.
Stock dividends are often used to conserve cash needed to operate
the business. Unlike a cash dividend, stock dividends are not taxed
A stop order that designates a price limit. Unlike the stop order,
which becomes a market order once the stop is reached, the stop-limit
order becomes a limit order.
An order to unwind a position when the price moves against you.
For example, you had purchased a stock, the stop-loss order would
be to sell the stock when the price falls to a specified level.
If you were short the asset, the stop-loss would trigger a purchase.
Stop order (or stop)
An order to buy or sell at the market when a definite price is reached,
either above (on a buy) or below (on a sell) the price that prevailed
when the order was given.
Registration under which securities maybe held by a broker on behalf
of a client but be registered in the name of the Wall Street firm.
The stated price per share for which underlying stock may be purchased
(in the case of a call) or sold (in the case of a put) by the option
holder upon exercise of the option contract.
A claim ranked lower in priority than other claims. Common stock
claims are always subordinated to debt.
Securities that fall after others in priority of claims on the entity
in the case of financial distress.
Subordinated debenture bond
An unsecured bond that ranks after secured debt, after debenture
bonds, and often after some general creditors in its claim on assets
and earnings. Related: Debenture bond, mortgage bond, collateral
Debt over which senior debt takes priority. In the event of bankruptcy,
subordinated debt holders receive payment only after senior debt
claims are paid in full.
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The settlement date for securities transactions such as a stock
sale. It refers to the obligation in the brokerage business to settle
securities trades by the third day following the trade date. The
settlement occurs when the seller receives the sales price (the
broker's commission) and the buyer receives the shares.
Take a position
To buy or sell short; that is to own or to owe some amount on an
asset or derivative security.
General term referring to transfer of control of a firm from one
group of shareholders to another group of shareholders. Change in
the controlling interest of a corporation, either through a friendly
acquisition or an unfriendly, hostile, bid. A hostile takeover (with
the aim of replacing current existing management) is usually attempted
through a public tender offer.
In the context of finance, the original cost of an asset less depreciation
that is used to determine gains or losses for tax purposes.
In the context of investments, the price of a stock or bond plus
the broker's commission.
Tax-deferred retirement plans
Employer-sponsored and other plans that allow contributions and
earnings to be made and accumulate tax-free until they are paid
out as benefits.
Tax Equity and Fiscal Responsibility Act
of 1982 (TEFRA)
Legislation to increase tax revenue by eliminating various taxation
loopholes and instituting tougher enforcement procedures in collecting
An obligation whose interest is tax-exempt, often called a municipal
bond, offered by a country, state, town, or any political district
Annual report required by the SEC each year. Provides a comprehensive
overview of a company's state of business. Must be filed within
90 days after fiscal year-end. A 10-Q report is filed quarterly.
Quarterly report required by the SEC each quarter. Provides a comprehensive
overview of a company's state of business.
The standard individual tax return form of the IRS.
A statement sent to the IRS and taxpayers by the payers of dividends
and interest and by issuers of taxable original issue discount securities.
The tax statement used for reporting proceeds resulting from the
sale, redemption or liquidation of shares.
The tax statement used for reporting dividends paid to registered
General offer made publicly and directly to a firm's shareholders
to buy their stock at a price well above the current value market
Another name for the American Stock Exchange (AMEX).
Exchange-listed securities trading in the OTC market
An organization formed as a depository for primarily consumer savings.
Savings and loan associations and savings banks are thrift institutions.
Total dollar return
The dollar return on a nondollar investment, which includes the
sum of any dividend/interest income, capital gains or losses, and
currency gains or losses on the investment.
In performance measurement, the actual rate of return realized over
some evaluation period. In fixed income analysis, the potential
return that considers all three sources of return (coupon interest,
interest on coupon interest, and any capital gain/loss) over some
An oral (or electronic) transaction involving one party buying a
security from another party. Once a trade is consummated, it is
considered "done" or final. Settlement occurs 1-5 business
The date that the counterparties in an interest rate swap commit
to the swap. Also, the day on which a security or a commodity future
trade actually takes place. Trades generally settle (are paid for)
1-5 business days after a trade date. With stocks, settlement is
generally 3 business days after the trade. The settlement date usually
follows the trade date by five business days, but varies depending
on the transaction and method of delivery used.
A tax-deferred individual retirement account that allows annual
contributions of up to $2000 for each income earner. Contributions
are fully deductible for all individuals who are not active participants
in employer-sponsored plans or for plan participants within certain
One of several related securities offered at the same time. Tranches
from the same offering usually have different risk, reward, and/or
US Department of the Treasury, which issues all Treasury bonds,
notes, and bills as well as overseeing agencies. Also, the department
within a corporation that oversees its financial operations including
the issuance of new shares.
Debt obligations of the US Treasury that have maturities of one
year or less. Maturities for T-bills are usually 91 days, 182 days,
or 52 weeks.
Debt obligations of the US Treasury that have maturities of 10 years
From 1963 to 1975, the Treasury issued something called a "Treasury
Certificates". It was a nonmarketable, public issue with a
short maturity, usually three months and never more than a one year.
They were issued once or twice every month with odd interest rates
(such as 5.471% and 6.053%) and sold at par.
A system allowing an individual investor to make a noncompetitive
bid on US Treasury securities and thus avoid broker-dealer fees.
Treasury Investors Growth Receipt
US government-backed bonds without coupons, meaning that the bondholders
do not receive the periodic interest payments. The principal of
the bond and the individual coupons are sold separately.
Debt obligations of the US Treasury that have maturities of more
than 2 years but less than 10 years.
Securities issued by the US Department of the Treasury.
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A short call option position in which the writer does not own shares
of underlying stock represented by the option contracts. Uncovered
calls are much riskier for the writer than a covered call, where
the writer of the uncovered call owns the underlying stock. If the
buyer of a call exercises the option to call, the writer would be
forced to buy the asset at the current market price.
Uncovered call writing
A short call option position in which the writer does not own an
equivalent position in the underlying security represented by his
A short put option position in which the writer does not have a
corresponding short stock position or has not deposited, in a cash
account, cash or cash equivalents equal to the exercise value of
the put. The writer has pledged to buy the asset at a certain price
if the buyer of the option chooses to exercise it. Uncovered put
options limit the writer's risk to the value of the stock (adjusted
for premium received.)
Uncovered Put writing
A short put option position in which the writer does not have a
corresponding short position in the underlying security or has not
deposited, in a cash account.
Uniform Gifts to Minors Act (UGMA)
Legislation that provides a tax-effective manner of transferring
property to minors without the complications of trusts or guardianship
Unit investment trust
Money invested in a portfolio whose composition is fixed for the
life of the fund. Shares in a unit trust are called redeemable trust
certificates, and they are sold at a premium to net asset value.
A security traded in the over-the-counter market that is not listed
on an organized exchange.
Trading in unlisted securities that occurs on an organized exchange
to accommodate members. This practice is not permitted at the NYSE.
Unrealized capital gain/loss
An increase/decrease in the value of a security that is not "real"
because the security has not been sold. Once a security is sold
by the portfolio manager, the capital gains/losses are "realized"
by the fund, and any payment to the shareholder is taxable during
the tax year in which the security is sold.
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Procedure for estimating the probability of portfolio losses exceeding
some specified proportion based on a statistical analysis of historical
market price trends, correlations, and volatilities.
Stocks with low price/book ratios or price/earnings ratios. Historically,
value stocks have enjoyed higher average returns than growth stocks
(stocks with high price/book or P/E ratios) in a variety of countries.
A measure of risk based on the standard deviation of the asset return.
Volatility is a variable that appears in option pricing formulas,
where it denotes the volatility of the underlying asset return from
now to the expiration of the option. There are volatility indexes.
Such as a scale of 1-9; a higher rating means higher risk.
The right to vote on matters that are put to a vote of security
holders. For example the right to vote for directors.
The shares in a corporation that entitle the shareholder to vote.
Certificate of Foreign Status form required by the IRS to tell the
payer, transfer agent, broker or other middleman that an employee
is a nonresident alien or foreign entity that is not subject to
U.S. tax reporting or backup withholding rules.
A form used to certify a shareholder's social security or tax identification
number as true and correct, in order to avoid federal tax withholding.
Generic term for the securities industry firms that buy, sell, and
When issued (W.I.)
Refers to a transaction made conditionally, because a security,
although authorized, has not yet been issued. Treasury securities,
new issues of stocks and bonds, stocks that have split, and in-merger
situations after the time the proxy has become effective but before
completion are all traded on a when-issued basis.
The seller of an option, usually an individual, bank, or company
that issues the option and consequently has the obligation to sell
the asset (if a call) or to buy the asset (if a put) on which the
option is written if the option buyer exercises the option.
Writing puts to acquire stock
Selling a put option at an exercise price that would represent a
good investment by an option writer who believes a stock's value
will fall, so that the writer cannot lose. If the stock price unexpectedly
goes up, the option will not be exercised and the writer is at least
ahead the amount of the premium received. If the stock loses value,
as expected, the option will be exercised, and the writer has the
stock at what he had earlier decided was originally a good buy,
and he has the premium income in addition.
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The percentage return paid on a stock in the form of dividends,
or the effective rate of interest paid on a bond or note.
The advantage gained by purchasing convertible securities instead
of common stock, which equals the difference between the rates of
return of the convertible security and the common shares.
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