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financial terms

  1. 1. Bulge bracket: The firms in an underwriting syndicate who were responsible for placingthe largest amounts of the issue with investors. Since these firms are the most responsiblefor a securitys successful issuance, their names appear first in the advertisementconveying the details of the security issue, called the tombstone.Asked price: The lowest price that any investor or dealer has declared that he/she will sell agiven security or commodity for. For over-the-counter stocks, the ask is the best quotedprice at which a Market Maker is willing to sell a stock. For mutual funds, the ask is the netasset value plus any sales charges. also called or asking price or offering price or ask.Basket: A group of several securities created for the purpose of simultaneous buying andselling. Baskets often play a role in index arbitrage, program trading and hedging.A collection of consumer goods and services that are tracked in the process of calculatinga consumer price index. also called market basket.Analyst: An employee of a bank, brokerage, advisor, or mutual fund whostudies companies and makes buy and sell recommendations, often specializing ina single sector or industry. Analysts use a wide variety of techniques for researching andmaking recommendations. The reports and recommendations they publish are often usedby traders, mutual fund managers, portfolio managers and investors in their decisionmaking processes. also calledfinancial analyst or securities analyst.Short call option: A stock option strategy in which an investor sells a call on shares thatare either currently owned (covered call) or not yet owned (naked call). The two types ofshort calls carry different risks. For a naked call, the breakeven point isthe premium received plus the strike price. For a covered call, the breakeven point isthe strike price minus the premium.Affordability index: A measure of the financial ability of U.S. families to buy a house. 100means that families earning the nationalmedian income have justthe amount of money needed to qualify for a mortgage on a median-priced home; higherthan 100 means they have more than enough and lower than 100 means they have lessthan enough.Market breadth: The fraction of the overall market that is participating in the markets upor down move. Looking at this parameter allows investors to reduce the impact of the largecap stocks which influence market indices the most, and instead examine price trends of adiverse range of stocks. This parameter is important in the context of technical analysis, asa measure of market sentiment. Market breadth is also used to refer to the number ofindependently issued price forecasts for a certain number of stocks (less common). alsocalled breadth.
  2. 2. Banking book: An accounting book that includes all securities that are not activelytraded by the institution, that are meant to beheld until they mature. These securities areaccounted for in a different way than those in the trading book, which are traded onthe market and valued by the performance of the market.Shareholder loan: A loan made to a company from anindividual shareholder or partnership that exchanges money for interestpayments. The loancan be secured by the shares (an equity loan) or through a debenture. This type of loanranks below commercial loans if it is not secured by collateral, making it subordinated debt.A shareholder loan is often associated with S Corporations.Withholding: An amount of an employees income that an employer sends directly tothe federal, state, or local tax authority as partial payment of that individuals tax liability forthe year. When a person starts a new job, he/she is required tofill out a W-4 form on whichhe/she can indicate his/her filing status and the number of allowances he/she is claiming.Inflation risk: The possibility that the value of assets or income will decreaseas inflation shrinks the purchasing power of acurrency. Inflation causes money to decreasein value at some rate, and does so whether the money is invested or not.Electronic communication network: Electronic Communication Network. Anelectronic system that brings buyers and sellers together for theelectronic execution of trades. It disseminates information to interested parties aboutthe orders entered into the network and allows these orders to be executed. ElectronicCommunications Networks (ECNs) represent orders in NASDAQ stocks; theyinternally match buy and sell orders or represent the highest bid prices and lowest askpriceson the open market. The benefits an investor gets from trading with an ECN include after-hours trading, avoiding market makers (and their spreads), and anonymity (which is oftenimportant for large trades).457 plan: A tax-exempt deferred compensation program made available to employees ofstate and federal governmentsand agencies. A 457 plan is similar to a 401(k) plan, exceptthere are never employer matching contributions and the IRS does not consider ita qualified retirement plan. Participants can defer some of their annual income (up to anannual limit), and contributions and earnings are tax-deferred until withdrawal. Distributions start at retirement age but participants canalso take distributions if they change jobs or in certain emergencies. Participants canchoose to take distributions as a lump sum, annual installments or as an annuity.Distributions are subject toordinary income taxes and the amounts cannot be transferredinto an IRA.
  3. 3. Currency convertibility: The ability to exchange money for gold or other currencies.Some governments which do not have large reservesof hard currency foreign reserves tryto restrict currency convertibility, since they are not in a position to handle largecurrency market operations to support their currency when necessaryCash less exercise: A method of converting options into stock that requires noinitial cash payment to cover the strike price. Essentially,a broker briefly loans enough money to exercise the options, and a portion of the stockis soldimmediately after exercise in order to repay the broker. In this respect it isessentially buying on margin. The broker is willing to enter this arrangement when thatbroker feels that the option holder will honor his/hercommitment andquickly sell his/her stocks to settle the debt to the broker.Covered arbitrage: Arbitrage involving investments denominated indifferent currencies, using forward cover to reduce or eliminatecurrency risk.Broad base index: An index whose purpose is to reveal the performance of theentire market, such as the S&P 500, Wilshire 5000,AMEX Major MarketIndex or Value Line Composite Index. Different broad-base indices have differentapproaches to ensuring that the index captures the entire breadth of market activity. TheWilshire 5000 takes the most all-inclusive approach by including all the stocks listed onthe New York Stock Exchange and almost all the stocks listed onthe NASDAQ and American Stock Exchange. The S&P 500 includes 500 companies thatare together considered a good indicator for the US stock market, based onthe industries the companies operate in, theirpositions within the industry, and their marketcapitalizations. The S&P 500 is a market-weighted index, so only 10% if its componentsmake up about 75% of its value. The Value Line Composite Index takes an in betweenapproach by tracking 1700 issues. The Value Line Composite is thought to be a betterindicator of speculative stocks than of more stable stocks.Effective duration: The duration for a bond with an embedded option whenthe value is calculated to include the expected change incash flow caused bythe option as interest rates change. This measures the responsiveness ofa bonds price tointerest rate changes, and illustrates the fact that the embedded option willalso affect the bonds price.Exotic option: A category of options which includes complicated components andcomplex payoffs. Its payoff or other keyvalues often depend on outside factors which varyover time, such as exchange rate. Because of their complexity, exotic options are oftentraded over the counter rather than through an exchange. Asian-style options are one typeof exotic options. opposite of plain vanilla option.
  4. 4. NASD: NASD. Merged with the NYSE Regulation, Inc. in 2007 to formthe organization now known as the Financial Industry Regulatory Authority (FINRA).EQUITY: Ownership interest in a corporation in the form of common stock or preferredstock. It also refers to total assets minus total liabilities, in which case it is also referred toas shareholders equity or net worth or book value. In real estate, it is the differencebetween what a property is worth and what the owner owes against that property (i.e. thedifference between the house value and the remaining mortgage or loan payments on ahouse). In the context of a futures trading account, it is the value of the securities in theaccount, assuming that the account is liquidated at the going price. In the context ofa brokerage account, it is the net value of the account, i.e. the value of securities in theaccount less any margin requirements.Capital net worth: Total assets minus total liabilities of an individual or company.For a public company, the excess of assets overliabilities consist of retainedearnings, common stock and additional paid-in surplus; here also called ownersequity or shareholders equity or net assets. For an individual, the excess of assets overliabilities is most likely to come from savings and any additional contributions to income thatthey have received. Some economists saynet worth is not very useful, since financialstatements value most assets and liabilities at historical cost, which is usually not agood indicator of true value. also called capital net worthMarried filling separately: A tax filing status indicating that a married coupleis filing two separate tax returns, one for each individual. Married couples have the option offiling jointly or separately. Although filing jointly often results in less taxes, filing separately issometimes preferable when one partner has significant medical expenses, casualty losses,or miscellaneous itemized deductionsForward outright rate: The forward rate of a foreign exchange contract, often expressedas U.S. dollars per foreign currency.Contract for difference: CFD. A contract between two people that mirrors the situationof trading a security, without actually buying or selling the security. The two parties make acontract that the seller will pay the buyer the difference in price after a certain period of timeif the designated securitys price increases, and the buyer will in return pay the seller thedifference in price if the securitys price decreases. CFDs are traded in over the countermarkets in many countries, although they are not allowed in the United States.Health maintenance organisation: HMO. A form of healthinsurance combining a range of coverages in a group basis. A group of doctors and other
  5. 5. medical professionals offer care through the HMO for a flat monthly rate withno deductibles. However, only visits to professionals within the HMO network are coveredby the policy. All visits, prescriptions and other care must be cleared by the HMO in order tobe covered. A primary physician within the HMO handles referralsRed herring: Same as preliminary prospectus. Its name comes from the warning, printedin red, that information in the document is still being reviewed by the SEC andis subject to change.Saw buck: Slang term for the U.S. ten dollar paper currency. The slang isderived from the Roman numeral for ten, "X". The "X" looks like the shape of a sawbuck, adevice used to hold wood in place for sawing it into pieces.Fed: The 7-member Board of Governors that oversees Federal Reserve Banks,establishes monetary policy (interest rates, credit, etc.), and monitors the economic healthof the country. Its members are appointed by the Presidentsubject to Senate confirmation,and serve 14-year terms. also called the Federal Reserve Board.Knock out option: An option that becomes worthless in the eventthat the underlying commodity or currency crosses a certain price level.Adjustable rate: Any interest rate that changes on a periodic basis. The change isusually tied to movement of an outsideindicator, such as the prime interest rate. Movementabove or below certain levels is often prevented by a predetermined floor and ceiling for agiven rate. For example, you might see a rate set at "prime plus 2%". This means that therate on the loan will always be 2% higher than the prime rate, which changes regularlyto take intoaccount changes in the inflation rate. For an individual taking out a loanwhen rates are low, a fixed rate loanwould allow him or her to "lock in" the low rates and notbe concerned with fluctuations. On the other hand, ifinterest rates were historically high atthe time of the loan, he or she would benefit from a floating rate loan, because as the primerate fell to historically normal levels, the rate on the loan would decreaseSecurities analyst: Global Depositary Receipt. A negotiable certificate held inthe bank of one country representing a specific number of shares of a stock traded onan exchange of another country. American Depositary Receipts make it easier forindividuals to invest in foreign companies, due to the widespread availabilityof price information, lowertransaction costs, and timely dividend distributions. alsocalled European Depositary Receipt.
  6. 6. Synthetic put: A transaction involving the purchase of a call option on a stock thathas already been shorted. This enables theholder to protect against an increase inthe price of the underlying stock. If the stock price decreases, the call is not exercised andthe investor profits minus the premium. If the stock price increases, the call is exercised andthe investor breaks even minus the premium and short interest.Permitted currency: A minor foreign currency that is allowed to be converted intoa major currency, such the U.S. dollarAdjusted debit balance: Value used to determine a margin accounts position, asrequired by Regulation T. This is the amount acustomer owes a broker,minus profits on short sales and balances in a special miscellaneous account. If theadjusted debit balance is very small, the customer can withdraw cash or securities froma margin account.U.S. Government Agency SecurityA security, usually a bond, issued by a U.S. government-sponsored agency.The offerings of these agencies are backed by the government, but not guaranteed by thegovernment since the agencies are private entities. Such agencies have been set upin order to allow certain groups of people to access low cost financing e.g. students andhome buyers. Some prominent issuers of agency securities are Student Loan MarketingAssociation (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and FederalHome Loan Mortgage Corporation(Freddie Mac). Agency securities areusually exempt from state and local taxes, but not federal tax. also calledagency security.Gift tax: A graduated tax assessed against a person who gives money or an asset toanother person without receiving fair compensation. A significant amount of each gift is tax-free. There are no exclusion limits on gifts given to a spouse unless the spouse is not a U.S.citizen. The recipient of the gift does not report income except when the gift isa property or stock. The recipient still has to pay taxes if he or she makes a profit from thegift.Overnight limit: The maximum amount of currency positions that can be carried overfrom one trading day to another. The overnight limit is set by the CentralBank regulation the financial institution where the positions are held.
  7. 7. -stapled securityA security which is comprised of two parts that cannot be separated from one another. Thetwo parts of a stapledsecurity are a unit of a trust and a share of a company. The resultingsecurity is influenced by both parts, and must be treated as one unit at all times, such aswhen buying or selling the security.-repatriationCapital flow from a foreign country to the country of origin. This usually refers toreturning returns on a foreign investment in the case of a corporation, or transferringforeign earnings home in the case of an individual.- wash saleStock approved by the Federal Reserve and an investors broker as being suitable forproviding collateral for margin debt. Depositing marginable stocks (or any othermarginable securities) in a margin account is an effective way for an investor toreduce financing charges. However, the criteria to ensure that securities are suitable ascollateral for margin debt can be quite strict. The Federal Reserve has a minimum setof standards for marginable stock, but a broker can choose to set stricter standards.-participation certificateFinancing in which an individual buys a share of the lease revenues of an agreement madeby a municipal or governmental entity, rather than the bond being secured by thoserevenues. This form of financing can be used by the municipal or government entity tocircumvent restrictions that might exist on the amount of debt they might be able to take on.As of now, the only agencies to issue or guarantee such certificates are FreddieMac, Fannie Mae, Ginnie Mae and Sallie Mae.- bear raidA traders attempt to force down the price of a particular security by heavy selling or shortselling. In the case of short selling, the trader then makes a profit by buyingthe stock cheaply to cover the short position. Bear raids are often carried out by largegroups of traders together, since an individual trader might not have a large enoughtrade toinfluence market price significantly. This practice is not allowed under SEC regulations.
  8. 8. -odd-lot theoryA technical analysis theory based on using odd-lot trading behavior as a contrary indicator,under the assumption that odd lots are traded primarily by small investors who areon average less experienced than institutional investors. The theory has declined inpopularity as historical data has failed to support it.-U.S. Treasury SecuritiesNegotiable U.S. Government debt obligations, backed by its full faith andcredit. Exempt from state and localtaxes. U.S. Treasury Securities are issued by the U.S.government in order to pay for government projects. Themoney paid out for a Treasurybond is essentially a loan to the government. As with any loan, repayment ofprincipal isaccompanied by a specified interest rate. These bonds are guaranteed by the "full faith andcredit" of the U.S. government, meaning that they are extremely low risk (since thegovernment can simply print money to pay back the loan). Additionally, interest earned onU.S. Treasury Securities is exempt from state and local taxes.Federal taxes, however, arestill due on the earned interest. The government sells U.S. Treasury Securities byauction inthe primary market, but they are marketable securities and therefore can be purchasedthrough abroker in the very active secondary market. A broker will charge a fee for sucha transaction, but the governmentcharges no fee to participate in auctions. Prices on thesecondary market and at auction are determined byinterest rates. U.S. Treasury Securitiesissued today are not callable, so they will continue to accrue interest until the maturity date.One possible downside to U.S. Treasury Securities is that if interest rates increase duringthe term of the bond, the money invested will be earning less interest than it could earnelsewhere. Accordingly, theresale value of the bond will decrease as well. Because there isalmost no risk of default by the government, thereturn on Treasury bonds is relatively low,and a high inflation rate can erase most of the gains by reducing thevalue of the principaland interest payments. There are three types of securities issued by the U.S. Treasury(bonds, bills, and notes), which are distinguished by the amount of time from theinitial sale of the bond tomaturity. also called Treasuries.-active accountA brokerage account in which there are many transactions. Often, brokerages will charge acertain flat fee on accounts that are not very active. For a brokerage, this is a chance togenerate revenues from accounts that would otherwise not be generating revenues.-circular flow of incomeA model that indicates how money moves throughout an economy,between businesses and individuals.Investors spend their income byconsuming goods and services from businesses, paying taxes and investing in the stock
  9. 9. market. Businesses use the money spent by individuals while consuming and the moneyraised from selling stock to pay for capital to run their business, purchase material tomanufacture products and to payemployees. All expenditures from individuals become theincome of the businesses, and the expenditures of the businesses become the income ofthe individuals- market makerA brokerage or bank that maintains a firm bid and ask price in agiven security by standing ready, willing, and able to buy or sell at publicly quoted prices(called making a market). These firms display bid and offer prices for specific numbers ofspecific securities, and if these prices are met, they will immediately buy for or sell from theirown accounts. Market makers are very important for maintaining liquidity and efficiency forthe particular securities that they make markets in. At most firms, there is a strict separationof the market-making side and the brokerage side, since otherwise there might bean incentive for brokers to recommend securities simply because the firm makes a marketin that security.-watermarkAn image on paper currency designed to differentiate officially sanctioned bills fromcounterfeit bills.-corporate spread durationThe price sensitivity of a corporate bond to a 100 basis point change inits spread over LIBOR. Because a change in the option-adjusted spread affectsthe amount of cash flows received by the option holder.A corporatebond option investor maintaining a long position has to decide if the optionshould be executed because changesin the market price of the bond alters the return onthe investment. For example, if the spread between the corporate bond optionand Treasuries narrows, the price of the bond may rise to the point at which theoptionissuer could initiate the call.-basis swapA specific type of interest rate swap, where the interest rates exchanged are based ondifferent money marketsor currencies.-quantity demandedThe amount of goods which would be demanded at a particular price. If non-price factors that could influencedemand are removed, then the higher the price of a good
  10. 10. the lower the quantity of that good will be demanded. It is the inverse of the law of supply,and is directly related to the law of demand.-production possibility frontierPPF. A curve that compares the trade offs between two goods produced byan economy in order to demonstrate the efficient use of resources. Points along the curveare considered efficient and obtainable, and show the maximum amount of one good thatcan be produced in relation to another. Points within the curve are considered obtainablebut inefficient. Points outside the curve are considered impossible to obtain. A classicexample considers an economy that can produce either guns or butter, and shows how agovernment ctan spend a finite amount of resources on guns (defense), butter (non-defense) ora combination of the two.-Federal Open Market CommitteeFOMC. A 12-member committee which sets credit and interest rate policies for the FederalReserve System. This committee consists of 7 members of the Board of Governors, and 5of the 12 . This group, headed by the Chairman of the Federal Reserve Board, sets interestrates either directly (by changing the discount rate) or through the use of open marketoperations (by buying and selling government securities which affects the federal fundsrate). The discount rate is the rate at which the Federal Reserve Bank charges memberbanks for overnight loans. The Fed actually controls this rate directly, but it tends to havelittle impact on the activities of banks because these funds are available elsewhere. Thisrate is set during the FOMC meetings by the regional banks and the Federal ReserveBoard. The federal funds rate is the interest rate at which banks loan excess reserves toeach other. While the Fed cant directly affect this rate, it effectively controls it through theway it buys and sells Treasuries to banks. There are 8 scheduled FOMC meetings duringthe course of each year. However, when circumstances dictate, the Fed can make inter-meeting rate changes.-direct quoteA foreign exchange rate of one currency, usually the domestic currency, per unit of adifferent currency. In termsof U.S. dollars, a direct quote is the number of a foreign currencythat one dollar could buy. For example, a direct quote for the Euro could be US$1.50 = 1Euro.-back-to-back loans
  11. 11. An arrangement in which two companies in different countries borrow eachothers currency for a given period of time, in order reduce foreign exchange risk for both ofthem. also called parallel loans.-accumulationBuying over a period of time. For example, this might be done by an institutional investor toavoid making a singlesubstantial purchase that might drive up the market price, or bya retail investor who wants to reduce risk bydollar cost averaging.Retaining profits within a company, as opposed to paying them out as dividends.More generally, any buying.-contingent orderAn order which is to be executed only if another order is executed first. An example ofa contingent order would be to sell one specific security if another specific security has beenbought. Brokers often do not like to work with these orders, given the uncertainty and extrawork involved.-money market accountA savings account which shares some of the characteristics of a money market fund. Likeother savings accounts, money market accounts are insured bythe Federal government. Money market accounts offer many of thesame services as checking accounts although transactions may be somewhat more limited.These accounts are usually managed by banks or brokerages, and can be a convenientplace to store money that is to be used for upcoming investments or has been receivedfrom the sale of recent investments. They are very safeand highly liquid investments, butoffer a lower interest rate than most other investments.
  12. 12. -Form 10-QUnaudited document required by the SEC for all U.S. public companies, reportingthe financial results for thequarter and noting any significant changes or events in thequarter. The Form 10-Q contains financial statements, a discussion from the management,and a list of "material events" that have occurred with thecompany (such as a stocksplit or acquisition). also called quarterly report.-ISOIncentive Stock Option. A type of employee stock option which provides tax advantages forthe employer that anon-qualified stock option does not, but which is subject to morestringent requirements. For ISOs, no income taxis due when the options are granted orwhen theyre exercised. Instead, the tax is deferred until the holder sellsthe stock, at whichtime he/she is taxed for his/her entire gain. As long the sale is at least two years after theoptions were granted and at least one year after they were exercised, theyll be taxed at thelower, long-termcapital gains rate; otherwise, the sale is considered a "disqualifyingdisposition", and theyll be taxed as if they were nonqualified options (the gain at exercise istaxed as ordinary income, and any subsequent appreciation is taxed as capital gains). ISOsmay not be granted at a discount to the current stock price, and they are not transferable,except through a will. also called qualified stock option.International Organization for Standardization. The worlds largest standards developer. Anon-governmentalorganization established in 1946, consisting of a network of 156countries national standards institutes with one member representing each country. Theorganization is managed by a general secretariate in Geneva, Switzerland.-total return indexAn index that calculates the performance of a group of stocks assuming thatall dividends and distributions are reinvested. Examples include the S&P 500, the Russell2000, and the Wilshire 5000. This method is usually considered a more accurate measureof actual performance than if dividends and distributions were ignored.-automatic exerciseThe procedure that prevents in-the-money equity options from expiring andbecoming worthless. In this procedure, the clearing firm will exercise certain kindsof options that are in the money without instruction from the option holder, thusallowing option holders who may not be monitoring an option to still capture a profit. Not alloptions are subject to automatic exercise. Certain options (known as "capped-styleoptions") become subject to automatic exercise if the price of the underlier hits a certainprice (known as the "cap value"), regardless of when the price is achieved (this is onlypossible in the case of an American-style option). Other options will be subject to automaticexercise just before expiration and at no other time. In such cases, the trigger for automatic
  13. 13. exercise is either when the option is in the money, or when it is in the money by acertain amount.-margin lendingA program though lending institutions that allows an individual to borrow money for thepurposes of investing it. The amount of credit loaned is based upon the amountof assets held by the borrower, which are pledged ascollateral on the loan. This program isoften used by individuals who want to invest more than they currently are investing, and arewilling to take on the risk of this type of loan.Term of the Day - collarThe lowest rate acceptable to a buyer of bonds, or the lowest price acceptable tothe issuer of an underwriting, or the lowest rate possible for an adjustable rate.The index level at which a circuit breaker is triggered.A combination of put options and call options that can limit, but not eliminate, the risk thattheir value will decrease.Term of the Day - revocationThe act of recalling or terminating a previously granted power of attorney. The power ofattorney document may state a specific date when the power will terminate. In most cases,the power of attorney automatically expiresupon the death or incapacity of the person whogranted the power. The person granting the power may alsorevoke the power athis/her discretion, but if the power of attorney had been set as irrevocable at the time thatthecontract was drawn up, such a revocation may constitute breach of contract. Whilerevocation of power of attorney becomes effective the moment the person who was giventhat power of attorney receives notice, third parties who deal with the attorney must beseparately notified of the fact that the power of attorney has been revoked.Term of the Day - extended broad moneyOne measure of the money supply that includes M2, plus large timedeposits, repos of maturity greater than one day at commercial banks, andinstitutional money market accounts. also called M3.Term of the Day - normal distributionA probability distribution shaped like a bell, often found in statistical samples.The distribution of the curve implies that for a large population of independent randomnumbers, the majority of the population often cluster near a central value, andthe frequency of higher and lower values taper off smoothly.
  14. 14. Term of the Day - investTo engage in any activity in which money is put at risk for the purpose of making a profit,and which is characterized by some or most of the following (in approximatelydescending order of importance): sufficientresearch has been conducted; the odds arefavorable; the behavior is risk-averse; a systematic approach is being taken; emotions suchas greed and fear play no role; the activity is ongoing and done as part of a long-termplan;the activity is not motivated solely by entertainment or compulsion; ownership of somethingtangible is involved; a net positive economic effect results.-currency tradingThe act of buying and selling world currencies. Currency trading is most often engaged inby banks and otherinstitutions, for the purposes of international trade. Individualinvestors may engage in currency trading as well, attempting to benefit from variations inthe exchange rates of the currencies.-SIMPLE 401(k) PlanA retirement plan sponsored by employers which is attractive for employers because itavoids some of the administrative fees and paperwork of plans such as a 401(k) plan.Employers benefit from the tax-deductiblecontributions made to the plan,and employees may elect to have salary deferrals in order to contribute to the plan. Theemployer has the option of matching a certain portion of the employees deferrals or makingnon-elective contributions to all eligible employees (an annual limit applies in both cases). Aminimum compensation eligibility requirement exists for employees who want to join thisplan, and employees cannot establish any otherqualified retirement plans at the same time.-net interest incomeNII. A financial measure for banks, calculated by the amount of money the bank receivesfrom interest on assets(commercial loans, personal mortgages, etc) minus the amount ofmoney the bank pays out for interest onliabilities (personal bank accounts, etc). Althoughusually calculated for banks, this figure can also be calculated for other corporations, simplyby subtracting the amount of interest paid on liabilities from the amount of interest earnedfrom assets.-media buyThe buying of advertising space from a company operating media properties. The cost of amedia buy varies depending on the specific media property on which the buyer wants toadvertise, the size of the advertising campaign, the specific times at which theadvertisements are to be displayed, and other specific features of the advertising campaign.
  15. 15. -net income multiplierThe price of an asset (usually current price) divided by the net income it generates in agiven period of time. Usually refers to rental property, for which the time period over whichthis multiple is considered is generally a month. It is a useful measure for judging howeffective an asset is at generating income, compared to its market price.-previous balance methodA technique for calculating finance charges on a creditcard account that takes the outstanding balance at the end of the previous billing period andapplies the interest rate to that total. Charges in the current billing period are notincluded. Interest charges are usually higher under this method than under other methods,such as adjusted balance, and average daily balance methods.-impairment chargeA specific reduction on a companys balance sheet that adjusts the value of acompanys goodwill. Due toaccounting rules, a company must monitor and test the value ofits goodwill, to determine if it is overvalued. If it is, the companymust issue an impairment charge on its balance sheet, to take into account the reducedvalue of the goodwill.-dutch diseaseThe deindustrialization of a nations economy that occurs when the discovery of anatural resource raises thevalue of that nations currency, makingmanufactured goods less competitive with other nations, increasingimports anddecreasing exports. The term originated in Holland after the discovery of North Sea gas.-Coverdell Education Savings AccountESA. An investment vehicle designed to help parents fund their childs education. TheCoverdell EducationSavings Account has replaced the Education IRA. Contributions tothe account are taxed, but earnings used topay education expenses are not. The account istransferable among family members. However, there are several restrictions attached to thisaccount. The entire account has to be disbursed before the beneficiarys 30th birthday, andany withdrawals after this date or for expenses that do not qualify under the act willbe subject toincome taxes and a penalty.-open-ended investment companyOEIC. A type of company that allows investors tocollectively pool together money to invest in various opportunities. As money isinvested, shares are created. When a shareholder requests to sell shares, that money is
  16. 16. then redeemed. The value of a share varies with the value of the OEICs net portfolio value(NPV). It is most often used in the United Kingdom. In the United States it is referred to asan open-ended mutual fund.-ISM manufacturing indexA monthly index released by the Institute of Supply Management which tracksthe amount of manufacturingactivity that occurred in the previous month. This data isconsidered a very important and trusted economicmeasure. If the index has a value below50, due to a decrease in activity, it tends to indicate an economicrecession, especially ifthe trend continues over several months. A value substantially above 50 likely indicates atime of economic growth. The values for the index can be between 0 and 100.-broad moneyOne measure of the money supply that includes M1, plus savings and small timedeposits, overnight repos atcommercial banks, and non-institutional money marketaccounts. This is a key economic indicator used toforecast inflation, since it is not as narrowas M1 and still relatively easy to track. All the components of M2 are very liquid, and thenon-cash components can be converted into cash very easily.-overhead ratioOperating expenses divided by the sum of taxable equivalent net interest income andother operating income. This ratio shows the proportion of expenses, in relation tototal income, that cannot be allocated directly to production of the goodor service. Operating expenses include items such as office rent, maintenance ofmachinery, depreciation costs, etc. In general, companies want to minimize these costssince it is difficult to quantify the revenues generated by undertaking these costs.-incontestability clauseA provision in a life insurance policy that prevents the insurer fromrevoking coverage because of alleged misstatements by the insured after aspecified period, usually about two years. Of course, this is not a license to commit fraud,and the discovery of fraud will lead the company to contest any claims and possibly pursuecriminal charges.-Basel IIA document written in 2004 by the Basel Committee on Banking Supervision, which makesmore detailedrecommendations for banks, building on its previous document, Basel I. BaselII includes recommendations on three main areas: risks, supervisory review,and market discipline. Many countries and banks are planning on implementing theguidelines set out in Basel II, although it may take as long as the year 2015for fullimplementation.
  17. 17. -ABC agreementAn agreement between a brokerage firm and an employee detailing the rights ofthe firm when it purchases anNYSE membership for the employee. It is believed to beknown as an ABC agreement because the employee can: A) keep the seat if he/she leavesbut must buy another seat for an individual named by the firm; B) sell the seatbut return the proceeds to the firm; or C) transfer the seat to another employee of the firm.-bear spreadAn option strategy designed to profit from a drop in a securitys price, by selling a near-month futures contractand buying a deferred month futures contract.-full ratchetIn venture capital, an investor protection provision which specifiesthat options and convertible securities may be exercised relative to the lowest price atwhich securities were issued since the issuance of the option orconvertible security.The full ratchet guarantee prevents dilution, since the proportionate ownership would staythe same as when the investment was initially made.-futures commission merchantAn individual or organization accepting orders to buy or sell futures or futures options. Aperson or organization in this role needs to be certified by the Commodities andFutures Trading Commission. A futures commissionmerchant has a role in thefutures market similar to that of a broker in the securities market. In addition to acceptingbuy or sell orders, the futures commission merchant can also holdtheir clients money or securities inmargin accounts in accordance with the rules ofthe exchange on which they are trading. The work of a futures commission merchant mayalso occasionally be carried out by a full service broker.-basis tradingAn arbitrage strategy usually consisting of the purchase of a particular security andthe sale of a similar security(often the purchase of a security and the sale of acorresponding futures contract). Basis trading is done when the investor feels that thetwo securities are mispriced with respect to each other, and that the mispricing will correctitself such that the gain on one side of the trade will more than cancel out the loss on theother side of the trade. In the case of such a trade taking place on a security andthe futures contract, the trade will be profitable if the purchase price plus the cost of carry isless than the futures price. also called cash and carry trade.-basis tradingAn arbitrage strategy usually consisting of the purchase of a particular security andthe sale of a similar security(often the purchase of a security and the sale of a
  18. 18. corresponding futures contract). Basis trading is done when the investor feels that thetwo securities are mispriced with respect to each other, and that the mispricing will correctitself such that the gain on one side of the trade will more than cancel out the loss on theother side of the trade. In the case of such a trade taking place on a security andthe futures contract, the trade will be profitable if the purchase price plus the cost of carry isless than the futures price. also called cash and carry trade.-commodityA physical substance, such as food, grains, and metals, which is interchangeable withanother product of the same type, and which investors buy or sell, usually through futurescontracts. The price of the commodity issubject to supply and demand. Risk is actually thereason exchange trading of the basic agricultural productsbegan. For example, afarmer risks the cost of producing a product ready for market at sometime in the futurebecause he doesnt know what the selling price will be.More generally, a product which trades on a commodity exchange; this would also includeforeign currencies andfinancial instruments and indexes.-short sellingBorrowing a security (or commodity futures contract) from a broker and selling it, with theunderstanding that it must later be bought back (hopefully at a lower price) and returned tothe broker. Short selling (or "selling short") is a technique used by investors who tryto profit from the falling price of a stock. For example, consider aninvestor who wants to sellshort 100 shares of a company, believing it is overpriced and will fall. The investorsbrokerwill borrow the shares from someone who owns them with the promise that the investorwill return them later. The investor immediately sells the borrowed shares at thecurrent market price. If the price of the sharesdrops, he/she "covers the short position" bybuying back the shares, and his/her broker returns them to thelender. The profit is thedifference between the price at which the stock was sold and the cost to buy it back,minus commissions and expenses for borrowing the stock. But if the price of the sharesincrease, the potentiallosses are unlimited. The companys shares may go up and up, but atsome point the investor has to replace the 100 shares he/she sold. In that case, the lossescan mount without limit until the short position is covered. For this reason, short selling is avery risky technique. For a while, SEC rules only allowed investors to sell short only onan uptick or a zero-plus tick, to prevent "pool operators" from driving down a stock pricethrough heavy short-selling, then buying the shares for a large profit. This rule waseliminated in July 2007.-cash forward contractA cash market transaction in which a seller agrees to deliver a specific cash commodity to abuyer at some point in the future. Unlike futures contracts (which occur through a clearingfirm), cash forward contracts are privately negotiated and are not standardized. Further, thetwo parties must bear each others credit risk, which is not the case with a futures contract.Also, since the contracts are not exchange traded, there is no markingto marketrequirement, which allows a buyer to avoid almost all capital outflow initially
  19. 19. (though some counterparties might set collateral requirements). Given the lack ofstandardization in these contracts, there is very little scope for asecondarymarket in forwards. The price specified in a cash forward contract for a specific commodity.Theforward price makes the forward contract have no value when the contract is written.However, if the value of the underlying commodity changes, the value of the forwardcontract becomes positive or negative, depending on theposition held. Forwards are pricedin a manner similar to futures. Like in the case of a futures contract, the first step in pricing aforward is to add the spot price to the cost of carry (interest forgone, convenienceyield, storagecosts and interest/dividend received on the underlying). Unlike a futurescontract though, the price may also include a premium for counterparty credit risk, and thefact that there is not daily marking to market process to minimize default risk. If there isno allowance for these credit risks, then the forward price will equal the futures price. alsocalled forward contract.-permanent life insuranceAn umbrella term for a variety of plans that combine a death benefit similar to a term lifeinsurance plan with tax-sheltered savings arrangements. Permanent life policies, as theirname implies, are meant to be held and paidinto for the duration of the insureds life.Because of this, there are significant fees associated with setting up thepolicy. Despitethese fees, the tax advantages can make permanent life a valuable investment over along periodof time. also called cash value insurance.-dividend payoutThe amount of cash that a company sends to its shareholders in the form of dividends. Thecompany can decide to send all profits back to its investors, or could keep a portion of itas retained earnings.-Series HH bondSeries HH bonds are sold in amounts from $500 to $10,000. They may be redeemed afteronly six months, and their interest is exempt from state and local taxes. The interest rate atthe time of purchase is locked in for the first 10 years that the bond is held. After ten years,HH bonds enter extended maturity and the new interest rate is determined by the rateassigned to new bonds issued at that time.-default rateThe rate at which debt holders default on the amount of money that they owe. It is oftenused by credit cardcompanies when setting interest rates, but also refers to the rate atwhich corporations default on their loans. Default rates tend to riseduring economic downturns, since investors and businesses seea decline in incomeand sales while still required to pay off the same amount of debt.-indirect investment
  20. 20. A way of investing in real estate without actually investing in the property.Indirect investment can be done in many ways, including securities, funds, or private equity.Most investors interested in indirect investment would do so througha company or advisor who has experience in this type of investing.-trading bookAn accounting book that includes all securities that the institution regularly buys and sells onthe stock market. These securities are accounted for in a different way than those inthe banking book, which are meant to be heldby the institution until they mature and are notusually affected by market activity.subscription warrantA certificate, usually issued along with a bond or preferred stock, entitling the holder to buy aspecific amount of securities at a specific price, usually above the current market price at the timeof issuance, for an extended period, anywhere from a few years to forever. In the case that the price ofthe security rises to above that of the subscription warrants exercise price, then theinvestor can buy thesecurity at the subscription warrants exercise price and resell it for a profit. Otherwise, thesubscription warrant will simply expire or remain unused. Subscription warrantsare listed on options exchanges and trade independently of the security with which it was issued.alsocalled warrant.ceiling1. The maximum interest rate permitted by state law for a given loan. A ceiling isa commonfeature of floating rate notes. 2. An upper limit on the exchange rate of acountrys currencyimposed by some regulatory authorities (the government or regulators will step inand ensure that the exchange rate does not exceed the ceiling). 3. More generally, any limit or maximumwedgeA technical analysis term used to describe a chart on which lines that connect tops and bottomsconvergetowards each other but are both moving in the same direction. Similar to a triangle,except that in atriangle, the trends move in opposite directions, with the tops decreasing and the bottoms increasing. In awedge, both lines have the same trend (upward or downward) but have different slopes, leading tothe convergence. A falling wedge is generally thought to be a rest during a period of upward rateRate at which one currency may be converted into another. The exchange rate is used when simplyconverting one currency to another (such as for the purposes of travel to another country), or forengaging in speculation or trading in the foreign exchange market. There are a wide varietyof factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and
  21. 21. the economy in each country.also called rate of exchange or foreign exchange rateor currencyexchange rateowner of recordThe name of an individual or entity that an issuer carries in its records as the registered holder(notnecessarily the beneficial owner) of the issuers securities. Dividends and other distributionsare paid onlyto owners of record. also called stockholder of record or holder of record orshareholder of creditA tax credit available for education expenses, such as a Hope Credit or a Lifetime Learning Credit.Education credits can be applied to many situations including education expenses,deposits in EducationSavings Accounts, and withdrawals from IRAs in order to financeeducation and student interest barA gold ingot fashioned in the shape of a bar that is 99.5%-99.9% pure in gold. In the US, theirvalue ismeasured in troy ounces, whereas other nations may use grams. 1 troy ounce is equal to 31.1034768grams. Ingots range in size from 1 troy ounce to 400 troy ounces. Gold bars can be usedfor trading or investing purposes. However, because they are easier to fabricate, they have to be testedfor purity when sold, and thus are often held as long-term investments to hedgeagainst inflation. Centralbanks often hold these items in large vaults or reserves. In the past, gold bars directly backed theUS currency. In more modern times however, they serve as a symbolic backing of the dollar.conversion privilegeAn insurance policy in which the insurer is required to renew the policy for a specified amount of timeregardless of changes to the health of the insured. The agreement requires that premiums are paid ontime and that the insurer makes no changes except if a premium change is made for anentire class of policyholders. also called guaranteed renewable or convertible terminsuranceor guaranteed insurability.convertible term insuranceAn insurance policy in which the insurer is required to renew the policy for a specified amount of timeregardless of changes to the health of the insured. The agreement requires that premiums are paid ontime and that the insurer makes no changes except if a premium change is made for anentire class of policyholders. also called guaranteed renewable or conversion privilege orguaranteedinsurability.put-call parityThe relationship between the price of a call and the price of a put for an option withthe samecharacteristics (strike price, expiration date, underlying). It is used in arbitrage theory. If different
  22. 22. portfolios comprised of cals and puts have the same value at expiration, it is implied that they will havethe same value leading up to the expiration point. Thus, the values of the portfolios move inlock step. Portfolio price equality is calculated as c + PV(x) = p + s, where c is the market valueof the call,PV(x) is the present value of the strike price, p is the market value of the put, and s is the market value ofthe underlying security. If the two sides of the equation are not equal, arbitrage profit could be gainedby investing in the less expensive portfolio. Analysis of the parityrelationship assumes that other factors,such as a dividend, are not taken into account.clawback1. A financial or other benefit that is given, but is later taken back due to unique circumstances.A common example of this is when particular investments are purchased, they provide taxablebenefits tothe purchaser, but if the investments are sold before they mature, these benefits arerequired to bereturned. 2. A decrease in the stock market that follows just after an increase in the stock market.Roth 401(k)A contribution-based retirement account, which combines features of the traditional Roth IRA and401(k)plan accounts. The Roth 401(k) contains many benefits for employees, such asbeingable to contribute post-tax money, but many companies do not yet offer this as a retirementplanoption, due to the increased amount of work it takes to maintain this plan. Companies were given theoption to begin offering this plan in 2006.caputA type of exotic option that is composed of a call option placed on a put option. An investor whouses acaput option is purchasing the option to buy a put option. The word is formed from thecombination of"call" and "put". also called compound option.domestic rateThe interest rate of a domestic currency expressed in real terms. The domestic rate is used inforeignexchange markets in interest rate parity calculations, and is compared to the inflation-adjusted interest rate of the foreign currency.optional payment bondA type of bond that allows principal or interest payments to be made in foreign currency. At theoption ofthe bondholder, the payments can be made payable in one or more foreign currencies.conglomerate mergerA merger of two companies which are involved in different types of business. There are many ways forthis to benefit the companies, such as sharing of assets and reducing business risk, but can also becomea risk to the company if the new company gets too large or if it isnt able to successfully blend the twobusinesses.
  23. 23. continuous inventoryKeeping book inventory continuously in agreement with stock on hand within specified time periods. Insome cases, book inventory and stock on hand may be reconciled as often as after each transaction,while in some systems these two numbers may be reconciled less often. Thisprocess is useful inkeeping track of actual availability of goods and determining what the correct timeto reorder from suppliers might be. Sometimes also called perpetual inventory.double topA technical analysis term for two successive rises to the same price level. On a chart, this lookssomething like an M. The particular price level where the double top occurs is considered aresistancelevel for the stock, because technical analysts believe that the stock is havingdifficulty rising above thatlevel. opposite of double bottom.flippingThe practice of buying initial public offerings at the offering price and then reselling them oncetrading hasbegun, usually for a substantial profit. This is more commonly done by institutional investors than retailinvestors, because institutional investors get most of the IPO shares at theoffering price. Flipping ismost profitable in a hot IPO market, when the price of an IPO often risesdramatically above the offeringprice on the first day. also called of fundsA mutual fund company offering many mutual funds, for various objectives.Usually, investors canmove assets between different funds of a family of funds at little or no cost, andcan receive asingle statement describing their holdings in all the funds in the family of funds. alsocalledmutual fund family or fund family.crawling pegAn exchange rate adjustment technique in which the par value of a fixed exchange rate is allowedto fluctuate within a certain range of values. The par value is adjusted for inflation and other marketfactors. A crawling peg allows the exchange rate to adjust over time, hence "crawl," rather than beadjusted by a sudden or dramatic currency devaluation, which would createinstability.current capitalCurrent assets minus current liabilities. Current capital is the part of a companys capital that is used forday-to-day operations, and so it is desirable that companies maintain substantially morecurrent assets than current liabilities. A companys level of current capital is also a measure of how wellthe company is able to fulfill its short-term debtors and obligations. also called net currentassets or working capital.