Glossary

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Immunization:

A process for designing fixed income portfolios to obtain a target rate of return over a specified time period, within a narrow range, despite market conditions.

Income:

Interest payments for bonds, dividends for stocks. The most reliable portion of investment return.

Income Bond:

An unsecured bond that requires interest to be paid only if a specified amount of income is earned.

Income Fund:

Invests in both equity and fixed-income securities primarily for the purpose of realizing current income. An income fund generally will not invest more than 50% of its assets in equities.

Income Statement:

A financial summary of the operating results of a firm covering a specified period of time, usually one year.

Indenture:

For debt securities, the contract that specifies all legal obligations of the issuer with respect to the securities and any qualification or restriction that may exist.

Index:

A statistical composite that measures changes in the economy or financial markets. Stock market indices are unmanaged and reflect the value of different segments of the U.S. stock market. Investors cannot invest in an index. Well-known U.S. indices include the Dow Jones Industrial Average and the Standard and Poor's 500 Index. Well-known world indices include the Financial Times Stock Exchange Index and the Nikkei Index.

Index Fund:

A fund that invests in the group of securities represented by a particular index, in an attempt to match the performance of that index as a whole.

Index Price:

Technique used to price Treasury Bill (and other short-term securities) futures contracts, which reflects the actual price movements of these futures contracts.

Indexes:

Numbers used to measure the general behavior of stock prices by measuring the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time.

Individual Retirement Accounts (IRAs):

A self-directed, tax-deferred retirement plan, in which gainfully employed persons may contribute annually up to $2,000 for an individual or $2,250 for an individual and non-working spouse.

Inflation:

A general rise in prices, usually measured by changes in price of major indices, such as the Consumer Price Index.

Initial Public Offering (IPO):

A special category for common stock issued by (relatively) new firms going public for the first time.

Institutional Investors:

Pension funds, investment companies, bank trust departments, life insurance companies, and so forth, all of whom manage large portfolios of securities; investment professionals paid to manage other people's money.

Insurance:

A mechanism that allows people to reduce financial risk by sharing in the losses associated with the occurrence of uncertain events.

Interest:

An amount charged to a borrower by a lender for the use of money, expressed in terms of an annual percentage rate upon the principal amount.

Interest-Rate Risk:

The potential price change in a financial asset in response to a change in the interest rate.

Intermediate Bond:

A bond with a maturity of 5 to 10 years.

Interest-on-Interest:

Bond coupons are reinvested to earn interest thereby generating interest-on-interest.

Interest Rate Futures:

Futures contracts on fixed-income securities such as Treasury bills and bonds, Certificates of Deposits, and mortgages.

Interest Rate Options:

Option contracts on fixed-income securities such as Treasury bonds.

Interest Rate Risk:

The change in the price of a security resulting from a change in market interest rates.

International:

Outside of, and excluding the U.S.

International Fund:

A fund that does all or most of its investing in foreign securities.

Intrinsic Value:

The underlying or inherent value of a stock, as determined through fundamental analysis.

Investment:

The utilization of money in the expectation of future returns in the form of income or capital gain.

Investment Act of 1940:

Legislation passed by Congress to insure that those investing in investment companies are fully informed and fairly treated. It requires that all publicly held investment companies register with the Securities Exchange Commission.

Investment Banker:

An individual or firm engaged in the financing of capital. The middleman between the issuer of new securities and the investor. He/She facilitates the conversion of savings into investment. Also called an underwriter.

Investment Company:

A company that uses its capital to invest in other companies. There are two principal types of investment companies:

closed-end and open-end, which are referred to as mutual fund.

Investment Grade:

Bonds rated in the top four rating categories ("AAA," "AA," "A," "BAA") are commonly known as investment grade securities and are considered eligible for bank investment under present commercial bank regulation issuer by the Comptroller of the Currency.

Investment Plan:

A written document describing financial goals, how funds will be invested, the target date for the accomplishment of goals, and the amount of tolerable risk.

Investment Premium:

The difference between the market value of an option and its true value; indicates the amount of excess value embedded in the quoted price of a put or call.

Investment Trust:

A type of investment vehicle whereby the trust sponsors put together a fixed/unmanaged portfolio of securities and then sell ownership units in the portfolio to individual investors; also called a unit investment trust.

Investment Value:

The amount that investors believe a security should be trading for, or what they think it is worth; the price at which a convertible would trade if it were nonconvertible and if it were priced at or near the prevailing market yields of comparable nonconvertible issues.

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Junior Bond:

Debt obligation backed only by the promise of the issuer to pay interest and principal on a timely basis.

Junk Bonds:

High risk securities that have received low ratings and as such, produce high yields so long as they do not go into default. A bond claimed to have a low investment quality and credit worthiness, usually with a rating of "BB" or less.

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Keogh Plan:

A retirement plan that allows self-employed individuals to establish tax-deferred retirement plans for themselves and their employees.

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Leverage:

The magnification of gains and losses in earnings resulting from the use of fixed-cost financing.

Leverage Measures:

Financial ratios that measure the amount of debt being used to support operations, and the ability of the firm to service its debt.

Liabilities:

All the claims against a corporation including accounts and wages and salaries payable, dividends declared payable, accrued taxes payable, and fixed or long-term liabilities such as mortgage bonds, debentures, and bank loans.

Limited Liability:

The right of an investor to limit potential losses to no more than the amount invested. Equity shareholders, such as corporate stockholders and limited partners, have limited liability.

Limited Tax Bond:

A general obligation municipal debt security issued by a municipality whose taxing power is limited to a specified maximum rate.

Limit Order:

An order to buy or sell at a specific price or better.

Liquidation Value:

The amount left if a firm's assets were sold or auctioned and the liabilities and preferred stockholders paid.

Liquidity:

The ease with which an asset can be bought or sold quickly with relatively small price changes.

Liquidity Measures:

Financial ratios concerned with the firm's ability to meet its day-to-day operating expenses and satisfy its short-term obligations as they come due.

Liquidity Risk:

The risk of not being able to liquidate an investment conveniently and at a reasonable price.

Load Fund:

A mutual fund that charges a commission when shares are bought; also known as front-end load fund. Funds are also available with no loads or low loads.

Long:

Refers to the market position of a person who has bought securities (expecting a price rise) that he has not yet sold.

Long-Term Investments:

Investments with maturities of longer than a year, or with no maturity at all.

Long-Term Equity Options:

An option contract that has a longer expiration than traditional equity option contracts. The most common long-term equity option is the CBOE's Long-Term Equity AnticiPation Security (LEAPS).

Low-Load Fund:

A mutual fund that charges a small commission (1 to 3%) when shares are bought.

Low-Risk Investments:

Investments considered safe with regard to the receipt of a positive return.

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Management Fee:

A fee levied annually for professional mutual fund services provided; paid regardless of the performance of the portfolio.

Margin:

The part of a transaction's value that a customer must pay to initiate the transaction, with the other part being borrowed from the broker. The initial margin is set by the Federal Reserve System. The maintenance margin is the amount, established by brokers and exchanges, below which the actual margin actually go.

Margin Account:

A brokerage account in which the customer has borrowing privileges.

Margin Call:

A demand from the broker for additional cash or securities as a result of the actual margin declining below the maintenance margin.

Margin Deposit:

An amount deposited with a broker to cover any loss in the market value of a futures contract that may result from adverse price movements.

Margin Loan:

Vehicle through which borrowed funds are made available, at a stated interest rate, in a margin transaction.

Margin Trading:

The use of borrowed funds to purchase securities; magnifies returns by reducing the amount of capital that must be put up by the investor.

Marginal Tax Rate:

The tax rate on additional income.

Market:

(1) The prices at which a security can actually be bought and/or sold. (2) A locale where a security is known to be traded.

Marketability:

The ease with which an asset can be sold at a given price.

Market Average:

An arithmetic average of the price for the sample of securities being used.

Market Capitalization:

Total value of a company's outstanding stock calculated by multiplying the number of outstanding shares by the current share price.

Market Data:

Primarily, stock price and volume data.

Market Index:

Measures the current price behavior of a sample of stocks in relation to a base period established for a previous time. (See Index).

Market Order:

An order given to buy or sell a particular security at the best immediately obtainable price.

Market Portfolio:

The portfolio of all risky assets with each asset weighted by the ratio of its market value to the market value of all risky assets.

Market Price:

In the case of a security, the market price is usually considered the last reported price at which the stock or bond sold.

Market Risk:

The risk that an investor can experience in financial or book loss from an adverse change in market prices.

Market Risk Premium:

The difference between the expected return for the market and the risk-free rate of return.

Market Timing:

Switching out of, or into, stocks or bonds according to one's prognostication on how the markets will do in the short run.

Market Value:

The current or prevailing price of a security or commodity as indicated by current market quotations, and, therefore the price at which additional amounts presumably can be purchased or sold.

Marketable Securities:

Financial assets that are easily and inexpensively traded between investors.

Maturity:

The terminating or due date of a debt security. The date on which the principal or stated value becomes due and payable in full to the holder.

Modified Duration:

Duration divided by 1 plus yield to maturity.

Money Market:

The market for assets maturing in less than one year, which includes among others: 1. Federal Funds; 2. Treasury Bills; 3. Banker's Acceptances; 4. Commercial Paper; 5. Certificates of Deposit; 6. Agency Discount Paper; 7. Repurchase Agreements.

Money Market Deposit Accounts (MMDAs):

A bank account with features similar to money market mutual funds; has no legal minimum balance but many banks impose their own.

Money Market Mutual Fund (MMMF):

Mutual fund which invests exclusively in money market instruments; also called money fund.

Money Market Securities:

Securities sold in the money market, including Treasury Bills, Certificates of Deposits, commercial paper, bankers' acceptances, etc.

Mortgage:

A conveyance of an interest in real property given as security for the payment of a debt.

Mortgage-Backed Fund:

A government bond that seeks income by generally investing at least 65% of its assets in securities backed by mortgages.

Mortgage-Backed Security (MBS):

An ordinary bond backed by an undivided interest in a pool of mortgages.

Mortgage Banker:

A firm that supplies its own funds for mortgage loans which are later sold to permanent investors. Usually they continue to service the loans for a specified fee.

Mortgage Bond:

A person or firm to whom property is conveyed as security for a loan made by such person or firm; a creditor.

Municipal Bond Fund:

Similar to an investment bond, this fund has average to below-average risk. However, the risk of a municipal bond fund lies within the average credit rating of the bond in its portfolio.

Municipal Securities:

Securities issued by political entities other than the federal government and its agencies, such as states and cities.

Mutual Fund:

A fund operated by an investment company that pools shareholder funds and invests in stocks, bonds, money market instruments and other securities. Advantages for investors include diversification and professional management.

Mutual Fund Custodian:

A national bank, stock exchange member firm, trust company or other qualified institution that physically safeguards the securities held by a mutual fund. It does not manage the fund's investments; its function is solely clerical. See also Custodian; Plan Custodian.

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National Association of Securities Dealers Automated Quotation (NASDAQ) System:

An automated system that provides up-to-date bid and ask prices on certain selected, highly active over-the-counter securities.

NASDAQ National Market System (NASDAQ/NMS):

A combination of the competing market makers in over-the-counter stocks and the up-to-the-minute reporting trades using data identical to that shown for the New York Stock Exchange and American Stock Exchange. National Association of Securities Dealers (NASD): A self-regulating body of brokers and dealers overseeing over-the-counter practices.

Negotiable Order of Withdrawal Accounts (NOW):

Checking accounts that pay interest at a specified interest rate.

Net Asset Value (NAV):

The underlying value of a share of stock in a particular mutual fund; represents the net market value of the securities held by a mutual fund.

Net Operating Income (NOI):

The amount left after subtracting vacancy and collection losses and property operating expenses, including property insurance and taxes, from an income property's gross potential rental income.

Net Present Value (NPV):

The difference between the present value of the cash flows and the amount of equity required to make an investment.

New York Stock Exchange (NYSE):

The major secondary market for the trading of equity securities; measure of the current price behavior of the stocks listed on the NYSE in relation to base of 50, set 12/31/65.

No-Load Fund:

A mutual fund that does not have a sales charge (load fee).

Non-Callable:

Exempt from any kind of redemption for a stated time period.

Nondiversifiable Risk:

The risk possessed by every investment vehicle and therefore not capable of being eliminated through diversification; also called systematic risk.

Non-Refundable:

Ineligible, for a stated period of time, for redemption with funds raised through the sale of an issue having an issue lower than that on the outstanding bonds. Bonds with refunding protection are still subject to regular redemption and call for sinking funds.

Note:

A debt security originally issued with a maturity from 2 to 10 years.

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Odd-Lot:

Less than a round lot; technically, an amount of bonds less than $100,000 par amount.

Offer:

The price at which a seller is willing to sell a security.

Open-End Fund:

A mutual fund that has no fixed number of shares outstanding.

Open-End Investment Company:

An investment company that has capitalization constantly changing as new shares are sold and outstanding shares are redeemed.

Open Interest:

In the futures market, the number of contracts currently outstanding on a commodity or financial future.

Options Spreading:

Combining two or more options with different strike prices and/or expiration dates into a single transaction.

Option:

A right to buy or sell a specific security or property at a specified price within a specified time.

Ordinaries:

Shares of stock representing ownership in a foreign company. A few trade on U.S. exchanges, but most must be bought in the country where they are issued. Also called foreign stock.

Organized Securities Exchanges:

Centralized institutions in which transactions are made in already outstanding securities.

Original Issue Discount:

The discount from par at which a new issue comes to the market. The Internal Revenue Service treats the accretion of this discount over the life of the security as being current income to the holder.

Over-the-Counter (OTC) Market:

A network of securities dealers for the trading of securities not on the exchanges; primary market in which public issues are sold.

Over Bought:

A market that is susceptible to an downward correction in price levels. Implies that prices have risen more than fundamentals would dictate.

Oversold:

A market that is susceptible to an upward correction in price levels. Implies that prices have fallen more than fundamentals would dictate.

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Par:

In the case of a common share, par means a dollar amount assigned to the share by the company's charter. Par value may also be used to compute the dollar amount of the common shares on the balance sheet. Par value has little significance insofar as the market value of common stock is concerned. In the case of preferred shares and bonds, par often signifies the dollar value upon which dividends on preferred stocks, and interest on bonds, are figured.

Par Bond:

A bond selling at par, in line with prevailing new issue or estimated going yield rates.

Participating Preferred:

A preferred stock entitled to a specific dividend before dividends are paid to common stockholders, and which also participated with the common stock in additional corporate earnings distributed as dividends.

Participation Certificate (PC):

A security issued by FHLMC representing an undivided interest in a pool of conventional mortgages.

Passive Management Strategy:

A bond management strategy whereby investors do not actively seek out trading possibilities in an attempt to out perform the market.

Pass-Through Certificate:

A security representing an interest in a pool of conventional, Veteran' Administration, Farmers Home Administration or other agency mortgages. The principal and interest payments are received by the pool and are passed through to the certificate holder. Payments may or may not be guaranteed.

Paydown:

A regularly scheduled repayment of principal on mortgage and asset-backed securities (usually occurs monthly).

Payout Ratio:

The ratio of dividends to earnings.

Pension Plan:

A contract between an individual and an employer, labor union , government entity or other institution, which provides for the distribution of pension benefits at retirement. Plan Custodian: An institution retained by a contractual plan company to perform clerical duties. The custodian's responsibilities include safeguarding plan assets, sending out customer confirmations and issuing shares. See also Custodian; Mutual Fund Custodian.

Pooled Diversification:

A process used to spread the risk of securities' ownership whereby investors buy into a diversified portfolio of securities, which is held for the collective benefit of the individual investors.

Portfolio:

Holdings of securities by an individual or institution. A portfolio may contain the bonds, preferred stocks, and common stocks of various types of enterprises as well as other earning assets such as coins, stamps, real estate.

Portfolio Insurance:

An asset management technique designed to provide a portfolio with a lower limit on value while permitting it to benefit from rising security prices. The basic concept involves the purchase of a "protective put" on the portfolio, with the balance of the funds invested in the underlying assets.

Portfolio Management:

The second step in the investment decision process, involving the management of a group of assets as a unit.

Preemptive Right:

The right of existing stockholders to maintain their proportionate share of ownership in a firm.

Preferred Stock:

A class of stock with a claim on the company's earnings before payment may be made on the common stock and usually entitled to priority over common stock of the company liquidates. Usually entitled to dividends at a specific rate when declared by the board of directors and before payment of a dividend on the common stock and depending upon the terms of the issue.

Premium:

The difference between the price of an issue and the par value for issues selling above par.

Premium Bonds:

Bonds selling above face value because their interest payments are higher than prevailing interest rates.

Prepayment:

Any payment made on a mortgage that is in excess of, or in addition to, the regularly scheduled principal payment.

Prepayment Risk:

The risk that a pass-through issue will have an adverse pattern of prepayments.

Present Value:

The current worth of a cash flow. Future value becomes present value through the process of discounting.

Price:

The value of anything exposed for sale expressed in money terms.

Price/Book Ratio:

A ratio that represents the premium (or discount) a shareholder pays relative to the underlying company's net worth.

Price/Earnings (P/E) Ratio:

The current market price of a share of stock divided by earnings per share for a 12-month period.

Price Risk:

That part of interest rate risk involving the inverse relationship between bond prices and required rates of return.

Price/Sales Ratio (PSR):

Calculated as a company's total market value divided by its sales. It indicates what the market is willing to pay for a company's revenues.

Prime Rate:

The rate of interest at which a commercial bank offers to lend money to its most credit worthy customers.

Principal:

The person for whom a broker executes an order, or a dealer buying or selling for his own account. The term may also refer to a person's capital or to the face amount of a bond.

Private Debt:

A private placement debt security.

Private Equity:

A private placement equity investment, such as a limited partnership, restructuring and direct investment.

Private Placement:

An issue that is sold to one or a few investors as opposed to being publicly offered and sold.

Prospectus:

A statement filed with the Securities Exchange Commission containing all of the pertinent information about a security being offered and about the issuer of the securities.

Proxy:

A written statement given by a shareholder to someone else which authorizes that individual to represent and to vote on behalf of the shareholder at a shareholders' meeting.

Proxy Statement:

Information the Securities Exchange Commission requires to be given stockholders as a prerequisite to solicitation of proxies for a security subject to the requirements of the Securities Exchange Act.

Prudent Man Rule:

A standard of conduct that requires a fiduciary to discharge his duties with care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a similar character with the same aims.

Put:

An option to sell a specified number of shares of stock at a specified price within a specified period of time.

Pyramiding:

The technique of using paper profits in margin accounts to partly or fully finance the acquisition of additional securities.

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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z