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Investment Dictionary Investment Dictionary


American Association of Individual Investors

Ability To Pay
The present and future capacity of a municipal bond issuer to generate enough tax revenue to meet its liabilities. To determine a municipality's ability to pay, all factors concerned with property values and municipal income are considered.

An issue is absorbed when it has been entirely sold to the public.

Absorption Point
During market trading, securities are absorbed when there are corresponding orders to buy and sell. When further absorption is impossible without an adjustment in price, the security has reached its absorption point.

Acceleration Clause
A clause frequently contained within an indenture agreement and other contracts. It stipulates that if certain default events should occur, the unpaid balance will become due and payable. Examples of the type of events are insolvency and failure to meet principal, interest or sinking fund payments.

When a brokerage firm obtains a client, an account must be opened in the name of the client. The account will reflect activities of the client such as the buying and selling of securities.

Account Executive (AE)
An employee of a brokerage firm who must pass specified tests and must be registered with the National Association of Securities Dealers (NASD) before he or she may solicit or accept orders from clients. An account executive working for a full service brokerage firm generally provides their clients with advice, placement of orders and has the legal powers of an agent. In a discount brokerage firm, an account executive generally provides the client with customer service and handles the purchase and sale of securities on an unsolicited basis. Because account executives at discount brokerage firms usually do not provide advice for their clients, the commissions charged for the purchase and sale of securities are customarily much lower.

Account Statement
A statement that includes all transactions, positions and open orders and indicates the status of a client's account with a brokerage firm. Statements are required to be issued at least quarterly for all accounts. However, statements for active accounts are often provided on a monthly basis.

Accredited Investor
To qualify as an accredited investor, an investor must either be: A) a financial institution; B) an affiliate of the issuer; or C) an individual with a net worth of at least $1 million or an annual income of at least $200,000, and the investment must not account for more than 20% of the investor's worth. SEC Regulation D stipulates that a maximum of 35 non-accredited investors are allowed to invest money into a Private Placement. An issuer of a private placement will try to acquire accredited investors to raise a greater amount of capital than would be possible if only 35 investors of less affluence could contribute.

A method of adjusting the tax cost basis of a bond bought at an original issue discount in equal amounts over the life of the bond. For tax purposes, the annual accretion is treated as interest.

Accrual Basis
An accounting method in which income and expense items are credited as they are incurred or earned, although they may not have been received or actually paid in cash. Cash Basis accounting is an alternative method.

Accrued Interest
When a bond or other fixed income security is sold, the buyer pays the seller the price of the bond plus accrued interest. To calculate the amount of accrued interest due to the seller, multiply the number of days that have elapsed since the last payment by the coupon rate. The recipient of the accrued interest is taxed at ordinary income rates. The buyer's expenditure is only temporary. When the next interest payment on the bond is due, the purchaser will receive the entire amount. Part of the payment is for the current holder's status as a creditor and part restitution for the earlier payment to the former bondholder.

Accrued Market Discount
An increase in a discount bond's market value as it approaches its maturity date. The increase is not due to the decline of market interest rates.

Accumulated Dividend
A dividend due to stockholders of cumulative preferred stock that has not been paid to them. Until the dividend is paid, it is carried on the corporation's books as a liability.

With respect to mutual funds, accumulation is when a fixed dollar amount is invested regularly and any capital gains and dividends are reinvested back into the fund. In regard to other types of investments, accumulation occurs when an organization (or individual) purchases a large number of shares in a controlled method. This is done in order to avoid driving up the price of the investment. It may take weeks or months to complete an organization's accumulation program.
See: Dollar Cost Averaging

Accumulation Account
The sponsor of a Unit Investment Trust uses an accumulation account to deposit securities it has acquired. These securities will eventually become part of the trust itself.

Accumulation Area
The price range of a security that indicates buyers are willing to purchase the security at its current price. Technical analysts detect accumulation areas when a security does not fall below a specific price. Technicians advise buying securities that have attained their accumulation area because the securities are likely to draw more buying interest.

Authentication of a signature on a brokerage document to ensure it is valid and has been sanctioned by an authorized individual. Acknowledgment, for example, is needed when a client wishes to transfer an account from one broker to another.

Across The Board
Movement, up or down, in the stock market that affects nearly all stocks in the same direction. That is, nearly all stocks are gainers (or losers).

Acting In Concert
More than one investor who works in concert to achieve an investment objective. A group of investors who wish to take over a company may act in concert to buy up the company's stock. This is legal as long as proper notification is made to the SEC. However, if the group were acting in concert to manipulate a stock's price for their own gain, it would be considered an illegal act.

Active Bond
Corporate debt instruments that trade frequently on the floor of the NYSE are classified as active and are assigned certain privileges. Included are substantial issues of established corporations and most convertible bonds.

Active Bond Crowd
New York Stock Exchange members who are responsible for the heaviest volume of bond trading. Investors who trade bonds in the active crowd usually tend to get better prices for their securities than in the inactive market. (The spreads between bid and asked prices are wider.) A cabinet crowd, which deals in bonds that are infrequently traded, is the opposite of an active crowd.

Active Box
Securities held by a brokerage firm that meet specific qualifications are used as collateral for securing brokers' loans or customers' margin positions. They are held in safekeeping for clients of a broker/dealer or for the broker/dealer itself in a physical location known as the "open box" or "active box."

Active Market
An active market occurs when a security, or the exchange as a whole, experiences heavy trading volume. The spread between the securities bid and asked price is usually narrower in an active market than in an inactive market.

A physical commodity that, when traded, results in the delivery of the actual commodity to the buyer when the contract expires. When actuals are traded, most options and futures contracts are closed out before the contracts expire. Thus, these transactions tend not to end in the actual delivery of the commodity. Examples of actuals are commodities such as oil and gold.

Adjusted Basis
The base price that is used to assess capital gains and losses when a security is sold. When net proceeds are used for tax purposes, the commissions are deducted at the time of sale. If any stock splits have occurred since the original purchase, the stock's price needs to be adjusted to obtain a correct adjusted basis.

Adjusted Debit Balance (ADB)
Under Regulation T of the Federal Reserve Board, it is the formula that is used to determine the status of a margin account. An account's ADB is effectual in ascertaining whether withdrawals of cash or securities are acceptable based on Special Miscellaneous Account (SMA) entries. The ADB is calculated by netting the balance owed to the brokerage firm with any balance in the SMA plus unrealized profits on short accounts.

Adjustment Bond
When recapitalizing a corporation that faces bankruptcy, if the bondholders approve, adjustment bonds are issued in replacement of outstanding bonds. Bondholders usually will authorize the issuance of adjustment bonds as they are deemed a lesser evil than a corporate bankruptcy. An adjustment bond assures payment of interest only if earned by the corporation. This is one of the characteristics of an income bond.

In regard to investments, an administrator is a court-appointed official empowered to supervise or conduct the court's decisions with respect to a decedent's estate until it is fully disbursed to all claimants. An administrator (or "administratix," if a woman) is appointed when anybody dies either without a will, without naming an executor, or if the named executor will not or cannot serve.
See: Executor

Affidavit Of Domicile
A document that states the residence of the decedent at the time of death. The form is executed by the legal representative of an estate and is required when transferring ownership of a security from a deceased person. The security's transfer agent requires the affidavit to be notarized and dated within 90 days.

Affiliated Person
Any persons who are officers, directors, or owns 10 % or greater of the voting shares, and in most cases, the aforementioned immediate family and confidants. These people are in a position to exercise control on the performance and conduct of a corporation. The terms "affiliated person" and "control person" are interchangeable.

A term used to reference the trading of a new issue or, the secondary market.

After-tax Basis
It is the basis for comparing the return of a tax-free bond to a corporate bond. The basis lets the investor know what tax-free yield is required in order to receive the equivalent or greater return of a corporate yield. In determining the after-tax basis, one needs to consider the investor's tax bracket.

After-tax Real Rate Of Return
The amount of money that an investor can keep from an investment's income and capital gains after it has been adjusted for inflation.

Generally, investors look for an after-tax real rate of return that will equal if not surpass the rate of inflation.

1: A transaction in which the broker-dealer acts as an agent for the account. An agent (broker) acts as an intermediary between a buyer and a seller and charges a commission for this service.

2: Government securities issued by entities other than the US Treasury such as the Federal Home Loan Bank.

Agency Cross
A transaction whereby the same broker acts as agent for both sides (buy and sell) of the trade. As long as the broker first offers the securities publicly at a price higher than the bid, the practice is legal.

Agency Transaction
The brokerage firm's confirmation report to its clients that it executed an order in the capacity of a broker and charged a commission for the services rendered. The firm acted as an "agent" between the customer and the market maker. It is a requirement to show the commission charged separately on the confirmation report. The commission cannot be added into the execution price.

Aggressive Growth Fund
A mutual fund that buys shares in small or speculative growth companies to achieve maximum capital appreciation.

Air Pocket Stock
A term used to exemplify a stock falling sharply as holders rush to sell and few buyers can be found, likened to an airplane hitting an air pocket.

Alligator Spread Order
An options spread order with very high commission costs. It is improbable that an investor will profit even if the market moves as anticipated.

All Or None (AON) Offering
All or none offerings give an issuer the right to cancel an entire issue if an underwriting is not completely subscribed. A corporation may select this type of offering because it may be uneconomical to complete the distribution unless the entire amount of capital needed can be financed. No purchases can be finalized until it is determined that the entire offering is sold.

All Or None (AON) Order
A type of order where the client wants the entire order executed or none of it. The purchase (or sale) order must be greater than one round lot (100 shares). An AON order can be either a "day" order or a "good til canceled" order.

CUNA Brokerage Services on-line rules require an AON order to be a minimum of 200 shares for securities and a minimum of 11 contracts for options orders.

A specific amount of securities assigned to all underwriters in an investment banking syndicate. The syndicate is formed to distribute a new issue.

A coefficient measuring a security's price volatility caused by factors other than the stock market in its entirety. Alpha calculates the amount of return expected from an investment's intrinsic value, such as the rate of growth in earnings per share. For instance, an alpha of 1.35 infers that a security is projected to increase 35% in price when the security's "beta" is zero. A security, whose price is low in relation to its alpha, is considered undervalued.

Alternative Minimum Tax (AMT)
A tax aimed at preventing affluent investors from using tax shelters to evade other types of taxes such as income tax. Computation of the AMT takes into consideration tax preference items.

American Depository Receipt (ADR)
Receipt for shares of a foreign-based corporation held by a US banking institution. ADRs are created to facilitate transactions and transfers of ownership of foreign securities in the United States.

American Stock Exchange (AMEX)
The second largest stock exchange in the US is located in the financial district of New York City at 86 Trinity Place. As a general rule, the securities traded on the AMEX are those of small to mid-size corporations. The AMEX also trades options of many NYSE securities and some OTC securities.

American Stock Exchange Market Value Index
The AMEX computes an index to measure the aggregate market value changes in all common shares, ADRs and warrants listed on the exchange. The index is computed by totaling the securities' market values, dividing it by the market value at the close from the previous day, and then multiplying that figure by the previous closing index. The index represents a relative change in the total value of all shares.

American Style Exercise
It is a privilege that allows holders of American Style options to exercise an option at any time during its life.

1: An accounting procedure that gradually decreases the book value of an intangible asset through periodic charges to income. For fixed assets, the term used is depreciation, and for wasting assets, it is depletion. Both terms mean essentially the same thing as amortization. The purpose of amortization is to reflect resale or redemption value.

2: In a bond bought at a premium, it is a method of reducing a taxpayer's cost basis (vs. Accretion).

3: Amortization also applies to debt reduction through periodic payments of principal and interest sufficient to pay off a loan by maturity.

Individual in a brokerage firm, bank trust department, or mutual fund group who researches corporations, industry groups and the market to make buy and sell recommendations on specific securities. A majority of analysts specialize in a particular industry. However, some analyze corporations that interest them, regardless of its industry group.

Annual Meeting
A stockholder meeting that is held yearly. Functions of an annual meeting are for corporate executives to report on the year's results, to elect the board of directors, and to transact other business. The chief executive officer customarily makes a statement on the outlook for the next year and conducts a question and answer period. If a shareholder is unable to attend the annual meeting, the owner may vote for directors and pass on resolutions through the use of a proxy. Proxy materials are mailed to all shareholders of record.

Annual Report
A yearly statement of a corporation's financial condition that describes its operations and provides its balance sheet and income statement. In addition, other information that shareholders will be interested in will be furnished.

Annualized Discount
On a 360-day basis, it is the percentage of discount from par value that US Treasury Bills trade in the securities market at a particular moment in time.

An investor who is receiving annuity payments.

The series of payments from the capital that has built up in an annuity. The payments may be a fixed amount, or for a fixed period of time, or for the lifetimes of one or two annuitants.

A contract between a life insurance company and an individual that guarantees income for a defined period, usually starting at retirement, to the person on whose life the contract is based. In exchange, the individual agrees to make periodic payment to the insurance company. All capital in the annuity grows tax-deferred. See: Fixed Annuity; Variable Annuity

Annuity Unit
An accounting procedure used to calculate the amount of each payment an annuitant should receive during the payout period.

Appreciation is an asset's increase in value.

Approved List
A list of investments that a mutual fund or other financial institution is allowed to invest in. When fiduciary responsibility exists, the use of an approved list may be statutory.

This is the practice of simultaneously buying and selling the same (or equivalent) securities to profit from the disparity in their prevailing prices in separate markets. This activity applies to equivalent securities trading in different markets, securities with convertible features, or securities involved in mergers, tender offers, recapitalizations, or corporate divestitures.

A method of settling disputes between brokers and their clients, brokerage firms and clearing corporations, employees and their firms, and two brokerage firms. All exchanges and securities associations have adopted arbitration. A pre-dispute arbitration clause in a customer's brokerage account agreement is customary and assures that objective third parties will arbitrate disputes and preclude court cases.

Past due obligations such as interest on bonds or dividends on cumulative preferred stocks. If a cumulative preferred stock's dividends are in arrears, common dividends cannot be paid.

Ascending Tops
A chart pattern that tracks a stock's price over a period of time. The pattern will show that each peak in the stock's price is higher than the preceding peak. This upward movement is considered bullish.

Asked Price
1: It is the lowest round lot price at which a dealer will sell a security or commodity on an exchange or in the over-the-counter market. In other words, it is the price that an investor can buy the security. Also called the "asking price," "ask," "offering price" or "offer."

2: The per-share price that mutual fund shares are offered to the potential investors. It is usually the "net asset value" per share plus any sales charges.

Assessed Valuation
A dollar value that is given to property by a municipality for the purpose of assessing taxes. Assessed valuation is important to both homeowners and investors in municipal bonds that are backed by property tax.

Anything of value owned or is owed to it by a business, institution, or individual. Assets may include cash, investments, accounts receivable, product inventory and other current assets. Patents and goodwill are called intangible assets.

Asset Allocation
The allotment of investment funds amongst various types of assets such as cash equivalents, stock, fixed-income investments, real estate, and precious metals. It also applies to sub-classifications such as industry groupings of common stocks and government, municipal, and corporate bonds. Asset allocation affects both risk and return.

Asset-Backed Securities
Securities underwritten by brokerage firms who sell them to investors. The securities (bonds or notes) are backed by loan paper or accounts receivable of the issuer.

Asset Coverage
Extent to which a corporation's net assets cover a specific class of preferred stock, debt obligation or equity position. Asset coverage is significant as a buffer against losses in the event of liquidation.

Asset Management Account (AMA)
An account at a brokerage firm or a bank that combines check writing, debit cards (or credit cards) and brokerage services such as buying and selling securities. AMAs are convenient because all financial transactions are listed on one monthly statement. AMAs are also called central asset accounts and are known by proprietary names such as Cash Management Account (Merrill Lynch).

Asset Play
A security whose current price does not reflect the value of corporate assets. For instance, analysts may recommend a corporation because its real estate value is greater than is reflected in the stock's current price and not because the corporation is run well. Asset play securities are attractive targets for takeovers because they provide a low-cost way to buy assets.

1: When an option is exercised, the Options Clearing Corporation prepares an assignment notification to a broker/dealer that one of its clients has options written that were exercised. The firm then assigns the exercise to one of its clients. This is done in accordance with their internal procedures.

2: It is the signing of either a stock/bond certificate or a separate form known as a stock power/bond power to authorize transfer of ownership to a new owner.

After an issue's underwriters have sold all shares, a new issue is considered assimilated by investors.

Assumed Interest Rate
The growth rate built into an annuity table to calculate the payout on variable annuities.

At Par
The price of a security that is equal to the face or nominal value.

At The Money
An option in which the underlying security is trading exactly at the strike (exercise price) of the option. Premiums paid or received and commissions are not considered. Thus, "at the money" should not be confused with an investor's break-even point on the option.

At The Close Order
An order to execute a buy or sell within the last 30 seconds of the trading day. There is no guarantee that the execution price will be the closing price or that the order will be executed at all.

At The Opening Order
An order to execute a buy or sell at the opening price. If the order can not be executed at the opening, it will be automatically canceled.

Auction Market
System by which securities are traded through brokers or agents on an exchange such as the New York Stock Exchange. Unlike conventional auctions with one auctioneer and many buyers, here there are many buyers and sellers. Brokers competitively bid for the most advantageous price. It is distinguished from the over-the-counter market, where trades are bought by dealers.

Autex System
When brokers want to trade large blocks of securities, they will utilize this electronic system to alert other brokers. The actual transaction takes place over-the-counter or on an exchange floor and not on the system.

Authorized Shares
Also called "authorized stock"; it is the maximum number of shares of any class that a corporation may issue. This amount is set at the time of incorporation and is part of the Articles of Incorporation. A corporation provides for future increases in authorized stock by the votes of stockholders. The corporation does not have to issue all the authorized shares.

Automatic Withdrawal
A program offered by a mutual fund to its shareholders. It enables shareholders to withdraw a fixed amount of money on a monthly or quarterly basis. The payment consists of dividends, realized capital gains and income generated from securities held by the fund.

Average Down
A strategy used to reduce the average price paid for a security by buying additional shares of the security at lower prices.

Average Equity
In a trading account, it is the average daily balance. Although daily fluctuations in equity are normal, average equity is an effective guide in ensuring sufficient equity to meet margin requirements.

Average Life
The average length of time anticipated that a bond, with a mandatory sinking fund, will be outstanding.

Average Up
On a rising market, averaging up is the act of buying an equal number of shares of a security to lower its overall cost basis. For example, if an investor buys an equal number of shares at $20, $23, $25, and $28, the average cost basis will be $24.