Glossary of Investment Terms (A - C)

This glossary offers a handy reference for some of the more common investment and financial terms.  The information presented here covers topics that are subject to change due to legal and regulatory actions.  Readers should consult with their legal, tax or financial advisors before entering into any agreement or effecting any transactions involving terms or concepts about whose meaning they may be unsure.

A

Accredited investor.  SEC Regulation D stipulates that a maximum of 35 non-accredited investors are allowed to invest money into a Private Placement. To qualify as an accredited investor, an investor must either be: i) a financial institution; ii) an affiliate of the issuer; or iii) 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.

Accrued interest.  The interest due on a bond since the last interest payment was made. The buyer of the bond pays the market price plus accrued interest.

Affiliated person.  Persons who are either (i) officers, directors, or owners of 10% or more of the voting shares of an issuer, or (ii) in most cases, immediate family and confidants of the aforementioned. The terms "affiliated person" and "control person" are interchangeable.

Agency.  1). A transaction in which the broker-dealer acts as an agent for the account, and as an intermediary between buyer and a seller, charging a commission for this service. 2). Government securities issued by entities other than the U.S. Treasury, e.g., the Federal Home Loan Bank.

All or None (AON) order.  A type of order where the client wants the entire order executed or none of it. An AON order can be either a "day" order or a "good til canceled" order.

Alpha. A measure of an investment fund's risk-adjusted return. Alpha can be used to measure the value added (or subtracted) by a fund’s manager. It is calculated as the difference between a fund's actual returns and its expected performance given its level of market risk (as measured by beta). An alpha of 1.0 means the fund produced a return 1% higher than its beta would predict. An alpha of -1.0 means the fund produced a return 1% lower.

American Depositary Receipt (ADR).  A security issued by a U.S. bank in place of the foreign shares held in trust by that bank.  ADRs facilitate trading of foreign shares in U.S. markets.

Amortization.  An accounting technique which accounts for expenses or charges in the period in which they are incurred rather than when they are paid. Includes such practices as depreciation, depletion, and the write-off of intangibles, prepaid expenses and deferred charges.

Annuity. A form of investment contract sold by life insurance companies which guarantees a fixed or variable payment to the annuitant at some specified time in the future, usually retirement.

Arbitrage.  A trading strategy for profiting from differences in prices for the same or similar assets offered in different markets or forms. For example, if ABC stock can be bought in New York for $10 a share and sold in London at $10.50, an arbitrageur may simultaneously purchase ABC stock in New York and sell it in London realizing a profit of $0.50 a share, less expenses. Another common form of arbitrage involves the purchase of a convertible security and the sale at or about the same time of the security obtainable through conversion.

Assets.  Everything a business entity owns or that is due it.  Cash, investments, accounts receivable, and inventories, are the common forms of current assets.  Non-current assets include buildings and equipment (known as fixed assets) and intangible assets such as patents and goodwill.

Asset allocation.  The process of selecting a mix of investments designed to realize certain financial goals within the investor’s risk tolerance limits.

Assignment.  When an option is exercised, the Options Clearing Corporation delivers an assignment notification to a broker/dealer that one of the broker dealer’s 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.

Auction market.  The system of trading securities through brokers or agents on an exchange such as the New York Stock Exchange. Buyers compete with other buyers while sellers compete with other sellers for the most advantageous price.

B

Back-end load. A redemption charge incurred on sale of, or withdrawal from, certain mutual funds.

Balance sheet.  The section of a financial statement which shows the nature and amount of a company's assets, liabilities and capital on a given date.  Stated differently, the balance sheet shows in dollar terms what the company owned, what it owed and the ownership interest of its stockholders.

Basis point (bps). One hundredth of one-percent.  Used commonly in expressing variations in the yields of bonds or of investment returns. For example, the difference between 12.83% and 12.88% is 5 basis points.

Bearer bond.  A bond that does not have the owner's name registered on the books of the issuer. Interest and principal, are payable to the holder of the bond.

Beta. Beta measures the risk of a particular investment relative to the market as a whole or a relevant index.  It describes the sensitivity of the investment to broad market movements.  For example, in equities, the stock market is assigned a Beta of 1.0.  An investment which has a Beta of 0.5 will tend to participate in broad market movements but only half as much as the overall market.

Bid and asked.  The bid is the highest price anyone offers to pay for a security at a given time.  The asked is the lowest price anyone offers to accept at the same time.

Block. A large holding or transaction of stock, generally considered to be 10,000 shares or more.

Blue Sky Laws. A popular name for laws that various states have enacted to protect the public against securities fraud. The term is thought to have originated when a judge ruled that a particular stock had about the same value as a patch of blue sky.

Bond. A bond is an IOU or promissory note of a corporation or government entity which is usually issued in multiples of $1,000 or $5,000.  A bond is evidence of a debt on which the issuer usually promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date.

Book-entry securities.  Securities that are registered to an owner without the issuance of a physical certificate. Ownership is reflected by an entry in the issuer's books. This method of registering securities has expanded because investors need not worry about the location of their certificates and it requires less paperwork for a brokerage firm.

Book value. Book value is an accounting term for an amount determined from a company's balance sheet by adding all assets then deducting all debts and other liabilities, including  the liquidation price of any preferred issues. The sum thus arrived at is divided by the number of common shares outstanding, and the result is book value per common share. Book value of the assets of a company or a security is often very different from the market value of the stock.

Bottom-up investing. An investment approach whereby the investor seeks individual stocks that are performing well with little or no consideration given to economic or market conditions.

Brokers' loans. Money borrowed by brokers from banks or other brokers for a variety of uses.  Examples include loans used by specialists to help finance inventories of stock they deal in; loans by brokerage firms to finance the underwriting of new issues of corporate and municipal securities; loans to help finance a brokerage firm's own investments; and loans to help finance the purchase of securities by customers who obtain credit from the broker.

Buy side. The portion of the securities business which holds customers’ money and makes buy and sell decisions on their behalf. Mutual funds, pension funds and trust companies are buy-side institutions.

C

Call option.  A contract that gives the holder the right to buy a specified number of shares of a particular stock, stock index, or dollar face value of bonds at a predetermined price (called the "strike price") on or before the option's expiration date. For this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the value of the security rises. If the holder decides to exercise the option (as opposed to selling it), the writer must give up ownership of the security.

Callable. A bond issue all or part of which may be redeemed by the issuing corporation under specified conditions before maturity. The term also applies to preferred shares that may be redeemed by the issuing corporation.

Called away.  Phrase used to indicate that a particular bond issue was redeemed before its maturity date. This mainly occurs when an issuer exercises a right to retire the bond before its maturity.

Capital gain. The difference between cost of an asset and the price realized when it is sold for a profit.

Capital gains distribution.  Mutual funds are required to distribute to their shareholders a certain proportion of their realized gains each year.  A capital gains distribution does not by itself change the value of an investor’s holdings because the share price is adjusted downward to offset the increase in the number of shares issued to investors receiving the distribution.  Unfortunately, distributions constitute a taxable event for shares held in taxable accounts.  Even if the value of an investor’s shares in the mutual fund have declined since purchase, the distribution still represents taxable income.

Capital loss. The difference between cost of an asset and the price realized when it is sold for a loss.

Capital stock. All shares representing ownership of a business, including preferred and common.

Capitalization. Total amount of the various classes of securities issued by a corporation. Capitalization may include bonds, debentures, preferred and common stock, and surplus. Bonds and debentures are usually carried on the books of the issuing company at their par or face value. Preferred and common shares may be carried at par or stated value. Stated value may be an arbitrary figure decided upon by the directors or may represent the amount received by the company from the sale of the securities at the time of issuance.

Cash equivalent.  A debt instrument that is nearly as liquid and as low-risk as cash.

Cash flow. Reported net income of a corporation, plus non-cash charges for items such as depreciation, depletion, amortization, and extraordinary charges to reserves.

Cash sale. A transaction on the floor of the stock exchange that calls for delivery of the securities the same day. In "regular way" trade, the seller must deliver on the third business day, except for bonds, which are the next day.

Certificate of deposit (CD). A money market instrument characterized by its set date of maturity and interest rate. There are two basic types of CDs: traditional and negotiable. Traditional bank CDs typically incur an early-withdrawal penalty, while negotiable CDs have secondary market liquidity, with investors receiving more or less than the original amount depending on market conditions.

Commercial paper. Debt instruments issued by companies to meet short-term financing needs.

Common stock. Securities that represent an ownership interest in a corporation. If the company has also issued preferred stock, both common and preferred have ownership rights. The terms common stock and capital stock are often used interchangeably when the company has no preferred stock.

Control person.  Any officer, director, or 10% stockholder of a corporation, and members of their immediate family.

Convertible. A bond, debenture or preferred share that may be exchanged by the owner for common stock or another security, usually of the same company, in accordance with the terms of the issue.

Correlation.  A measure of the extent to which two investments, indices, or other variables move in the same direction.

Correspondent. A securities firm, bank or other financial organization that regularly performs services for another firm in a place or market to which the other does not have direct access. Securities firms may have correspondents in foreign countries or on exchanges of which they are not members.

Coupon bond.  A bond with interest coupons attached. The coupons are clipped as they come due and presented by the holder for payment of interest.

Covered call option.  A call option for which you have an offsetting position in the underlying security.  For example, an investor owns 500 shares of XYZ and writes (sells) 5 XYZ call options. The 500 shares cover the call options sold.  If the writer is assigned (viz., if the option is exercised), the 500 shares will meet the obligation of the option contract. The writer does not have to go into the market to buy shares to deliver to the option exerciser.

Cumulative preferred. A preferred stock having a provision that, if one or more dividends are omitted, the omitted dividends must be paid before dividends may be paid on the company's common stock.

Cumulative voting. A method of voting for corporate directors that enables the shareholders to multiply the number of their shares by the number of directorships being voted on and to cast the entire amount for either one director or a selected group of directors. Cumulative voting, which is generally considered to increase influence of minority shareholders, is required under the corporate laws of some states and is permitted in most others.

Cyclical stock.  A stock that is strongly affected by changes in economic activity. The stock's price will generally rise when the economy turns up, and will fall when the economy turns down. Examples are automobiles and paper stocks. Non-cyclical stocks, such as stocks within the food and hospital industries, are much less affected by the overall level of economic activity.