Glossary of Investment Terms (H - L)

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.

H

Hang Seng. An index of the share prices of largest securities listed on the Hong Kong Stock Exchange. The index is weighted by market capitalization.

Hedge.  A hedge is an investment designed to limit or protect against losses in another investment or position.

Hedge fund.  Technically, a hedge fund is simply an investment pool, usually organized as a partnership with a general partner that manages the investments, and investors as limited partners.  While many early investment partnerships used “hedged” investment strategies, today’s hedge funds employ a wide range of strategies that may or may not entail hedging.

High yield bonds.  Corporate bonds whose credit rating is less than investment grade (BBB), often represented by the Merrill Lynch U.S. High Yield BB-B Rated Index.

Holder of record.  Owner of a company's securities recorded on the books of the issuing company or its transfer agent as of a specific date (called the "record date"). For example, dividend and stock splits always specify whether they are payable to holders as of the record date.

Holding period.  Length of time an asset is held by its owner. The holding period is based on the trade date (as opposed to the settlement date), and determines whether a gain or loss is considered short term or long term.

Hypothecation. The pledging of securities as collateral, e.g., to secure the debit balance in a margin account.

I

Illiquid.  Said of investments such as a stock, bond or commodity that cannot be readily converted into cash. A security becomes illiquid when a lack of trading activity in the security makes it hard to sell without taking a large loss. Other assets such as real estate can also be considered illiquid because they generally take time to sell.

Imputed interest.  Interest that is considered to have been paid for tax purposes even though no actual payment was paid. A zero coupon bond, for instance, has imputed annual interest that the IRS requires the bondholder to report.

Income bond. Generally income bonds promise to repay principal but to pay interest only when earned. In some cases unpaid interest on an income bond may accumulate as a claim against the corporation when the bond becomes due. An income bond may also be issued in lieu of preferred stock.

Indenture. A written agreement under which bonds and debentures are issued and which sets forth the maturity date, interest rate and other terms.

Index. A statistical measure for a market or class of investments that is designed to show changes from a base year. For instance, the NYSE Composite Index of all NYSE common stocks was computed so that the base year of 1965 was equal to 50. An index is not an average.

Index fund.  A mutual fund that buys securities to match the securities that make up a broad-based index such as the Standard & Poor's Index. The fund aims to achieve a rate of return equal to that of the market as measured by the index used.

Indexing.  An investor who buys individual securities or index funds to mirror a broad-based index such as the S&P 500. The investor aims to match the index's performance.

Initial public offering.  The original sale or offer for sale of a company's securities.

Institutional investor. An organization whose primary purpose is to invest its own assets or the assets of  others which it holds in trust. Includes pension funds, investment companies, insurance companies, universities and banks.

Insured bonds.  Municipal bonds covered by an insurance policy. The policy guarantees that should the issuer default in making payments, the insurance company will pay all interest and principal due. Insured bonds usually are rated highly rated because the risk to the investor is minimal.

Intangible assets.  Assets of a corporation that are not physical such as goodwill, trademarks, patents, copyrights, franchises, leases, licenses, and permits.

In the money.  Expression used for any option for which the strike (exercise) price and market price of the underlying security are such that the holder would realize some value if the option were exercised. For example, if a call option with a strike price of 30 and the underlying stock's market price is currently 33, the call is 3 points in the money. Premiums and transaction costs are not considered in determining whether the option is in the money or out of the money.

Investment banker. The middleman between a corporation issuing new securities and public investors. The usual practice is for one or more investment bankers to buy a new issue of stocks or bonds outright from a corporation. The investment banker (or bankers) forms a syndicate to sell the securities to individuals and institutions. Investment bankers are often employed to distribute very large blocks of stock or bonds.

Investment company. A company or trust that uses its capital to invest in other companies. There are two principal types of investment companies: closed-end and open-end. Open end companies, commonly known as mutual funds, sell their own shares to investors, and agree to buy back their shares from investors at their net asset value (NAV), or in some cases at NAV less a redemption charge.  Shares in closed-end investment companies, some of which are listed on the New York Stock Exchange, are readily transferable in the open market and are bought and sold like other shares. Capitalization of these companies remains the same unless action is taken to change it. Open-end funds are so called because their capitalization is not fixed; they issue more shares as people want them.

Investment counsel. One whose principal business consists of acting as an investment advisor or rendering investment supervisory services.

Investment grade.  A bond that is rated within the top four categories by Moody's or Standard & Poor's.

IRA (Individual retirement account).  A tax advantaged retirement plan. IRAs permit investment through intermediaries like mutual funds, insurance companies and banks, or directly in stocks and bonds through stockbrokers.

IRA Rollover.  An individual's reinvestment of assets received as a distribution from a qualified tax-deferred retirement plan such as a corporate pension plan. If the assets are deposited in an IRA within 60 days from the time they are withdrawn, the individual will not have any tax consequences and the assets will continue to accumulate on a tax-deferred basis.  IRAs and Rollover IRA differ with respect to certain aspects of their tax treatment and holder’s rights.

Issue. Any of a company's securities.  Used as a verb to mean the act of distributing such securities.

J

Joint tenancy (JT).  An account or property for which there are two or more owners. There are several types of joint tenancy. State laws and the relationship between the owners determine the preferred type of joint tenancy.

Joint Tenants by Entirety. Ownership of assets by a married couple where the husband or wife automatically acquires the other's share upon death.

Joint Tenants in Common (JTIC).  Ownership of assets by two or more individuals. A specific ownership percentage is assigned to each individual. In the event of the death of one party, the deceased's interest passes to their estate and not to the surviving tenant(s).

Joint Tenants with Right of Survivorship (JTWROS).  Ownership of assets by two or more individuals where there is no specific fractional financial interest. In the event of the death of one party, the survivor(s) receives total ownership.

Junior securities.  Security whose claim on assets is subordinate to that of a "senior security." For instance, a preferred stock is junior to a debenture, but a debenture, being an unsecured bond, is junior to all corporate bonds.

Junk bond.  Bonds that have little or no collateral or liquidation value, and are typically very risky. In return for this risk, they offer a high rate of return. They are issued by corporations with limited sales and earnings track records, or by those with questionable credit. In the 1980s, junk bonds were popular instruments for corporate mergers and acquisitions. The bonds usually have a credit rating of BB or lower. Because the term “junk bond” has an unfavorable connotation, issuers and holders prefer use of the term "high yield bonds."

K

Keogh plan. Tax-advantaged personal retirement plan that can be established by a self-employed individual.

L

Legal list. A list of investments selected by various states in which certain institutions and fiduciaries, such as insurance companies and banks, are allowed to invest. Legal lists are often restricted to high-quality securities meeting certain specifications.

Leverage. The use of borrowed money to fund an investment.  An investor who borrows money to purchase stock is leveraged.  Companies employ leverage to the extent that they are capitalized with debt.  For example, if the earnings of a company with one million common shares and no debt increases from $1 million $1.5 million, earnings per share would go from $1 to $1.50, an increase of 50%. But if a company capitalized with 1 million shares and debt requiring $500,000 in bond interest increased by the same amount before interest expense, earnings per common share would jump from $.50 to $1 a share, or 100%.

Limited partnership (LP).  Legal entity that consists of a general partner and limited partners. The general partner manages one or more projects for which the organization was formed. Limited partners invest money into the project.  Their risk is usually limited to the amount that they invested, and they do not have any day-to-day responsibilities of running the partnership. Limited partners typically receive income, capital gains, and tax benefits, while the general partner collects fees and a percentage of capital gains and income. Limited partnerships are commonly used for investments in real estate, oil and gas, and equipment leasing, as well as other investment projects.

Limited Power of attorney (LPOA).  Written document that permits a third party to conduct certain specified actions on behalf of the person signing the document.  A limited Power of attorney is commonly used to allow an investment advisor to effect trading in a client’s account held at a third-party custodian.

Limit order. An order to buy or sell a stated amount of a security at a price equal to or better than the limit price.

Liquidation. The process of converting securities or other property into cash. The dissolution of a company, with the cash remaining after sale of all assets and payment of all indebtedness being distributed to the shareholders.

Liquidity. The ability of a market to absorb a reasonable amount of buying or selling at reasonable price changes. Liquidity is one of the most important characteristics of a good market.

Listed stock. The stock of a company that is traded on a securities exchange.

Load. The portion of the price of shares in a mutual fund in excess of the value of the underlying assets. Historically, load charges were typically applied on purchase of shares (called a “front-end” load) as a means of funding sales commissions and other costs of distribution. In recent years, an increasing number of mutual funds apply a “back-end” load or “redemption fee” on the sale of shares.  Redemption fees are often used as a means of discouraging short-term trading by having them apply only to sales made within a short period (typically 120-180 days) following purchase.

Long. Signifies ownership of a security. "I am long 100 U.S. Steel" means the speaker owns 100 shares. The opposite of a short position.

Long bond.  A bond maturing in 10 or more years. Because an investor's money is tied up for a long time, the bonds are riskier than shorter term bonds of the same quality. Thus, they usually pay a higher yield.