Glossary of Investment Terms (M - O)

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.

M

Maintenance call.  A call for more money or securities to be deposited into a brokerage client's margin account. A call will be made when the account's margin equity falls below exchange requirements or the brokerage firm's house requirements which are usually more stringent than those for the exchange. If the account is not brought up to maintenance levels, the brokerage firm has the right to liquidate some of the client's securities to eliminate the deficiency.

Margin. The cash amount put up or paid by the customer when the customer funds part of a purchase with a loan from the broker (“margin debt”). Under Federal Reserve regulations, the initial margin requirement since 1945 has ranged from 50% of the purchase price to up to 100%.

Margin call. A demand upon a customer to put up additional money or securities with the broker. The call is made either when a new investment is made or if the value of a customer's account declines below a minimum standard set by the exchange or by the firm.

Market order. An order to buy or sell a stated amount of a security at the most advantageous price obtainable at the time the order is placed.

Market timing.  Determination of when to buy or sell securities through use of fundamental or technical indicators. Mutual fund investors can accomplish market timing decisions by switching from different types of funds within a family as the market outlook changes. For example, the investor can switch from a stock fund to a money market fund and back again. Recent scandals involved short-term market timing trades in mutual funds shares by hedge funds or other clients who provided the mutual fund with some consideration in return for the ability to make such trades.

Market Risk.  The chance that a security's value will decline due to a general decline in the market. With fixed income securities, market risk is closely tied to interest rate risk. As interest rates rise, fixed income prices decline, and vice versa.

Maturity. The date on which a loan or bond comes due and is to be paid off.

Maximum drawdown. A measure of risk which captures the largest percentage drop of an investment from any peak to the trough for a given period. 

Merger. Combination of two or more corporations.

Money market fund. A mutual fund whose investments are in money market instruments such as federal securities, CDs and commercial paper. These instruments, normally purchased in large denominations by institutions, are made available to individuals through money market funds.

Mortgage bond. A bond secured by a mortgage on a property. The value of the property may or may not equal the value of the bonds issued against it.

Municipal bond. A bond issued by a state or a political subdivision, such as county, city, town or village. The term also designates bonds issued by state agencies and authorities. Before the Tax Reform Act of 1986, interest paid on municipal bonds was exempt from federal income tax and state and local income tax within the issuing state. The terms municipal and tax-exempt were synonymous. However, the Act separated municipal bonds into two broad groups – public purpose bonds and private purpose bonds. Public purpose bonds are tax-exempt (except for purposes of the alternative minimum tax (AMT) and may be issued without limitations. Private purpose bonds are taxable unless specifically exempted. The difference between public and private purpose bonds is based on the extent to which the bonds benefit private parties.

Municipal bond insurance. Insurance policies that protect investors if a municipal bond should default.  The insurance may either be purchased by the issuer or the investor. Two major insurers of municipal bonds are the AMBAC Indemnity Corporation and the Municipal Bond Insurance Association (MBIA). Insured municipal bonds usually have the highest ratings. Subsequently, the bond's marketability increases, which lowers the cost to the issuers. However, the yield on an insured bond is usually lower than similarly rated uninsured bonds – the cost of the insurance is passed on to the investor.

Mutual fund. An open-end investment company. 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.  Open-end funds are so called because their capitalization is not fixed; they issue more shares as people want them.

N

Naked option.  Call or put options that are written (sold) by an investor that does not hold a position that would offset a loss if the option price moves against them.  In the case of call options, writers are naked if they do not own either the underlying security, a security convertible into the underlying security, or a long call at a strike price equal to or lower than the strike price that was written and that does not expire before the written call. In the case of put options, writers are naked if they do not either have a short position in the underlying security, a bank guarantee letter, or do not own a long put with a strike price equal to or higher than the strike price of the put that was written and that does not expire before the put that was written.

NASD. The National Association of Securities Dealers, an association of brokers and dealers in the over-the-counter securities business.

NASDAQ. The National Association of Securities Dealers Automated Quotation System is a nationwide computerized quotation system for over 5,500 over-the-counter stocks. The index is compiled of more than 4,800 stocks that are traded via this system.

Net asset value (NAV). Usually used in connection with investment companies to mean net asset value per share. An investment company computes its assets daily (or twice daily) by totaling the market value of all securities owned. All liabilities are deducted, and the balance is divided by the number of shares outstanding. The resulting figure is the net asset value per share.

Net change. The change in the price of a security from the closing price on one day to the closing price on the next day on which the stock is traded. The mark +1 1/8 means up $1.125 a share from the last sale on the previous day the stock traded.

New issue. A stock or bond sold by a corporation for the first time. Proceeds may be used to retire outstanding securities of the company, for new plant or equipment, for additional working capital, or to acquire a public ownership interest in the company from private owners.

Nikkei. The Nikkei 225 Index is composed of the 225 largest stocks on the Tokyo Stock Exchange.

Non-callable.  A bond that cannot be redeemed before its maturity by the issuer. Call provisions in a bond's indenture agreement specify whether the bond is callable or non-callable. Because so many bonds issues are callable, bond yields are often quoted to the first date at which the bonds could be called instead of yield to maturity.

Non-cumulative preferred. A type of preferred stock on which unpaid dividends do not accrue. Omitted dividends are, as a rule, gone forever.

Non-qualified plan.  A retirement plan or an annuity in which contributions are made with after-tax dollars. The contributions are not tax-deductible because the plan or annuity is not an IRS approved pension plan. However, just as with a qualified plan, earnings accumulate tax-deferred until withdrawn.

NYSE Composite Index. The composite index covering price movements of all common stocks listed on the New York Stock Exchange. The index value was established at 50 on the close of the market on December 31, 1965.  The index is weighted according to the number of shares listed for each issue. Point changes in the index are converted to dollars and cents to provide an indication of changes in the average price of listed stocks.

O

Odd lot. An amount of stock less than 100 shares. Amounts in increments of 100 are referred to as “round lots.”

Odd lot differential.  An extra charge, usually 1/8 of a point, that dealers may add to purchases, and subtract from sales, when the order's share quantity is less than the standard trading unit or round lot.

Offer. The price at which stock is offered for sale, as opposed to the bid, which is the price at which a prospective purchaser has agreed to pay.

Original Issue Discount (OID).  A new bond issue that is usually offered below par. The bond's value is increased (accreted) over its life from the original discounted price up to par. At the bond's maturity, it will be valued at par. Interest on these types of bonds are not paid until maturity. However, the interest is taxed as it is accreted. A zero coupon bond is an example of an OID.

Open-end investment company.  Essentially synonymous with “mutual fund.”

Open order. An order to buy or sell stock which has not yet been filled.

Option premium.  The market price of an option that is paid by an option buyer to the option writer (seller) for the right to buy (call) or sell (put) the underlying security at a specified price (the "strike price" or "exercise price") at any time prior to the option's expiration date. The premium is set by the supply and demand of option traders as they evaluate the underlying security's future market value.

OTC (over the counter).  A market for securities that are not listed on an exchange. Security orders are transacted via telephone and a computer network that connects dealers. As opposed to the NYSE, which is an auction market, the OTC is a negotiated market. OTC dealers may act as either principals or agents for customers. The OTC market is regulated by the NASD.

OTC bulletin board.  Electronic listing of bid and asked quotations for over the counter stocks that do not meet the NASDAQ listing requirements. The system generally provides continuous quotations on stocks, except for foreign stocks which are updated twice-daily. It facilitates trading and provides greater surveillance than is the case with non-NASDAQ stocks

Out of the money.  Expression used for any option for which the strike (exercise) price and market price of the underlying security are such that if the holder attempted to exercise the option, the holder would realize no value.  For example, in the case of a put, the strike price is lower than the stock’s current price.  In the case of a call, the strike price is higher the stock’s current price. An investor who buys an out-of-the-money option is speculating that the option will become in-the-money.

Overnight position.  Broker-dealer who has a long position or a short position in a security at the end of a trading day.

Oversubscribed.  Term used when potential buyers for a share offering want more shares than the number offered. The stock will usually rise in price when it starts trading on the open market as buyers who could not previously purchase the issue do so in the open market.