Glossary of Investment Terms (U - Z)

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.

U

UGMA (Uniform Gift To Minors Act).  Law adopted by most states, with few changes, that sets up rules for the distribution and administration of assets in the name of a child. The Act requires a custodian of the assets which is usually a parent but may be an independent trustee. It must be one person.  UGMA is used in the securities industry as a qualifier to indicate accounts and securities purchased or sold under the provisions of the Act. A gift to a minor is irrevocable. When a minor reaches majority, UGMA accounts become the child's property.

Underwrite.  A process whereby investment bankers (underwriters) buy a new issue of securities from the issuing corporation or government entity and resell them to the public. The underwriter makes a profit from the underwriting spread which is the difference between the price paid to the issuer and the public offering price. Underwriters usually form an underwriting group (also called "purchase group" or a "syndicate") to limit risk, assure successful distribution of the issue, and to obtain capital to buy the issue. The syndicate works under an underwriting agreement. The lead underwriter, also known as "managing underwriter" or "syndicate manager", is usually the firm that worked with the issuer to plan the issue and prepare the registration materials to be filed with the SEC. The manager, as agent for the group, signs the underwriting agreement with the issuer. The agreement sets forth the conditions of the arrangement and the responsibilities of both parties. The term "underwrite" is properly used only in a firm commitment underwriting where the securities are purchased outright from the issuer. Other investment banking arrangements to which the term may be applied include Best Effort, All Or None, and Standby Commitments.  In each of these, the risks are shared between the issuer and the investment banker. There are two basic methods by which underwriters are chosen by issuers and underwriting spreads are determined. Generally, negotiated underwriting is used in corporate equity issues and corporate debt issues. Competitive bid underwriting is used by municipalities and public utilities.

Underwriter. See Underwrite.

Underwriting spread.  Difference between the amount paid to an issuer in a primary distribution and the public offering price. The spread amount varies and is contingent on the issue's size, the issuer's financial strength, the type of security (stock, bonds, etc.), the status of the security (senior, junior, etc.), and the type of commitment made by the underwriters. The spread may range from a fraction of 1% for a bond issue, to 25% for an initial public offering of a small company. The spread is divided between the managing underwriter, the selling group, and the participating underwriters.

Unit Investment Trust (UIT).  A trust registered with the SEC under the Investment Company Act of 1940 in which a fixed portfolio of income-producing securities are purchased and held to maturity. This type of investment vehicle is commonly used with municipal bonds. Each unit usually costs $1,000 and is sold by brokers to investors for an average load of 4% which is included in the per share price. Investors receive an undivided interest of the portfolio's principal and income proportionate to the amount they invested. All unit investment trusts are redeemable securities and can be resold in the secondary market.

Universal life insurance.  Type of life insurance that combines the low cost coverage of term life insurance with a tax-deferred savings account that invests in money-markets. Without incurring additional sales charges, this type of policy allows the holder to increase or decrease coverage or to shift premiums into the savings account.

Unlisted stock. A security not listed on a stock exchange.

Up tick. A term used to designate a transaction made at a price higher than the preceding transaction. Also called a "plus" tick.  A "zero-plus" tick is a term used for a transaction at the same price as the preceding trade but higher than the price of the most recent trade at a different price. Conversely, a down tick, or "minus" tick, is a term used to designate a transaction made at a price lower than the preceding trade. A plus sign, or a minus sign, is displayed throughout the day next to the last price of each stock at the trading post on the floor of the New York Stock Exchange.

V

Variable annuity. A life insurance policy where the annuity premium (a set amount of dollars) is immediately turned into units of a portfolio of stocks. Upon retirement, the policyholder is paid according to accumulated units, the dollar value of which varies according to the performance of the stock portfolio. Its objective is to preserve, through stock investment, the purchasing value of the annuity which otherwise is subject to erosion through inflation.

Variable life insurance.  A variation of whole life insurance created to fight inflation and to remain competitive with other investment vehicles that provide higher rates of return. It affords policyholders a chance to earn capital gains on their insurance by investing the cash value of the policy in stock, bond, or money market portfolios. The policyholder sustains the investment risk and the insurance company guarantees a minimum death benefit that is not affected by any portfolio losses. As in IRAs, earnings from variable life policies grow tax deferred until distributed. Income is taxed only for the amount that exceeds the total premiums paid into the policy.

Velocity of money.  The amount of times a dollar is spent in a specific time period. Velocity affects economic activity produced by a given money supply, which includes bank deposits and cash in circulation. The Federal Reserve Board considers the velocity of money as a factor in their management of monetary policy. This is because a rise in velocity may preclude the need to stimulate an increase in the money supply. Conversely, a decline in velocity may slow down economic growth.

Volatility. a percentage measure of the range a variable moves up or down.

Volatility. A measure of fluctuation in the market price of a security. A volatile stock or fund has frequent and large price swings. Statistically, the measure most commonly used for volatility is "standard deviation," the amount the price of a stock or mutual fund varies over time.

Volume. The number of shares or contracts traded in a security or an entire market during a given period. Volume is usually considered on a daily basis and a daily average is computed for longer periods.

Voting right. Common stockholders' right to vote their stock in affairs of a company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified period. The right to vote may be delegated by the stockholder to another person.

W

Warrants. Certificates giving the holder the right to purchase securities at a stipulated price within a specified time limit or perpetually. Sometimes a warrant is offered with securities as an inducement to buy.

Wash sale.  1). A security that is bought or sold, either concurrently or within a short period of time, to create artificial market activity to profit from a rise in the security's price.  2). The sale of a security and then the repurchase of shares within 30 days. The Internal Revenue Service (IRS) automatically disallows for tax purposes realization of any losses from wash sales. The IRS also extends the wash sale prohibition to closing short sales.

When issued. A short form of "when, as and if issued." The term indicates a conditional transaction in a security authorized for issuance but not as yet actually issued. All "when issued" transactions are on an "if" basis, to be settled if and when the actual security is issued and the exchange or National Association of Securities Dealers rules the transactions are to be settled.

Wilshire 5000.  A total market index that is comprised of more than 6,500 U.S. stocks.

Wire house.  National or international brokerage firms. The term dates back to when only the largest firms had high speed communications. Through the dissemination of technology, regional brokers and small retail firms now have the same ability. However, the term wire house is still used to refer to the largest brokerage firms.

Writer. Sellers of option contracts who obligate themselves to the performance agreed upon in the contract, i.e., to sell if a call was written, or to buy if a put was written, the underlying security at the predetermined price if the option is exercised prior to a specific date. In return for the seller assuming this obligation, the seller collects a premium.

Y

Yellow sheets.  Daily publication that provides bid and ask prices of corporate bonds traded over the counter (OTC) and firms that are market makers in the particular bond.

Yield.  The interest or dividends paid by a security in relation to the price of the security. Yield is commonly expressed in several ways:

• Current yield (bonds). This is the "coupon rate" which is the interest rate stated in the description of the bond, divided by the purchase price. For example, a U.S. Treasury 5% bond bought for a price of 80 (out of a 100 points) has a current yield of 6.25% which is calculated as 5 divided by 80
• Yield to maturity (bonds). This is a more complicated formula that takes into consideration the purchase price, redemption, value, and time remaining to maturity.  It is greater than the current yield when the bond is selling at a discount, and less than the current yield when the bond is selling at a premium.  The yield to maturity is listed in most bond listings of various financial newspapers and online resources.
• Yield (stocks). This is the dividend per share paid by the company as a percentage of the current share price. For example, if a stock sells for $65 a share, and the stock pays $1.43 in dividends per year, the dividend yield on this stock is 2.2% ($1.43 dividend per share divided by $65 per share).
• Yield curve.  Graph depicting how interest rates vary as a function of time to maturity. Yields of bonds of the same quality and class (corporates, governments, etc.) are plotted on the y-axis, and times to maturity, from the shortest to the longest, are plotted on the x-axis. The curve will show whether short-term interest rates are higher or lower than long-term interest rates.  In general, the yield curve is positive meaning that investors receive a higher yield for the extra risk of tying up their money long term. However, if short-term rates are higher, the curve is considered to be a "negative (or inverted) yield curve".  If a small variation exists between short-term and long-term rates, the curve is considered to be a "flat yield curve".
• Yield equivalence.  The interest rate at which a taxable security and a tax-exempt bond have the same rate of return. To calculate the tax equivalent yield of a tax-exempt bond for investors in different tax brackets, the tax-exempt yield is divided by the reciprocal of the tax bracket (e.g., 100% less 28%). Thus, a person in the 28% tax bracket who wants to know the tax equivalent yield of an 8% tax free municipal bond would divide 8% by 72% to get 11% which equals the yield a taxable security would have to return to be equivalent after taxes to an 8% municipal bond. To convert a taxable yield to a tax-exempt yield, the formula is reversed – the tax-exempt yield is equal to the taxable yield multiplied by the reciprocal of the tax bracket.

Z

Zero coupon bond. A bond that pays no interest but is priced on its issuance at a discount from its redemption price.  The discount, in effect, represents the bond’s interest