An investor in an offering who meets certain criteria under Regulation D, who
does not have to be counted for purposes of limitations on the number of
purchasers in an offering. At least one of the following criteria must be met to
be an accredited investor: (i) a buyer with a net worth individually or with a
spouse of $1,000,000 or more; (ii) institutional investors including banks,
insurance companies, registered broker/dealers, and large pensions plans; (iii)
tax-exempt organizations with total assets in excess of $5,000,000; (iv);
private business development companies; (vii) directors, officers, or general
partners of the issuer; and (viii) entities owned entirely by accredited
Actively traded securities: Securities
that have a current worldwide average daily trading volume over 60 consecutive
calendar days (ADTV) of at least $1 million and an issuer with common equity
securities having a public float value of at least $150 million. This condition
is used for an exemption from Regulation M, which restricts the trading of an
existing security by participants in a public offering of that security.
Affiliated Persons: Persons (individuals,
corporations, trusts, etc.) in a position to influence a corporation's
decisions. Includes officers, directors, and principal stockholders (those with
10% ownership or more) of the corporation, and their immediate families. Also
called insiders or control persons.
Agency transactions: Transactions in
which a broker acts only as an agent for the customer, putting together a buyer
and a seller, and makes a commission on the sale.
Agent: One who acts for another.
When a firm acts as agent, it is acting as a broker, bringing together a buyer
and a seller. As agent it does not buy or sell for its own account.
Aggregate exercise price: In an
options position, the total amount of money involved in the resulting stock
trade if the position is exercised. If a customer is long 1 XYZ July 50 Put, the
aggregate exercise price is $5,000.
American Depository Receipt: A
receipt for shares of a foreign corporation on deposit with a foreign branch of
an American bank.
American Stock Exchange (AMEX): The second
largest traditional stock exchange, based in New York City.
Annuity: Money is paid (usually to
an insurance company) to someone who invests the money for a set period of time
and then pays money to the annuitant (the one receiving the annuity) when he/she
reaches a certain age. Fixed annuities guarantee a fixed payment amount, while
variable annuities pay a varying amount depending on the fixed amount of initial
Arbitration: A method of settling
disputes. The parties present their arguments to a panel of one or more
arbitrators who will render a decision. There are no appeals from arbitration.
Asked price: The lowest price a
seller of a security is willing to take for a unit of a security at a particular
time. (Note that the OTC market uses the term "asked," while the exchanges use
the term "offered" or "offering.")
At-the-money: An option contract
with a strike price that equals the market price of the underlying stock.
Basis points: 0.01% in yield.
Increasing from 5.00% to 5.05%, the yield increases by five basis points.
Underwriting without a guarantee to the issuer to sell the securities. The
underwriters act as brokers.
Bid price: The highest price a buyer
of a security is willing to pay for a unit of the security at a particular time.
Block trade: A trade of a large
number of shares, usually 10,000 shares or more.
Blue Chip Stocks: Stocks of strong,
well established corporations with a history of paying dividends in good and bad
Book value: The value of a
corporation's assets or liabilities on its balance sheet. Assets are valued at
their original purchase price less any depreciation taken for accounting
purposes. The book value of common stock is the corporation's assets less its
liabilities and the liquidation value of its preferred stock. Book value may
have little relationship to market value.
Broker: See Agent.
Broker/Dealer: A brokerage firm.
Bull market: A situation in a market
for investments in which price trends are generally upward.
Capital gain: A gain recognized when a security is purchased at one price and
sold at a higher price. It does not include dividend or interest income.
Cash flow: The net profits or losses
of a business plus noncash expenses such as depreciation, amortization, and
Common stock: The most basic type of
equity security, representing ownership of the corporation.
Conversion price: The price of a
bond or stock at which it can be converted to common stock.
Current assets: Assets that are
converted to cash within one year.
Current liabilities: Obligations
that must be paid within one year.
Delivery versus payment: A type of
settlement, commonly used by bank trust departments, in which the security is
paid for when the broker/dealer has it deliverable in the purchaser's name. Also
referred to as DVP or COD.
Depository Trust Company (DTC): A
central depository for the physical certificates evidencing securities held by
its members. The members transfer securities among themselves to effect
transactions using electronic bookkeeping entries.
Dividend: A payment of corporate
earnings to shareholders. Dividends are normally paid in cash,but may also be in
stock or property.
Earnings per share: The net income
of a corporation after taxes and payment of preferred stock dividends, divided
by the number of common shares outstanding.
ECN: see Electronic Communication
Electronic Communications Networks (ECNs):
Alternative trading systems that have sufficient volume in nongovernment
securities and commercial paper that they must be registered with the SEC. An
ECN may register with the SEC as either a broker/dealer or an exchange. ECNs
registered as broker/dealers must comply with Regulation ATS, which includes a
requirement to link to a registered exchange or the NASD and publicly display
their best priced orders for any security in which they have had 5% or more of
the average daily volume share in the past four out of six calendar months. ECNs
registered as exchanges must comply with exchange requirements for
self-regulation. ECNs registered as exchanges include Archipelago, Attain,
Island, and REDIBook. ECNs registered as broker/dealers include B-Trade, BRUT,
Instinet, NexTrade, and Strike. POSIT Crossing Network is registered as a
broker, but is not considered an ECN because of its low volume. POSIT is a call
market that matches sell and purchase orders six times a day, creating a single
trade at the midpoint each time.
Equity: The value of an asset (or
part of an asset) which is not indebted.
Exchanges: Organizations or groups
of individuals and/or firms that provide a means of bringing buyers or sellers
of securities together. Unless their volume is so small to qualify for an
exemption, exchanges must register with the SEC as national exchanges and abide
by their rules.
Fair market price: The price a
willing buyer would pay a willing seller for an asset, where both are acting
rationally with full knowledge.
Five percent policy: NASD policy to
limit commissions, markups, and markdowns to five percent. This is a guideline
rather than a rule because a number of other factors must also be considered.
Fully paid securities: Securities
held in a cash account for which full payment has been made.
Good delivery: Acceptable quality
for delivery. A security that is in good delivery form must be accepted.
Good faith margin account: Type of
account allowed under Reg T for margin transactions in exempt securities,
non-equity securities, money market mutual fund shares, or shares in a mutual
fund that has at least 95% of its assets continuously invested in exempted
securities. The initial good faith margin required for purchases is the "amount
of margin which a creditor would require in exercising sound credit judgment".
For short sales, the initial margin required is the current market value of the
security plus the good faith margin.
Haircut: A haircut is a percent
reduction required to certain valuations of assets included in a firm's net
capital calculation. Percentages are set by the SEC to allow for three types of
potential losses in rapid liquidation: fluctuations in the market value of
securities positions, losses in open contractual commitments made in firm
commitment underwritings, and losses for aged fail-to-delivers.
Hedging: An investment strategy by
which the investor tries to eliminate all potential future gain or loss on an
investment. For example, investors may hedge their investments with stock
options, future contracts, or by selling short.
Hypothecation: A broker/dealer's
pledge of a customer stock to a bank as collateral for a bank loan. The proceeds
of the bank loan are used to finance the debit balance in the customer's margin
Hypothecation agreement: Agreement
signed by a margin customer which pledges the securities in the account as
collateral for the loan and allows the broker/dealer to use the securities as
collateral with the bank supplying the loan money. Also called the margin
agreement. Usually combined with the Loan Consent Form into one document with
two signature lines. The combined document is called the Customer Agreement.
Illiquid asset: Any asset that
cannot be sold or disposed of without any loss in capital value in seven days or
Initial public offering: The initial
sale of securities to the public, often called an IPO.
Insider: Anyone in a position to
influence the decisions of a corporation. Insiders include officers, directors,
principal stockholders, and their respective immediate families. Insiders of a
corporation are also referred to as affiliated persons or control persons.
Intrinsic value: The amount an
option is in-the-money.
Investment: The use of capital to
earn more money, by generating income and/or capital gains.
IPO: See Initial Public Offering.
Margin account: An account in which
a customer may pay only part of the purchase price of securities.
Margin call: In a margin account,
the request for more equity to bring the account up to the minimum margin
maintenance level. Margin calls can be met by depositing cash or stock, or by
Market maker: A firm that buys and
sells a particular security for its own account.
NASD: See National Association of
Securities Dealers, Inc.
NASDAQ: The computer system designed
to facilitate trading of over-the-counter securities. NASDAQ stands for the
National Association of Securities Dealers Automated Quotation System.
National Association of Securities Dealers, Inc.:
Usually referred to as the NASD, this is the self-regulatory organization which
is responsible for supervising the OTC market.
National Market System: The most
actively traded stocks on the NASDAQ System. Commonly referred to as the NMS.
Net worth: Owners' equity of the
firm, or all assets less all liabilities. For a corporation, net worth is equal
to the total of capital stock, paid-in capital, and retained earnings.
Non-recourse loan: In a limited
partnership, a loan for which the limited partners are not personally liable. No
NYSE: The New York Stock Exchange.
OTC Bulletin Board (OTCBB): Quotation
system developed for penny stocks and other thinly traded securities. The system
lists domestic and foreign equity securities (including registered ADRs) that
have at least one market maker, are not listed on NASDAQ or a national
securities exchange, and are not listed on a regional exchange and eligible for
consolidated tape reporting. To be eligible for listing, foreign equity
securities must be fully registered with the SEC and domestic securities must be
providing current financial information to the SEC.
OTC market: See Over-the-Counter
Out-of-the-money: Lacking intrinsic
value. A call option is out-of-the-money if the market price of the underlying
stock is less than the strike price of the call. A put option is
out-of-the-money if the market price of the underlying stock is higher than the
strike price of the put.
Over-the-counter market: The market
for securities that are not listed on an exchange. Various broker/dealers buy
and sell these securities for their own accounts.
Parity: An option trading for
exactly its intrinsic value is said to be trading at parity.
Parity price: For convertible
securities, the price level at which their exchange value equals that of the
Penny stocks: Speculative equity
securities (excluding options and investment company shares) with prices under
$5 per share. Usually do not meet the listing requirements for Nasdaq or the
exchanges. Their sale through broker/dealers is subject to certain rules as to
approval of customers, maintenance of information to support quotations,
distribution of account statements, and disclosure of risk, quotations, and
Pink sheets: A listing (on pink
paper) of OTC securities, their quotes, and the firms that make the market.
Preferred stock: A type of corporate stock
with a stated dividend which must be paid before the common stockholders may
receive a dividend. A preferred stock also has priority in liquidation over the
Prime rate: The interest rate banks
charge their best customers.
Principal stockholder: Any person or
entity owning ten percent or more of the common stock of the corporation.
Private placement: A securities
offering under Regulation D, which is not registered with the SEC. The offering
is generally made to a limited number of persons who meet certain suitability
Real Estate Investment Trust: A
closed-end investment company that invests in real estate, either directly or
through real estate loans, commonly referred to as a REIT.
Record date: The date determining
shareholders of record (those who own the stock) who are entitled to receive a
Recourse loan: In a limited
partnership, a loan for which the limited partners are personally liable.
Regulation S: Safe harbor that
allows both domestic and foreign issuers to distribute and resell securities
outside the U.S. without registering them in the U.S.
Regulation T: The federal regulation
governing extension of credit by broker/dealers to customers for trading
securities. Regulation T mandates payment conditions and governs margin
Regulation U: The federal regulation
of bank loans collateralized by securities, including broker/dealer
hypothecation of stock.
Restricted securities: Securities
that have been purchased directly from the issuer or an affiliate of the issuer
rather than through a public offering. Affiliated persons might obtain
restricted securities by exercising stock options included in the person's
compensation plan. Nonaffiliated persons would normally purchase restricted
stock through a Regulation D offering or in a transaction subject to
Private Resales of Securities to Institutions. Subject to holding periods before
Reverse split: Combine multiple
stock shares into one share such that the stockholder's equity (both in total
and for the individual stockholder) remains unchanged, but each stockholder
holds fewer shares worth more each. For example, in a one-for-two reverse split,
each stockholder receives one share for every two shares held. The new shares
are worth twice as much as the old shares, but since the stockholder has half as
many shares, his investment remains unchanged.
Rule 144: The federal law regarding
resale of securities without registration if the securities are owned by
affiliated persons or the securities are restricted.
Rule 144A: Rule that exempts private
placements of some issuers from the SEC registration and disclosure
requirements, and allows qualified institutional investors (insurance companies,
investment companies, pension plans, investment advisers, etc.) to trade these
securities among themselves without some of the restrictions imposed to protect
the public. Securities must not be of the same class as securities listed on a
registered national securities exchange or quoted on a U.S. automated
inter-dealer quotation system (or be convertible or exchangeable into a class
thus listed or quoted). Issues of foreign securities are sometimes traded in
SEC: See Securities and Exchange
Securities Act of 1933: The federal
law regulating new issues, requiring their registration with the SEC.
Securities and Exchange Commission: The
federal agency that regulates the securities markets and administers federal
securities laws. Commonly known as the SEC.
Securities Exchange Act of 1934: The
federal law regulating the markets for existing securities, and governing public
companies, broker/dealers, and exchanges. It allowed for the creation of
self-regulatory organizations, such as the NASD.
Securities Investor's Protection Corporation (SIPC):
Organization that insures customers of brokerage firms in the event of the
bankruptcy of a brokerage firm, much the same way the FDIC insures customers of
banks. The SIPC is a nonprofit corporation that is not an agency of the U.S.
government. The NASD requires virtually all brokerage firms to be members of the
SIPC. The only exception is firms that deal only in mutual funds and variable
annuities. The SIPC is funded by assessments on member firms. The SIPC insures
customers for up to $500,000 of cash and securities on deposit with a member
firm. Of the $500,000, no more than $100,000 may be cash on deposit with the
Security: SEC definition includes:
investment notes, stocks, treasury stocks, bonds, or debentures; certificates of
interest or participation in a profit-sharing agreement or in oil, gas, or other
mineral royalty or lease; collateral-trust certificates or voting-trust
certificates; investment contracts; certificates of deposit for one of the
above; options, rights or warrants on one of the above or on any group or index
of the above; or foreign currency options or rights. Includes temporary
securities but does not include currency, or any note, draft, bill of exchange,
or banker's acceptance with a maturity of less than nine months. Commodity
futures contracts or commodity options are not generally considered securities,
but fall under the jurisdiction of the Commodities Futures Trading Commission.
While whole life, term, and universal life insurance are not considered
securities, even though they may include some investment risk, variable life
insurance is considered a security.
Selling away: See Private Securities
Selling short: Selling a security or
future that the seller does not own, either to lock in a gain on a long position
or to make a gain on an anticipated decline in the market.
Settlement: In a trade, the exchange
of money and the security. Regular way settlement takes place three business
days after trade date.
Short: In options, the position of
the writer of an option. In securities, the position of a seller of stock he
does not own, but hopes to buy later.
Short interest theory: An investment
theory according to which a large volume of short sales constitutes a buy
Short sale: The sale of a borrowed
security. If the seller can buy back the security at a lower price, he reaps a
Short straddle: An options position
in which the investor sells both a call and a put on the same security. The
position is profitable if the stock price remains between the two breakeven
Stock dividend: A dividend in the
form of stock. Shareholders are given additional shares of stock, rather than
being paid cash. Stock dividends are stated as a percentage. For example, if a
10% stock dividend is paid, the owner of 100 shares receives an additional 10
Stockholder of record: The owner of
a company's stock that is recorded on the books of the company.
Stockholders' equity: The dollar
value of all holdings of preferred and common stock, including any Paid-In
Surplus, plus retained earnings.
Straddle: An options position in
which the investor either buys a call and a put on the same security (a long
straddle), or sells a call and a put on the same security (a short straddle).
Tombstone advertisement: For a new
issue, an advertisement showing the security being sold, the price, and the
names of the broker/dealers from whom a prospectus can be obtained.
Total return: On a mutual fund, the
increase in value of an investment in the fund over a given period, assuming
reinvestment of distributions. Includes capital gains and unrealized
appreciation and depreciation in value of the fund's assets in addition to net
investment income. The total return is the appreciation in investment value an
investor who reinvested all distributions would have achieved over the period
described. Does not take into account taxes the investor would have had to pay
on dividends and does not consider the sales load for the initial purchase of
the fund shares.
Trade date: The date a firm accepts
a bid or offer for a security, even if time differences mean that the acceptance
may not reach the firm making the bid or offer until the next day. The trade
date may be different than the day the order was placed with a firm.
Trader: An individual who either
buys and sells from his own account for profit or handles trades for a brokerage
firm and its clients.
Treasury stock: Stock that has been repurchased by the issuing corporation. It
has no voting rights, does not receive dividends, and is not used in calculating
earnings per share.
Uptick: A higher price than the
Uptick rule: A federal law requiring
that short sales be executed on an uptick or a zero plus tick.
Venture capital: Equity investment
for a company not large enough to go public that is supplied by partnerships set
up to pool funds and invest in untried companies, by wealthy individuals, or by
large institutional investors. Venture capitalists take on high risks in hopes
of making extraordinary returns on some of their investments.
Warrant: A security that gives the
holder the right to buy the common stock of the issuer at a specified price for
a period of time, usually years. Warrants resemble rights, except warrants are