Accredited investor:  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 investors.

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 investment.

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.

Best-efforts underwriting:  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 times.

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 depletion.

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 Network

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 account.

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 less.

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 using SMA.

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 personal liability.

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 Market.

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 common stock.

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 compensation.

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 common stock.

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 standards.

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 dividend.

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 accounts.

Regulation U:  The federal regulation of bank loans collateralized by securities, including broker/dealer hypothecation of stock.

REIT:  See Real Estate Investment Trust.

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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 Rule 144A, Private Resales of Securities to Institutions. Subject to holding periods before resale.

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 this fashion.

SEC:  See Securities and Exchange Commission.

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 member.

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 Transactions.

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 signal.

Short sale:  The sale of a borrowed security. If the seller can buy back the security at a lower price, he reaps a profit.

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 points.

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 shares.

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.

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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 previous trade.

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 long-term.