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Investment GlossaryAgency Securities Securities issued by the U.S. government agencies, e.g. FNMA, SLMA, etc. They have high credit ratings, but are NOT backed by the "full faith and credit" of the U.S. government. “Chinese Wall” An imaginary barrier between departments or operations of a business in order to protect information from one from being disseminated to the other. For instance, the investment banking side of an organization should be cut off with such a barrier from the sales and trading side of the business, as investment bankers have inside knowledge and may also have incentives based on trading of the subject companies’ securities. SEC rule 10b-5 made this practice the law. 401(k) Plan A type of employer-sponsored, defined-contribution retirement plan that allows employees to defer a portion of their compensation in order to contribute to various funds in the plan on a pre-tax basis, and also allows employees to direct the allocation of their money to the various funds. 403(b) Plan A type of Individual Retirement Account (IRA) sponsored by qualified non-profit employers that allows employees to contribute to various funds in the plan on a pre-tax basis, and to direct the allocation of money to the various funds. Aggressive Growth An investment objective geared toward capital appreciation, and often involves investing in growing companies, large or small, that have above-average profit growth and do not declare many dividends. American Stock Exchange The primary market for United States equities, bonds, derivatives, and options. It is owned and operated by the NASD. Annual Return Total return on an investment for a year-long period, including dividends or interest and capital gains and losses, but excluding any management fees, commissions, or other transactional expenses. Annuitant The individual, not necessarily the contract owner, whose lifetime is used as a determinant of the annuity payments. Annuitization The process of making distributions from an annuity contract in periodic payments pursuant to the terms of the annuity contract. Annuity A contract with an insurance company that allows one or more contributions of funds to accumulate in exchange for distribution of funds according to a regular, systematic schedule. Annuity Units (1) A specified portion of invested funds in a deferred annuity that increases or decreases in value based on investment performance, similar to the net asset value of a mutual fund. Contributions to an annuity purchase will accumulate units, which are then converted to annuity units when the payout phase of the annuity begins. (2) A specified portion of invested funds in an immediate annuity, similar to the net asset value of a mutual fund, which are earmarked for payout. Appreciation An increase in the value of an investment. Arbitration The process of resolving disputes by an impartial person (or persons) who is a specialist in the issues raised in the dispute. Arbitrator An impartial person sitting alone or on a panel that supervises an arbitration and renders an award based on the evidence presented in an arbitration. Ask Price The price at which a security is offered for sale on an exchange or an over-the-counter market. It is also called an asked price, offering price, asking price. Asset Anything of value owned by an individual, business, or legal entity. Asset Allocation The distribution of investment funds amongst various categories of investments, for instance, cash equivalents, equities, bonds or other fixed-income investments. Categories may be further divided by type of tangible asset (real estate, precious metals, collectibles). Asset allocation is a theory of investment management that is intended to provide the maximum amount of return for a given amount of risk. Back-End Load A charge assessed to a policy owner or investor when a policy or investment is either surrendered or a certain amount is withdrawn. It is typically assessed in the first years of holding the policy or investment, and it serves as a redemption charge that decreases as holding time/policy life increases. In a mutual fund, B-class shares have back-end loads. Basis In general, it is the original cost plus all monies expended in connection with an investment. It is used in calculating capital gains and also relevant to the LIFO and FIFO (see below) methods of taxation, as basis is not taxable when an asset is sold or withdrawals are made. Bid The highest price an investor is willing to pay for a security; or, an offer to buy a security at a particular price. Blue Sky Law A state securities law intending to protect investors from fraud, and typically provides for registration of new issues of securities and make certain disclosures to the investing public. Its name is allegedly derived from a judge who said that a particular security was as valuable as a patch of blue sky. Bonds Debt securities that represent loans to a corporation, the U.S. government or its agencies or a municipality (the issuer) in return for which the issuer promises to pay a stated rate of interest and promises to repay the loan on a predetermined maturity date. Breakpoint Discounts on mutual fund sales charges that are available in certain circumstances, for instance, investments of a certain amount in particular fund or family of funds, or investments made within a certain period of time, etc. Breakpoints vary with the different mutual fund class shares. Breakpoint availability must be disclosed to an investor, and failure to disclose them or failure to utilize them when it would be in the best interest of the investor is a violation of NASD rules. Broker A person who serves as an intermediary between a buyer and a seller, usually receiving a commission for each transaction. In the life insurance business, it is an independent producer who has no primary relationship with or mandatory production quotas for any insurance company. Call Risk The risk that a bond may be “called” or redeemed by the issuer before the maturity date, thereby depriving the bondholder the interest that would otherwise have been earned after the call. Capital Appreciation An increase in the value of an investment from the time it is purchased until the time it is sold. Capital Asset Pricing Model A complex model of expected risk and return which seeks to demonstrate that investors require higher returns when they assume higher risks, i.e. that the expected return is equal to the virtually risk-free Treasury rate plus a premium for the assumed level of investment risk. Chicago Mercantile Exchange An exchange for U.S. derivatives trading, specifically, futures and futures options on agricultural products, currencies, indices and interest rates. Churning The prohibited practice in which a Registered Representative or account representative trades on a customer's account too frequently in light of the customer's investment needs and objectives. It is a violation of SRO Rules and a breach of fiduciary duty. Closed-end Fund A fund that has a fixed number of shares and is typically listed on a major stock exchange. It is not able to issue shares and redeem shares on a continuous basis, unlike open-end funds. Cold Calling The practice of making unsolicited calls to prospective investors. Cold calling is restricted to certain times and circumstances. Collateralized Mortgage Obligation (CMO) A type of bond supported by pools of mortgages issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) and by private issuers. CMOs are divided into different categories based on maturity, known as “tranches.” Tranches pay different rates of interest and have different maturities. CMOs are typically backed by government-guaranteed or other investment grade mortgages, but are complex investments. Commingling The prohibited practice of mixing of customer funds with company or other funds. Commodity Futures Trading Commission (CFTC) The agency that is charged with regulating the U.S. futures and options markets, including the protection of participants and investors from fraud or manipulation. Common Stock Shares of ownership of a corporation in a class for which dividends are declared at the discretion of the company’s board of directors, and shareholders are granted voting rights. Liability is limited to the amount that an individual has invested in the stock. In the event of liquidation, common stockholders have a lower, residual claim to corporate assets than do preferred stockholders. Convertibles Corporate securities that are eligible to be converted to securities of a different form at a predetermined price. Cooling-off Period The mandatory time period between the filing of a preliminary prospectus with the SEC and the initial offer of securities to the public. Corporate Bonds Loans to corporations governed by terms set forth in a bond document, or indenture. Corporate bonds usually provide for a higher interest rate than government bonds since they are not considered as safe as government or municipal bonds, and do not receive favorable tax treatment. Cost Basis The value of one’s investment in a particular item. In annuity distributions, it is the portion of the annuity payment that represents the owner’s investment in the contract on which taxes have already been paid, and thus is excluded from income when received. Coupon The interest rate payable by the issuer to the bondholder on a debt security, stated as an annual percentage of the principal. Covered Option An option contract backed by the shares that are the subject of the option. Cyclical Stock A type of stock that performs well during business cycle upswings, but falls sharply as business slackens. Dealer A person or firm that buys and sells securities for its own account. Defensive Stock A type of stock that is more likely to remain stable and provide a safe return during a period of business decline, and often consistently pays dividends. Deferred Sales Charge See “Back-end Load.” Deficiency Letter The SEC’s written response to the filing of a preliminary prospectus when it needs revision. It indicates that the information is necessary to make the prospectus accurate and complete, and requires prompt action. Defined Benefit Retirement Plan The traditional pension, in which a specified dollar amount of benefit is paid to retirees during retirement. Defined Contribution Retirement Plan An investment plan for retirement that provides a benefit during retirement based on the specified dollar amount of contributions made to the plan. Direct Participation Program (DPP) An investment program that allows investors to participate in the profits and tax advantages of the underlying investments, often established as limited partnerships. The use of DPPs has decreased somewhat with tax laws that do not favor such passive investments. Direct Placement (Private Placement) The direct sale of securities to a professional (institutional) investor, and are typically sold in large lots, involve higher risk, and provide higher returns. They may or may not be registered with the SEC. Discount The difference between a bond’s market price and its face value; or, the manner of selling certain U.S. Securities, which are sold at less than face value but redeemed at face value. Discovery The process of requesting, from the opposing party, documents that may bear upon the case. Discretionary Account An investment account in which the representative may execute trades without the customer’s prior consent or knowledge, but possibly subject to certain guidelines set by the customer. Diversification The spreading of risk by placing assets in various categories of investments, e.g. stocks, bonds, cash equivalents, or in various industries, e.g. technology, utilities, pharmaceuticals, etc. Dividend (Stockholder) A distribution of the after-tax profits of a corporation paid to the stockholders of that corporation. Dividend Reinvestment Plan (DRIP) An investment program in which dividends are automatically reinvested into additional shares of company stock or additional mutual fund shares, instead of being distributed in cash to the shareholder. Document Production List The NASD's list of specific documents that the parties to an arbitration must provide to each other, unless otherwise agreed to by the parties or ordered by the arbitrator(s). Dollar Cost Averaging An investment program in which a predetermined amount of money is invested in securities on a regular, periodic basis. This is intended to minimize risk because securities are purchased at different prices. Also called a “Constant Dollar Plan.” Efficient Market The theory that the market price of securities is based on the knowledge and expectations of all investors. Subscribers to this theory do not seek out undervalued stocks or attempt to predict market fluctuations. Employee Stock Ownership Plan (ESOP) A compensation plan in which employees are encouraged to purchase stock in their employer, usually under favorable terms. ERISA The Employee Retirement Income Security Act, which is a set of laws enacted in 1974 to regulate private pensions and retirement plans Excess Margin The amount of equity in an investor’s margin account above that required by Regulation T. Expected Return In the annuity context, it is the total amount that an annuity contract owner can expect to receive from the annuity contract. Expense Ratio A percentage figure that represents the amount a mutual fund investor pays for fund operating and management fees in reference to the total investment in the fund. Face Value The value of a bond, note, or other security (or life insurance policy), as expressed on the face of the instrument (or contract). Also known as “Par Value.” Fair Market Value The price at which a willing buyer will purchase an asset from a willing seller. Federal Deposit Insurance Corporation (FDIC) A federal agency that guarantees funds on deposit (up to $100,000) with member banks and thrift institutions, as well as makes loans or acts otherwise to prevent bank failures. Federal Home Loan Mortgage Corporation (Freddie Mac) An agency created (but not guaranteed by) the federal government, which purchases residential mortgages from lenders, then pools them together to back securities that are sold on the open market. Federal National Mortgage Association (Fannie Mae) An agency created (but not guaranteed by) the federal government, which purchases mortgages from lenders, particularly the Federal Housing Administration, then pools them together to back securities that are sold on the open market. Federal Reserve Board The governing body of the banks that comprise the Federal Reserve System. It establishes policies on reserve requirements and other bank regulations, sets the discount rate, controls the availability of credit in the economy, and controls the purchase of securities on margin. Fiduciary A person or entity that holds assets in trust for a beneficiary, and is responsible for managing those assets for the benefit of the beneficiary. FIFO “First in, first out,” which refers to the method by which withdrawals from life insurance contracts are considered. It means that withdrawals are not taxable until they equal the amount that was invested or paid into the contract. Fixed Annuity An annuity under which the insurance company invests the annuity premium in its general portfolio and guarantees to pay a fixed, minimum interest rate during the accumulation period and a fixed-income payment upon annuitization. Fixed-income Investment A security that pays a predetermined, fixed rate of return, e.g. government, corporate or municipal bonds, or preferred stock that pays a fixed dividend. Flipping The practice of purchasing stock in an Initial Public Offering and then immediately selling them for profit. Free Riding The prohibited practice of buying a security and then quickly selling it without providing any money for the purchase. This violates Regulation T which regulates margin and other credit given by broker-dealers to customers. NASD Rule 2790, Restrictions on the Purchase and Sale of Initial Equity Public Offerings, replaced the previously effective Free-Riding and Withholding Interpretation (IM-2110-1). Front Running The practice of buying or selling a security on the basis of knowledge of an important upcoming transaction in order to make a profit. It is a violation of the fiduciary duty of a Registered Representative or account representative prohibiting trading ahead of a customer order. Front-End Load A sales charge which is assessed upon the initial purchase of a life insurance policy, annuity, or security. In a mutual fund, A-class shares have front-end loads. Fund Switching The movement of money invested in a mutual fund to another mutual fund. This often refers to a movement to a fund within the same fund family, i.e. one that is issued by the same company. Futures Contract An agreement to purchase or sell a set amount of a commodity or financial instrument at a predetermined price on a predetermined date. General Obligation Bond A municipal bond backed by the full faith and credit of the municipality, and is repaid through the general revenue of the municipality as opposed to income from a facility constructed with the borrowed monies. Glass-Steagall Act of 1933 A set of laws that authorized deposit insurance and prohibited banks from owning fullservice brokerage firms and from engaging in investment banking activities. Government National Mortgage Association (GNMA or Ginnie Mae) A government agency owned by the U.S. Department of Housing and Urban Development that packages residential mortgages as securities and guarantees all principal and interest payments of the mortgages backing the securities. The securities are issued by private firms, such as mortgage bankers and financial institutions. Growth Mutual Fund A mutual fund with the investment objective of long-term capital appreciation, rather than current income, and invests primarily in common stocks. Growth Objective An investment that provides growth of the principal sum invested through capital appreciation. Growth Stock A type of stock that typically pays low dividends and is expected to appreciate substantially. Hedge Clause A disclaimer clause seen in market letters, advertisements, or other securities literature that absolves the author from responsibility for inaccurate information. Hedge Fund A private investment U.S. partnership in which the general partner has made a substantial investment and which is authorized to take long and short positions, use leverage and derivatives, invest in many markets (in addition to the securities markets), and often use speculative strategies. Hedge/Hedging An investment strategy used to minimize risk. A perfect hedge is one that totally eliminates the possibility of gain or loss in the future. Options, futures, and short sales are often used as hedging tools. High-Yield Bond A bond that pays a high coupon rate because it is a higher risk. It is rated BB or lower and is also known as a “junk bond.” Hot Issue A recently issued stock that is in great demand, as is usual at a stock’s initial public offering. Illiquid Not easily converted to cash, e.g. a stock or bond that is not actively traded, or real estate or collectibles, for which there is not a ready market. Income Mutual Fund A mutual fund with the investment objective of high current income rather than capital growth which invests in stocks, bonds or both. Income Objective An investment that provides a substantial and regular income in the form of interest, dividends or rent. Income Stock A stock that pays regular, substantial dividends to shareholders so that it provides steady current income. Utilities, banks, insurance companies, and REITs (see below) are often considered income stocks. Indenture An agreement between a bond issuer and a bondholder that provides for the detailed terms and conditions of the bond. Index Fund A type of mutual fund in which the underlying investment portfolio is tied to a particular stock index, such as the Dow Jones Industrial Average or S&P 500. Individual Retirement Account (IRA) A personal retirement account that allows an investor to contribute tax-deferred dollars to the account, so that the investments supporting the account increase in value and thus increase the number of dollars available for an individual’s retirement. Withdrawals may not be made before the age of 59 1/2 except under strict circumstances. Industry Arbitration An arbitration of a dispute between members of the securities industry, rather than between members of the industry and customers. Examples of industry arbitrations are arbitrations between securities firms and clearing firms, and between securities firms themselves. Inflation Risk The risk that the value of an investment will not keep pace with inflation, thus eroding the purchasing power or real value of the invested funds. Initial Margin The amount of cash or securities required to be deposited with a broker-dealer before an investor can trade on margin. Initial Public Offering (IPO) A corporation’s first offering of stock to the public. It is almost always a time when investors and venture capitalists can achieve large profits because shares are being valued on the market for the first time, at a price that purportedly indicates a company’s future growth. Insider Trading The illegal practice of buying or selling securities based on material, nonpublic information. It also refers to trading in a corporation’s stock by that corporation’s board members, managers, or stockholder of more than 10% of the corporation’s stock. The latter is not an illegal practice unless the former is also the case. Institutional Investor Organizations that buy and sell a large volume of securities, e.g. banks, insurance companies, mutual fund companies, pension funds, retirement plans, etc. Interest Rate Risk The risk that fluctuations in interest rates will cause the value of an investment to decrease. Investment Advisers Act A set of laws that require all investment advisers to register with the SEC, and is intended to protect the public and hold advisers to high ethical standards. “Investment Adviser” is specifically defined in the Act. Investment Company A firm that charges management fees to invest pooled funds of numerous investors according to stated investment objectives. A closed-end investment company is typically known as an investment trust and allows a finite number of investors to pool their funds, so that a finite number of shares may be issued. An open-end investment company is known as a mutual fund and allows a virtually infinite number of investors to pool their funds so that a virtually infinite number of shares may be issued. Investment Company Act of 1940 A set of laws that govern investment companies; specifically, they require that investment companies register with the SEC and adhere to stated standards for investment company promotion, reporting, pricing, and other operations. Investment Grade Bond A bond with a rating of AAA to BBB. JAMS A for-profit organization that provides alternative dispute resolution services such as arbitration to NASD members. Junk Bond See “High Yield Bond.” Keogh Plan A tax-deferred retirement account similar to an IRA, but available to unincorporated businesses or self-employed individuals. Know Your Customer A principle embodied in NYSE and NASD Rules, which provides that a recommendation to a buyer or seller of securities must be based on reasonable grounds for believing that the recommendation is suitable for the customer as ascertained from the facts, if any, disclosed by the customer as to his/her security holdings and as to his/her financial situation and needs. Legislative Risk The risk that the value of an investment will decrease as a result of the effectiveness of new or modified legislation. Letter of Intent (LOI) A written promise by a mutual fund purchaser that he/she will purchase additional shares at or by a specified point in time. An LOI will typically entitle an investor to a discount on sales charges at the time of the initial purchase. Level Load A sales charge that remains constant over the life of the investment. In a mutual fund, C-class shares have level loads. LIFO “Last in – First out”, which refers to the method by which withdrawals from annuity contracts and most investments in securities are considered. It means that withdrawals are taxable until they equal the amount of earnings (as opposed to contributions). Limit Order An order to purchase or sell a security at a specified price or a price that is better than that specified. Limited Partnership A business organization that consists of a general partner who manages the business and has unlimited liability, and one or more limited partners who do not actively manage the business and have liability limited to their contribution to the business. Liquid Readily convertible to cash, e.g. T-bills, bank deposits, money market shares. Listed security A security that is listed and thus traded on a registered securities exchange. Load/Loading The amount added to the net premium to cover expenses of operation, to provide for contingencies, and to allow a reasonable profit to the insurer. Alternatively, it is the sales charge(s) assessed on the value of certain mutual funds. Long Position The ownership of a security, including the right to transfer the security, receive income from it, or receive any profits or losses. Long-term Capital Gain/Loss An investor’s gain or loss resulting from the disposition of a capital asset that was held by the investor for 12 months or longer. Maintenance Call (Margin Call) A demand, or call, for additional money or securities in a customer’s margin account in order to meet the NASD minimum maintenance standards for margin accounts. If the customer does not provide the additional money or securities, some of the securities in the account may be sold to remedy the deficiency. Maintenance Fee An annual fee charged to the customer in order to maintain certain brokerage accounts, such as IRAs. Management Fee A fee charged to mutual fund or managed account investors to compensate for the management and shareholder expenses associated with the fund or account. Margin Account A brokerage account established so that a customer may borrow from the broker in order to purchase securities for his/her account. Margin Agreement A contract between the margin account-holder and the broker that governs the operation of the margin account. Market Maker A firm or person that maintains firm bid and offer prices for securities and stands ready to buy or sell round lots of securities at publicly traded prices. Market Timing The practice of buying and selling securities at certain points in time in an effort to maximize profit. This practice is not per se prohibited, but is prone to abuse and has been the subject of numerous sanctions and disciplinary actions at the firm and individual level. Mediation The process by which a mediator, working with each party to a dispute separately and together, promotes a settlement that is mutually agreeable to the parties. Mediator A neutral, impartial facilitator who helps the parties to a mediation resolve their dispute. Misrepresentation The violation of the fiduciary duty of a Registered Representative or account representative prohibiting the giving of false information—or the omission of needed information—that the investor relied on in making an investment. Modern Portfolio Theory The theory that an investor can identify, quantify and control the amount of risk assumed for a given return based on statistical evaluation of the relationship that securities in a portfolio have to each other. It utilizes four basic processes: security valuation, asset allocation, portfolio optimization and performance measurement. Money Laundering The illegal practice of characterizing illegally obtained assets in a way that makes them appear as if they were legally obtained. This often involves transferring money through foreign banks. Money Market A market for short-term debt instruments; that is, those that mature in less than a year. These instruments are known for safety and liquidity. Money Market Deposit Account A bank account that pays interest at a market-sensitive rate, but typically requires a minimum balance and restricts the amount of withdrawals by the account holder. Money Market Fund An open-ended mutual fund that invests in money market securities. It typically provides for a constant $1 share value and may offer check-writing privileges. Mortgage-backed Security Tradeable financial instruments that are created as a result of the securitization of real estate mortgages. NASD National Association of Securities Dealers, the self-regulatory organization established to standardize practices in the securities field, set high ethical standards, and to promulgate and enforce rules for fair securities trading. NASD Dispute Resolution, Inc. The subsidiary of the NASD that establishes the NASD's arbitration rules, trains arbitrators, and provides facilities for the hearing of arbitrations. NASDAQ The National Association of Securities Dealers Automated Quotation System, which provides price quotes for securities traded over the counter and also for some traded on the New York Stock Exchange. Net Asset Value (NAV) In the mutual funds context, the value of a fund share, (which is calculated daily after market close by taking the value of all securities owned by the fund, subtracting liabilities) divided by the number of fund shares outstanding. Net Capital Requirement (Net Capital Rule) The requirement mandated by the SEC that securities firms maintain a maximum ratio of indebtedness to liquid capital of 15:1. New Issue A corporation’s stock being offered to the public for the first time, whether it be an initial public offering or an offering of additional stock by an already existing public company. New York Stock Exchange (NYSE) The oldest and largest stock exchange in the United States, with over 400 member firms. NYSE promulgates rules regarding ethics and fair trading practices that must be followed by its members. No-load Fund An open-ended mutual fund that does not assess sales charges to its members because its shares are purchased directly from the fund, as opposed to a broker. Non-Public Arbitrator An arbitrator who works for or is otherwise associated with the securities industry, or has immediate family in the securities industry; or a service provider to the industry, including attorneys and accountants representing industry participants. NYSE Rule 405 The “know your customer rule”, which requires that members obtain sufficient information about a customer regarding their age, investment objectives, financial status, etc. so that a suitable recommendation may be based thereon. Odd Lot A securities trade for less than the normal trading unit (i.e. a round lot), which calls for a higher sales charge. If it is a stock trade, an odd lot is generally less than 100 shares. Opportunity Cost The benefit given up by making one choice instead of another; for instance, the investment income that is foregone when funds are kept as cash rather than invested. Option The contractual right to buy (a call option) or sell (a put option) a security within a specified time period, in exchange for an agreed-upon price. Original Issue Discount (OID) The discount from par value at the time a security is issued, e.g. the price of a zero coupon bond pays no interest but sells at a discount so that a gain is obtained when it matures at par value. Special tax treatment is required for OID securities. Over the Counter Market (OTC) A securities market that does not exist on an exchange but rather through a telephone and computer network that connects dealers in stocks and bonds with each other. Many smaller companies that do not meet the listing requirements for the larger exchanges are traded over the counter. Par (Par Value) A price equal to the face value of a security. Parking The placement of money in a less risky investment while considering other investment alternatives. Parking may also refer to the illegal practice of concealing stock ownership and avoiding disclosure requirements by putting stock in another’s name. Participation Certificate A certificate evidencing ownership in a pool of funds or other instruments such as mortgage pools. Freddie Mac, Fannie Mae, Ginnie Mae, and Sallie Mae are organizations that issue these types of securities. Passive Income/Loss An important concept in determining tax liability. It refers to income or economic loss from a passive activity, which is an activity in which a taxpayer does not materially participate. It is not investment income and is not income from wages, compensation, or active trade or business. Pass-through Security A security which consists of pooled-debt instruments packaged together as shares, and passes income from the debtors’ payments through an intermediary to the investor (shareholder). A mortgage-backed security is one of the most common types of passthrough securities. Penny Stock A stock that typically sells for less than $1, although that may rise to as much as $10/share as a result of heavy promotion, and is usually issued by a company with an uncertain financial history. Thus, it is typically more volatile than other stocks. Pension Benefit Guaranty Corporation A federally sponsored organization that was created under ERISA to guarantee basic pension benefits. Performance Fund A mutual fund designed to provide for capital growth. It invests in high-growth companies that issue few or no dividends. Piggybacking The prohibited practice in which a broker purchases or sells securities or his/her personal account after a customer’s purchase/sale in the same security, based on the assumption that the customer traded on material, nonpublic information. This practice is a conflict of interest and may subject the broker to discipline. Position An investor’s stake in a security or a market, e.g. a long position or short position. Predispute Arbitration Agreement Also known as a predispute arbitration clause and an arbitration agreement, a predispute arbitration clause is a contract between a customer and a securities firm that states that disputes between the parties must be determined by arbitration, not by courtroom litigation. Preferred Stock A class of a corporation’s stock that pays dividends at a set rate, which has priority above common stockholders in the event of a liquidation, and generally does not provide for voting rights. Pre-Hearing Conference A conference held by an arbitrator or panel of arbitrators prior to the arbitration hearing to determine procedural issues. Preliminary Prospectus The first document released about a security that discloses many salient details, but does not contain all the information that the final prospectus, filed with the SEC, will contain. Price Manipulation The raising or depressing of a price of a security for the purpose of inducing the purchase or sale of such security by others. Price/Book Ratio The ratio of a stock’s market price to its book value. Higher P/B ratios may mean that a company is growing because its stock is worth little on paper, but the market demands a higher price because it appears to be promising. Price/Earnings Ratio The ratio of a stock’s market price to its earnings per share. The higher the P/E ratio, the more investors are paying for the expectation of a company’s earnings. Prospectus The formal written offer to sell securities, filed with the SEC, that describes many details of the security, including historical performance, management, charges and expenses, and other financial information regarding a company or mutual fund. Prudent Man Rule A standard of care adopted by many states applicable to a fiduciary’s responsibility to manage assets on behalf of a beneficiary. It means that a fiduciary should act as a reasonable person would be expected to act, with discretion and intelligence, in seeking income yet preserving capital and avoiding speculative investments. Public Arbitrator An arbitrator who has no association with the securities industry, either directly or through immediate family. Qualified Plan A retirement plan that meets stringent IRS requirements and thus provides for tax deferred accrual of employer and/or employee contributions. Real Estate Investment Trust (REIT) A company, often publicly traded, that invests in and manages various real estate assets in order to provide earnings to shareholders. REITs are required to distribute most of their earnings and thus may offer a high rate of return to investors. Real Rate of Return The rate of return on an investment as adjusted for inflation. Reasoned Opinion A written explanation of the reasons behind the arbitration award by the arbitrator(s),\ rarely asked for and given. Redemption Fees Fees charged to mutual fund investors who sell shares within a short amount of time after purchasing them, usually around 1-2% of the amount withdrawn. Registered Investment Adviser (RIA) A person who provides financial advice for a fee and meets other SEC requirements, and is registered with the SEC. Larger investment advisors must register with the Securities and Exchange Commission (SEC) while those with less than $25 million in assets under management generally only register with the state in which they are doing business. Registration Statement The document submitted to the SEC that includes details of a proposed securities offering, including financial and management information, history, and other facts of interest to investors. Regulation T The regulation promulgated by the Federal Reserve Board that restricts the extension of credit to brokers, dealers, and other members of securities exchanges. Regulation U The regulation promulgated by the Federal Reserve Board that restricts the amount a bank can loan to an investor for the purpose of trading on margin. Reinvestment Risk The risk that rates of earnings will fall such that reinvested cash flows from an investment will earn a lower rate of return on that which was originally earned on the investment. Reply The response of the party filing the Statement of Claim to the allegations in the answer. Respondent The party to the dispute against whom the Statement of Claim is directed. Retail Investor A purchaser of securities who buys for him/herself on a personal basis, as opposed to purchasing for an organization. Return of Capital Distribution made as a result of the sale of a capital asset, depreciation deductions, or any other transaction not related to profits. Return on Equity (ROE) The amount earned on a corporation’s stock within a certain period, stated as a percentage. The percentage is derived by dividing initial common stock equity into net income. Risk The possibility that the investment will fail to perform as the investor hopes. As a general rule, the higher the potential income or growth, the greater the risk. Risk Tolerance The extent to which an investor can tolerate risk of investment loss. Risk-free Return The rate of earnings on a risk-free investment, with the 3-month Treasury bill serving as the standard. Rollover The transfer of funds in one investment to another investment. In the retirement planning context, it is the transfer of lump sum proceeds from a qualified plan or IRA to another qualified plan or IRA. If a direct transfer is made from plan/account to the next, an investor can avoid a steep withholding tax on the funds transferred. Roth IRA An individual retirement account that allows investors, under certain circumstances, to make after-tax contributions to it such that the earnings on contributions will accumulate tax-free, and distributions will not be subject to tax. Safety Objective An investment goal that seeks to minimize the risk that the principal sum invested will decline in value. Sales Loads/Charges Fees paid to cover the costs or value of selling a security to a customer. They may be front-end loads, back-end loads or a combination of both. In the insurance context, they are deductions made by the insurer to recover sales and marketing expenses. Secondary Market Exchanges and over-the-counter markets in which securities are sold after their original issue on the primary market. Section 1035 The section of the Internal Revenue Code that allows a policy owner to exchange one annuity contract for another annuity contract, a life insurance policy for a life insurance policy, or a life insurance contract for an annuity contract with no current tax. Securities Investor Protection Corporation (SIPC) Organization that insures securities investors against failure of member securities firms. Selling Dividends A prohibited practice in which a representative sells shares of a mutual fund so that the customer gets a dividend in the near future, but derives no real benefit because the dividend is already factored into the NAV of the shares. Separate Account An account that is funded and managed separately from the insurer’s general account and is not guaranteed by the insurer. In variable life insurance and variable universal life insurance policies, it is a securities-funded account comprised of various investment divisions or sub-accounts. Series EE Bond A U.S. savings bond issued in denominations of $50 to $10,000 and sold at half their face value. They earn interest for 30 years and are exempt from state and local income tax. Series HH Bond A U.S. savings bond issued in denominations of $50 to $10,000 and sold at half their face value. They earn interest for 20 years and are exempt from state and local income tax. Short Position The state of an investor when he/she has sold shares short and has not yet covered them. Short Sale The sale of securities at a point in which a seller does not own the securities and uses securities borrowed from the brokerage firm in order to make the sale. This technique is often used to profit from an impending decline in the price of the securities because after the decline, the investor can buy back the securities at a lower price and repay the brokerage the shares that were borrowed. Short Sale Rule The rule promulgated by the SEC which requires that short sales be made on a rising market. It requires that: either the last sale price was higher than the one before it; or the last sale price remained unchanged from the one before it, but the previous different sale price was lower. SIMPLE IRA A form of employer-sponsored retirement plan available to employers with no more than 100 employees earning $5,000 or more and who do not offer any other retirement plan. It allows for contributions to be made to an IRA via salary reductions. Simplified Employee Pension Plan (SEP) A form of employer-sponsored retirement plan available to employers with no more than 25 employees for which at least 50% of employees participate in the plan, and who do not offer any other retirement plan. It allows for contributions to be made to an IRA via salary reductions. Speculative Stock A type of stock that is high risk, offering the possibility of a quick profit or loss. SRO A self-regulatory organization that is empowered by the federal government to regulate the activities of its members. The various stock exchanges and the NASD are SROs. Standard and Poor’s 500 Composite Index A stock index that tracks the performance of the stock of 500 widely held companies. Standard and Poor’s Rating The risk classification assigned by S&P to a stock or bond by assigning a letter grade, with AAA being the least risk and D being the most risk and indicating reorganization. Statement of Claim The initial step in an NASD arbitration which is similar to a complaint filed in a lawsuit. It is a written statement submitted by the claimant to the arbitrators describing the claimant’s allegations and the remedies the claimant seeks. Stock Shares of ownership in a corporation. Stock Option The right to purchase stock at a specified point in time for a specified price. Stock options are often used as employee incentives and/or compensation. Stop Order An investor’s order to trade a security at market price once it hits the stated price; also known as a “good-til-cancelled” order. Suitability Rules Rules of the NASD and securities exchanges stating that a recommendation to buy or sell a security must be suitable for an investor based on the investor’s goals, experience, and financial status. These rules are closely tied to the knowing your customer rules. Switching In the mutual fund context, the moving of assets from one fund to another. If the switch is made within the same fund family, there is often no charge for the switch transaction. Systematic Risk A risk of a security that is present throughout the security class and cannot be eliminated through diversification. This is also known as market risk. Tax-deferred The postponement of tax payments until a later date, not to be confused with “tax-free” or “tax avoidance.” Third Market The “over-the-counter market”, comprised of a network of institutional investors and broker-dealers. Twisting The prohibited practice of causing an investor to trade unnecessarily in order to generate sales commissions for the broker. U.S. Government Securities Loans to the U.S. government evidenced by Treasury notes, bonds, bills or savings bonds and backed by the "full faith and credit" of the U.S. government. Unauthorized Trading The violation of the fiduciary duty of a Registered Representative representative prohibiting unauthorized trading in a customer's account. Unit Investment Trust An investment product, considered to be a security, which purchases various fixed income and equity securities and offers a portion of its ownership to investors in “unit” denominations. Variable Adjustable Life Insurance A permanent life insurance policy that includes a combination of variable life and adjustable life features. It incorporates insurance product and investment product features, as does variable life, but provides for some periodic adjustment of the death benefit and premium amounts and payment periods, as does adjustable life. The premium is typically invested in a separate account comprised of sub-accounts, which are investment accounts similar to (but not to be confused with) mutual funds. The owner may select the particular sub-accounts in which premiums will be invested, and may also have some fixed account options to choose from. It generally provides for a minimum death benefit or cash value but the actual death benefit or cash value is dependent upon the performance of the investments in the separate account. Variable Annuity An annuity contract in which the premium is typically invested in a separate account comprised of sub-accounts, which are investment accounts similar to (but not to be confused with) mutual funds. The owner may select the particular sub-accounts in which premiums will be invested during the accumulation phase, and sometimes during the payout phase as well. A variable annuity is intended to protect purchasing power by allowing for more growth of the premiums than a fixed annuity through the investments in the sub-accounts, but may also provide for some fixed-account investment options. Variable Life Insurance A permanent life insurance policy that incorporates insurance product and investment product features. The premium is typically invested in a separate account comprised of sub-accounts, which are investment accounts similar to (but not to be confused with) mutual funds. The owner may select the particular sub-accounts in which premiums will be invested, and may also have some fixed-account options to choose from. A variable life policy is intended to protect purchasing power by allowing for more growth of the premiums than a whole life policy, through the investments in the sub-accounts. It generally provides for a minimum death benefit or cash value but the actual death benefit or cash value is dependent upon the performance of the investments in the separate account. Variable Universal Life Insurance A permanent life insurance policy that includes a combination of variable life and universal life features. It incorporates insurance product and investment product features, as does variable life, but is also flexible with regard to timing of premium payments, premium amounts, and death benefit amounts, as is universal life. The premium is typically invested in a separate account comprised of sub-accounts, which are investment accounts similar to (but not to be confused with) mutual funds. The owner may select the particular sub-accounts in which premiums will be invested, and may also have some fixed-account options to choose from. It generally provides for a minimum death benefit or cash value but the actual death benefit or cash value is dependent upon the performance of the investments in the separate account. Waiver The surrender of a known right, done voluntarily and intentionally, e.g. Waiver of Premium. Wash Sale The purchase and sale of a security simultaneously, or within a short period of time, by the same investor (or another in cooperation with an investor), in an effort to profit from the later transaction. The tax laws prohibit recognizing any loss from such transactions made within a 30-day period. Yield The return on an investment. With respect to bonds: “current yield” refers to the coupon rate divided by the purchase price; “yield to maturity” refers to the total return received if the bond is held until its maturity date, and considers the purchase price, redemption value, coupon rate, time to maturity and time between coupon payments; and “yield to call” refers to the total return received if the bond is called at the first call date in the indenture. Zero-coupon security A security that is issued at a deep discount and makes no interest payments, such that all gain is realized at redemption. |
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