Investment Dictionary

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Accredited investor- any individual or institution that meets one of the following: 1. A net worth exceeding $1,000,000, excluding the primary residence, or 2. Is single and has an annual income of $200,000 or more or $300,000 jointly with a spouse.


Acid-test ratio- a measure of corporate liquidity found by subtracting inventory from current assets and dividing the result by the current liabilities.


Adjusted gross income (AGI) – an accounting measure employed by the IRS to help determine tax liability. AGI = earned income + investment income (portfolio income) + capital gains + net passive income.


American depository receipt (ADR) – a receipt representing the beneficial ownership of foreign securities being held in trust overseas by a foreign branch of a U.S. bank. ADRs facilitate the trading and ownership of foreign securities and trade in the United States on an exchange or in the over-the-counter markets.


Annuity- a contract between an individual and an insurance company that is designed to provide the annuitant with lifetime income in exchange for either a lump sum or period deposits into the contract.


At-the-close order- an order that stipulates that the security is to be bought or sold only at the close of the market, or as close to the close as is reasonable, or not at all.


Back-end load- a mutual fund sales charge that is assessed upon the redemption of the shares. The amount of the sales charge to be assessed upon redemption decreases the longer the shares are held. Also known as a contingent deferred sales charge.


Basis point- measures a bond’s yield; 1 basis point is equal to 1/100 of 1%.


Bearish- an investor’s belief that prices will decline.


Bear market– a market condition that is characterized by continuing falling prices and a series of lower lows in overall prices.


Beta- a measure of a security’s or portfolio’s volatility relative to the market as a whole. A security or portfolio whose beta is greater than one will experience a greater change in price than overall market prices. A security or portfolio with a beta of less than one will experience a price change that is less than the price changes by the overall market.


Bid- a price that an investor or broker dealer is willing to pay for a security. It is also a price at which an investor may sell a security immediately and the price at which a market maker will buy a security.


Bond fund- a fund whose portfolio is made up of debt instruments issued by corporations, governments, and/or their agencies. The fund’s objective is usually current income.


Book value– a corporation’s book value is the theoretical liquation value of the company. Book value is in theory what someone would be willing to pay for the entire company.

Capital gain- a profit realized on sale of an asset at a price that exceeds its cost.


Capital loss– a loss realized on the sale of an asset at a price that is lower than its cost.


Cash assets ratio- the most liquid measure of a company’s solvency. The cash asset ratio is found by dividing cash and equivalents by current liabilities.


Chinese wall- the physical separation that is required between investment banking and trading and retail divisions of a brokerage firm.


Consolidation– a chart pattern that results from a narrowing of a security’s trading range.


Convertible preferred stock– a preferred stock that may be converted or exchanged for common shares of the corporation at a predetermined price.


Cumulative preferred rights- a preferred stock that entitles the holder to receive unpaid dividends prior to the payment of any dividends to common shareholders. Dividends that accumulate in arrears on cumulative issues are always the first dividends to be paid by a corporation.


Debenture– an unsecured promissory note issued by a corporation backed only by the issuer’s credit and promise to pay.


Debt service ratio- indicates the issuer’s ability to pay its interest and principal payments.


Dow Jones Industrial Average (DJIA) – an index composed of 30 industrial companies. This average is one of the most widely quoted market indices.


Early withdrawal penalty– a penalty tax charged to an investor for withdrawing money from a qualified retirement account plan prior to age 59 ½ , usually 10% on top of ordinary income taxes.


Efficient market theory- a theory that states that the market operates and processes information efficiently and prices in all information as soon as it becomes known.


Eurodollar bonds- a bond issued by foreign issuer denominated in U.S. dollars.


Expense ratio– the amount of a mutual fund’s expense relative to its assets. The higher the expense ratio, the lower the investor’s return will be. A mutual fund’s expense ratio tells an investor how efficiently a mutual fund operates, not how profitable the mutual fund is.


Federal Open Market Committee (FOMC)- the committee of the Federal Reserve Board that makes policy decisions relating to the nation’s money supply.


Form 10-K – an annual report filed by a corporation detailing its financial performance for the year.


Form 10-Q – a quarterly report filed by a corporation detailing its financial performance for the quarter.



Growth stock – the stock of a company whose earnings grow at a rate that is faster than the growth rate of the economy as a whole. Growth stocks are characterized by increased opportunities for appreciation and little or no dividends.


Immediate annuity – an annuity contract purchased with a single payment that entitles the holder to receive immediate payments from the contract. The annuitant purchases annuity units and usually begins receiving payments within 60 days.


Insider – a company’s officers, directors, large stockholders of 10% or more of the company, and anyone who is in possession of nonpublic material information, along with the immediate family members of the same.


IRA rollover – the temporary distribution of assets from an IRA and the subsequent reinvestment of the assets into another IRA within 60 days. An IRA may be rolled over only once per year and is subject to a 10% penalty and ordinary income taxes if the investor is under 59 ½ and if the assets are not deposited in another qualified account within 60 days.


Joint tenants with rights of survivorship (JTWROS) – a joint account where the assets of a party who has died transfer to the surviving party, not the decedent’s estate.


Keynesian economics – an economic theory that states that government intervention in the marketplace helps sustain economic growth.


Limit order- an order that sets a maximum price that the investor will pay in the case of a buy order or the minimum price the investor will accept in the case of a sell order.


Listed security- a security that trades on one of the exchanges. Only securities that trade on an exchange are known as listed securities.


Market maker– a NASDAQ firm that is required to quote a continuous two-sided market for the securities in which it trades.


Monetary policy- economic policy that is controlled by the Federal Reserve Board and controls the amount of money in circulation and the level of interest rates.


Municipal bond- a bond issued by a state or political subdivision of a state in an effort to finance its operations. Interest earned by investors in municipal bonds is almost always free from federal income tax.


Outstanding stock– the total amount of a security that has been sold to the investing public and that remains in the hands of the investing public.


Payout stage– the period during which an annuitant receives payments from an annuity contract.


Preferred stock– an equity security issued with a stated dividend rate. Preferred stockholders have a higher claim on a corporation’s dividends and assets than common holders.


Price-earnings ratio (P/E) – a measure of value used by analysts. It is calculated by dividing the issuer’s stock price by its earnings per share.


Prime rate- the interest rate that banks charge their best corporate customers on loans.

Quote – a bid and offer broadcast from the exchange or through the NASDAQ system that displays the prices at which a security may be purchased and sold and in what quantities.


Record date- a date set by corporation’s board that determines which shareholders will be entitled to receive a declared dividend. Shareholders must be owners of record on this date in order to collect the dividend.


Retained earnings– the amount of a corporation’s net income that has not been paid out to shareholders as dividends.


Round lot- a standard trading unit for securities. For common and preferred stock, a round lot is 100 shares. For bonds, it is five bonds.


Secondary market– a marketplace where securities are exchanged between investors. All transactions that take place on an exchange or on the Nasdaq are secondary market transactions.


Shareholders equity– the value of a corporation after subtracting all of its liabilities. A corporation’s net worth is also equal to shareholder’s equity.


Simplified Employee Pension (SEP) – a qualified retirement plan created for small employers with 25 or fewer employees that allows the employees’ money to grow tax-deferred until retirement.
Specialist– members of an exchange responsible for maintaining a fair and orderly market in the securities that they specialize in and or executing orders left with them.


Treasury bond– a long-term U.S. government security that pays semiannual interest and matures in 10-30 years.


Trough– the bottoming out of the business cycle just prior to a new upward movement in activity.


Wash sale– the sale of a security at a loss and the subsequent repurchase of that security or of security that is substantially the same within 30 days of the sale. The repurchase disallows the claim of the loss for tax purchases.


Yield– the annual amount of income generated by a security relative to its price; expressed as a percentage.


Zero coupon bond– a bond that is issued at a discount from its par value and makes no regular interest payments. An investor’s interest is reflected by the security’s appreciation towards par at maturity. The appreciation is taxable each year even though it is not actually received by the investor (phantom income).